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essentials of management
Essentials Of Financial Management 4th Edition Eugene F. Brigham, Joel F. Houston, Jun-Ming Hsu, Yoon Kee Koong, A. N. Bany-Ariffin - Solutions
5-42 REQUIRED ANNUITY PAYMENTS Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85.He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value of his
5-41 PV AND A LAWSUIT SETTLEMENT It is now December 31, 2014 (t = 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2013 accident. She requested recovery of lost wages plus $100,000 for pain and suffering plus $20,000 for legal expenses. Her doctor
5-40 PAYING OFF CREDIT CARDS Tang Zhe recently received a credit card with an 18% nominal interest rate. With the card, he purchased a Samsung S7 for $372.71. The minimum payment on the card is only $10 per month.a. If Tang Zhe makes the minimum monthly payment and makes no other charges, how many
5-39 NONANNUAL COMPOUNDINGa. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 4% nominal interest, compounded semiannually, how much will be in your account after 3 years?b.One
5-38 AMORTIZATION SCHEDULE WITH A BALLOON PAYMENT You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mortgage companies will not lend you the required$90,000. However, the realtor persuades the seller to take a $90,000 mort-gage (called a
5-37 AMORTIZATION SCHEDULEa. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10% compounded annually.b.What percentage of the payment represents interest and what percentage represents principal for
5-36 FV OF UNEVEN CASH FLOW You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year, and you anticipate that your annual savings will increase by 10% annually thereafter. Your expected annual return is 7%.How
5-35 REACHING A FINANCIAL GOAL Six years from today you need $10,000. You plan to deposit $1,500 annually, with the first payment to be made a year from today, in an account that pays an 8% effective annual rate. Your last deposit, which will occur at the end of Year 6, will be for less than $1,500
5-34 REQUIRED LUMP SUM PAYMENT Starting next year, you will need $10,000 annually for 4 years to complete your education. (One year from today you will withdraw the first $10,000.) Your uncle deposits an amount today in a bank paying 5% annual interest, which will provide the needed $10,000
5-33 REACHING A FINANCIAL GOAL Shan Chen and Shan Xia, who are twins, just received $30,000 each for their 25th birthday. They both have aspira-tions to become millionaires. Each plans to make a $5,000 annual contri-bution to her "early retirement fund" on her birthday, beginning a year from today.
5-32 BUILDING CREDIT COST INTO PRICES Your firm sells for cash only, but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 909 day. To carry these receivables, you would have to borrow funds from
5-31 NOMINAL INTEREST RATE AND EXTENDING CREDIT As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank at a nominal 6%, monthly compounding. To offset your overhead, you want to charge your
5-30 EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded dailya. Based on the EAR (or EFF%), which bank should you use?b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds
5-29 PV AND LOAN ELIGIBILITY You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350.The loan will have a 12% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months?
5-28 FUTURE VALUE OF AN ANNUITY Find the future values of the following ordinary annuities:a. FV of $400 paid each 6 months for 5 years at a nominal rate of 12%compounded semiannuallyb. FV of $200 paid each 3 months for 5 years at a nominal rate of 12%compounded quarterlyc. These annuities receive
5-27 PRESENT VALUE FOR VARIOUS DISCOUNTING PERIODS Find the present value of $500 due in the future under each of these conditions;a. 12% nominal rate, semiannual compounding, discounted back 5 yearsb. 12% nominal rate, quarterly compounding, discounted back 5 yearsc. 12% nominal rate, monthly
5-26 FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find the amount to which $500 will grow under each of these conditions;a. 12% compounded annually for 5 yearsb. 12% compounded semiannually for 5 yearsc. 12% compounded quarterly for 5 yearsd. 12% compounded monthly for 5 yearse. 12% compounded
5-25 MOST EXPENSIVE HOUSE AFFORDABLE Ali, a single, is contemplating buying an apartment. He can set aside up to 25% of his monthly salary of MYR 40,000 as monthly mortgage payment. Ali has set aside ready cash for the 20% down payment for his property and will borrow the balance of 80% of the
5-24 LOAN AMORTIZATION Jan sold her house on December 31 and took a$10,000 mortgage as part of the payment. The 10-year mortgage has a 10%nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Form 1040 the amount of
5-23 EVALUATING LUMP SUMS AND ANNUITIES Wang Yun just won the lottery, and she must choose among three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.5 million, or to receive 30 end-of-year payments of $5.5 million.a. If she thinks
5-22 PV OF A CASH FLOW STREAM A rookie midfielder is negotiating his first Japan Soccer Premier League contract. His opportunity cost is 10%.He has been offered three possible 4-year contracts. Payments are guar-anteed, and they would be made at the end of each year. Terms of each contract are as
5-21 EFFECT OF INTEREST RATE ON FUTURE VALUE Michael Lim and Daniel Tan are good friends. Both have set aside S$100,000 for investment. Michael is financially conservative and prefers to keep his investment in a fixed deposit which earns a paltry 1% per year. Daniel is less risk-averse and prefers
5-20 FUTURE VALUE OF AN ANNUITY Your client is 40 years old. She wants to begin saving for retirement, with the first payment to come one year from now. She can save $5,000 per year, and you advise her to invest it in the stock market, which you expect to provide an average return of 9% in the
5-19 UNEVEN CASH FLOW STREAMa. Find the present values of the following cash flow streams at an 8%discount rate.0 12 34 5Stream A$100$400$400$400$300 Stream B SO$300 5400$400$400$100b. What are the PVs of the streams at a 0% discount rate?
5-18 EFFECTIVE INTEREST RATE You borrow $85,000; the annual loan payments are $8,273.59 for 30 years. What interest rate are you being charged?
5-17 perpetuity if the interest rate is 7%? If interest rates doubled to 14%, what would its present value be?
5-16 PRESENT VALUE OF AN ANNUITY Find the present values of these ordinary annuities. Discounting occurs once a year.a. $400 per year for 10 years at 10%b. $200 per year for 5 years at 5%c. $400 per year for 5 years at 0%d. Rework partsa, b, and c assuming they are annuities due.PRESENT VALUE OF A
5-15 FUTURE VALUE OF AN ANNUITY Find the future values of these ordinary annuities. Compounding occurs once a year.a. $400 per year for 10 years at 10%b. $200 per year for 5 years at 5%c. $400 per year for 5 years at 0%d. Rework partsa, b, and c assuming they are annuities due.
5-14 TIME FOR A LUMP SUM TO DOUBLE How long will it take $200 to double if it earns the following rates? Compounding occurs once a year.a. 7%b. 10%C. 18%d. 100%
5-13 EFFECTIVE RATE OF INTEREST Find the interest rates earned on each of the following:a. You borrow $700 and promise to pay back $749 at the end of 1 year.b. You lend $700 and the borrower promises to pay you 5749 at the end of 1 year.c. You borrow $85,000 and promise to pay back 5201,229 at the
5-12 GROWTH RATES Shalit Corporation's 2014 sales were $12 million. Its 2009 sales were $6 million.a. At what rate have sales been growing?b. Suppose someone made this statement: "Sales doubled in 5 years.This represents a growth of 100% in 5 years; so dividing 100% by 5, we find the growth rate to
5-11 PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST RATES Find the following values. Compounding/ discounting occurs annually.a. An initial $500 compounded for 10 years at 6%b. An initial $500 compounded for 10 years at 12%c. The present value of $500 due in 10 years at 6%d. The present value of
5-10 PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually.a. An initial $500 compounded for 1 year at 6%b. An initial 5500 compounded for 2 years at 6%c. The present value of $500 due
5-9 LOAN AMORTIZATION AND EAR You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized over 5 years(60 months), and the nominal interest rate will be 12% with interest paid monthly: What will be the monthly loan payment? What will be the loan's EAR?
5-8 PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other invest-ments of equal risk earn 8% annually, what is its present value? Its future
5-7 RETURN EARNED ON ANNUITY Lin Shan is about to retire and is exploring the possibility of investing a lump sum in an annuity so that she gets 50%of her last drawn salary at the end of every month for 15 years. She esti-mates her last-drawn salary to be ¥60,000. The quotation she obtained from
5-6 FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE What's the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be?
5-5 TIME TO REACH A FINANCIAL GOAL You have $42,180.53 in a brokerage account, and you plan to deposit an additional 55,000 at the end of every future year until your account totals $250,000. You expect to earn 12%annually on the account. How many years will it take to reach your goal?
5-4 TIME FOR A LUMP SUM TO DOUBLE If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?
5-3 FINDING THE REQUIRED INTEREST RATE Your parents will retire in 18 years. They currently have $250,000 saved, and they think they will.need $1,000,000 at retirement. What annual interest rate must they carn to reach their goal, assuming they don't save any additional funds?
5-2 PRESENT VALUE What is the present value of a security that will pay$5,000 in 20 years if securities of equal risk pay 7% annually?
5-1 FUTURE VALUE If you deposit $10,000 in a bank account that pays 10%interest annually, how much will be in your account after 5 years?
5-8 What is a loan amortization schedule, and what are some ways these schedules are used?
5-7 Banks and other lenders are required to disclose a rate called the APR.What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were comparing the costs of loans from different lenders, could you use their APRs to determine the loan
5-6 The present value of a perpetuity is equal to the payment on the annuity.PMT, divided by the interest rate, I : PV = PMT/I. What is the future value of a perpetuity of PMT dollars per year? (Hint: The answer is infinity, but explain why.)
5-5 To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity proce-dures can never be of use, even when some of the cash flows constitute an annuity, because the entire series is not an annuity. True or false? Explain.
5-4 Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
5-3 If a firm's earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain. (Hint: If you aren't sure, plug in some numbers and check it out.)
5-2 Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and 5400 in Years 3 through 10 does not constitute an annuity. However, the second series contains an annuity.
5-1 What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situa-tions? Explain.
ST-4 EFFECTIVE ANNUAL RATES Bank A offers loans at an 8% nominal rate (its APR) but requires that interest be paid quarterly; that is, it uses quarterly compounding. Bank B wants to charge the same effective rate on its loans, but it wants to collect interest on a monthly basis, that is, to use
ST-3 TIME VALUE OF MONEY It is now January 1, 2015; and you will need$1,000 on January 1, 2019, in 4 years. Your bank compounds interest at an 8% annual rate.a. How much must you deposit today to have a balance of $1,000 on January 1, 2019?b. If you want to make four equal payments on each January
ST-2 FUTURE VALUE It is now January 1, 2015. Today you will deposit $1,000 into a savings account that pays 8%.a. If the bank compounds interest annually, how much will you have in your account on January 1, 2018?What will your January 1, 2018, balance be if the bank uses quarterly
ST-1 KEY TERMS Define each of the following terms;a. Time lineb. FV. ; PV; 1; INT; N; FVA ,; PMT; PVA, C.Compounding; discountingd. Simple interest; compound intereste. Opportunity cost f.Annuity; ordinary (deferred) annuity; annuity due; perpetuity Uneven (nonconstant) cash flow; payment (PMI);
4-23 RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow.a. Calculate the indicated ratios for Barry.b. Construct the DuPont equation for both Barry and the industry.c. Outline Barry's strengths and weaknesses as revealed by your analysis.d. Suppose Barry had doubled its
4-22 BALANCE SHEET ANALYSIS Complete the balance sheet and sales infor-mation using the following financial data.Total assets turnover. 1.5x Days sales outstanding. 36.5 days"Inventory turnover ratio. 5x Fixed assets turnover. 3.0x Current ratio. 2.0×Gross profit margin on sales. (Sales-Cost of
4-21 P/E AND STOCK PRICE Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at$40 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $3.25 million. Over the next year, it also
4-20 DSO AND ACCOUNTS RECEIVABLE Harrelson Inc. currently has $750,000 4in accounts receivable, and its days sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average
4-19 CURRENT RATIO The Petry Company has $1,312,500 in current assets and$525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase
4-18 TIE RATIO AEI Incorporated has $5 billion in assets, and its tax rate is 40%.Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA)is 5%. What is AEl's times-interest- earned (TIE) ratio?
4-17 CONCEPTUAL. RETURN ON EQUITY Which of the following statements is most correct? (Hint. Work Problem 4-16 before answering 4-17, and consider the solution setup for 4-16 as you think about 4-17.)a. If a firm's expected basic earning power (BEP) is constant for all of its assets and exceeds the
4-16 RETURN ON EQUITY Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be operating income, If it so chooses, CCC can finance up to 50% of its assets with debt,
4-15 RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet:The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5x, without affecting
4-14 RETURN ON EQUITY Midwest Packaging's ROE last year was only 3%;but its management has developed a new operating plan that calls for a debt-to-capital ratio of 60%, which will result in annual interest charges of 5300,000. The firm has no plans to use preferred stock and total assets equal
4-13 TIE AND ROIC RATIOS The H.R. Pickett Corp. has $500,000 of inter-est-bearing debt outstanding, and it pays an annual interest rate of 10%. In addition, it has $700,000 of common stock on its balance sheet. It finances with only debt and common equity, so it has no preferred stock. Its annual
4-12 RATIO CALCULATIONS Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its times- interest-earned (TIE) ratio?
4-11 Corp:Calculate Brauer's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Sales/Total assets Return on assets (ROA) Return on equity (ROE) 1.5x 3.0% 5.0%
4-10 M/B AND SHARE PRICE You are given the following information.Stockholders' equity as reported on the firm's balance sheet = $3.75 billion, price/earnings ratio = 3.5, common shares outstanding = 50 million, and market/book ratio = 1.9. Calculate the price of a share of the company's common
4-9 BEP, ROE, AND ROIC Duval Manufacturing recently reported the following information:Duval's tax rate is 35%. Duval finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, and 60% of its total invested capital is common equity. Calculate
4-8 DuPONT AND NET INCOME Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2x. Common equity on the firm's balance sheet is 50% of its total assets. What is its net income?
4-7 ROE AND ROIC Hilyard Industries's net income is 525,000, its interest expense is $5,000, and its tax rate is 40%. Its notes payable equals $25,000, long-term debt equals $75,000, and common equity equals $250,000. The firm finances with only debt and common equity, so it has no preferred stock.
4-6 DuPONT AND ROE A firm has a profit margin of 2% and an equity multi-plier of 2.0. Its sales are $100 million, and it has total assets of $50 million.What is its ROE?
4-5 PRICE/EARNINGS RATIO A company has an EPS of $2.00, a book value per share of $20, and a market/book ratio of 1.2 x. What is its P/E ratio?
4-4 MARKET/BOOK RATIO Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and 56 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $32 per share. What is Jaster's
4-3 DuPONT ANALYSIS Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?
4-2 to 1. Its stock price is $14 per share and it has 5 million shares outstanding.The firm's total capital is $125 million and it finances with only debt and common equity. What is its debt-to-capital ratio?
4-1 DAYS SALES OUTSTANDING Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts receivable balance?Assume that it uses a 365-day year.DEBT TO CAPITAL RATIO Bartley Barstools has a market/book ratio equal
4-12 Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (-) to indicate a decrease, and (0) to indicate either no effect or an indeterminate effect. Be prepared to state any necessary
4-11 Differentiate between ROE and ROIC.
4-10 Refer to an online finance source such as Yahoo! Finance or Google Finance to look up the P/E ratios for Verizon Communications and Walmart. Which company has the higher P/E ratio? What factors could explain this?
4-9 Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs.If you applied the DuPont equation to both firms, would you expect the three components to be the same for each company? If not, explain what balance sheet and
4-8 Why is it sometimes misleading to compare a company's financial ratios with those of other firms that operate in the same industry?
4-7 Give some examples that illustrate how (a) seasonal factors and (b)different growth rates might distort a comparative ratio analysis. How might these problems be alleviated?
4-6 If a firm's ROE is low and management wants to improve it, explain how using more debt might help.
4-5 How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance sheet and income statement items affected?
4-4 Profit margins and turnover ratios vary from one industry to another.What differences would you expect to find between the turnover ratios, profit margins, and DuPont equations for a grocery chain and a steel company?
4-3 Over the past year, M.D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company's sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet accounts must have changed to produce the
4-2 Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?
4-1 Financial ratio analysis is conducted by three main groups of analysts.credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios on which they focus?
ST-3RATIO ANALYSIS The following data apply to A.L. Kaiser & Company (millions of dollars):Kaiser has no preferred stock-only common equity, current liabilities, and long-term debt.a. Find Kaiser's (1) accounts receivable, (2) current assets, (3) total assets, (4) ROA, (5) common equity, (6)
ST-2 TOTAL DEBT TO TOTAL CAPITAL Last year K. Billingsworth & Co. had earnings per share of $4 and dividends per share of 52. Total retained earn- ings increased by $12 million during the year, while book value per share at year-end was $40. Billingsworth has no preferred stock, and no new common
ST-1 KEY TERMS Define each of the following terms:a. Liquid assetb. Liquidity ratios. current ratio; quick (acid test) ratioc. Asset management ratios. inventory turnover ratio; days sales outstanding (DSO); fixed assets turnover ratio; total assets turnover ratiod. Debt management ratios. total
5. Over the past few years, has there been a strong correlation between stock price performance and reported earnings? Explain. (Hint: Change the Interactive Stock Chart so that it corresponds to the same number of years shown for the financial statements.)
4. Looking at the income statement, what are the company's most recent sales and net income? Over the past several years, what has been the sales growth rate? What has been the growth rate in net income?
3. Looking at the statement of cash flows, what factors can explain the change in the company's cash position over the last couple of years?
2. Does Starbucks have very much long-term debt? What are the chief ways in which Starbucks has financed assets?
1. Looking at the most recent year available, what is the amount of total assets on Starbucks's balance sheet? What percentage is fixed assets, such as plant and equipment? What percentage is current assets? How much has the company grown over the years that are shown?
3-20 FINANCIAL STATEMENTS AND TAXES Donna Jamison, a 2010 graduate of the University of Florida, with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon Inc., a small food producer that operates in north Florida and whose specialty is
3-19 FINANCIAL STATEMENTS, CASH FLOW, AND TAXES Laiho Industries's 2014 and 2015 balance sheets (in thousands of dollars) are shown.a. Sales for 2015 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was $8,575,000, the
3-18 PERSONAL TAXES Mary Jarvis is a single individual who is working on filing her tax return for the previous year. She has assembled the following relevant information:She received $82,000 in salary.She received $12,000 of dividend income.She received $5,000 of interest income on Home Depot
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