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Practical Financial Management 5th Edition William R. Lasher - Solutions
10. Discuss the relative riskiness of investment in bonds, common stock, and preferred stock.
8. Do stocks that don’t pay dividends have value? Why?
6. Paxton Sheet Metal Works Inc. is about to acquire a new stamping press that costs $400,000. It is considering purchasing the asset with money it can borrow at 10% repayable in annual, year-end installments over six years. It has also been offered an opportunity to lease the machine for payments
5. Suppose Wings and Nantucket of the previous problem agreed to assume a$300,000 residual value for the plane at the end of the lease. How much will Wings have to pay monthly to give Nantucket its 12% return?
4. Wings Inc. is a commuter airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is 15 years, and no residual value is expected at its end.a. What monthly lease payment must Nantucket charge to earn a 12% return on its investment if the
3. Taunton Manufacturing Inc. is a machine shop in Taunton, Massachusetts. The firm recently leased a drill press for a 20-year term at payments of $9,000 per year payable at year end. No residual value was assumed in the lease which is clearly a financing lease. Taunton can borrow at 8% and will
2. Henderson Engineering Ltd. just leased a computer-aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Henderson to purchase the machine at its fair market value as used equipment when the lease expires.
1. Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet.The firm is interested in acquiring a fleet of 10 company cars for its sales staff.The cars have an economic life of seven years, but Caruthers plans to keep them for only three because it doesn’t want
1. You’ve just joined SeaCraft Inc., a manufacturer of fiberglass boats, as its CFO.When you took the job, you knew that the company was not in the best financial condition. Profits are adequate, but the firm is carrying substantial debt. To make matters worse, the company’s largest fiberglass
10. Leveraged leases offer tax advantages to unprofitable companies.a. Why are they called leveraged?b. Briefly, how do they work?
9. Leasing is generally more expensive than borrowing to buy, and FASB 13 has reduced the availability of off balance sheet financing. Why then is leasing popular?
8. Depreciation is a noncash charge. Why then is it important in lease-buy analysis?(Very short answer.)
7. Why are residuals important in negotiations between lessees and lessors?
6. In leases with no residuals, lessors calculate the lease payments they must charge as if the lease was a loan. How does the presence of a residual change the calculation?
5. Just what is placed on the balance sheet in a financing lease?
4. There’s a fundamental difference between rules one, two, and four for qualifying as an operating lease and rule three. What is it?
3. What argument was made against adopting FASB 13? (One-line answer.)
2. Describe the feature of financial reporting that made leasing popular before FASB 13.
1. What, in general, is meant by off balance sheet financing?
29. Halidane Transfer Inc. is an armored car service that operates in the Chicago area transferring cash between customer locations and various banks. The firm has 22 armored vehicles which are fully utilized serving existing customers. Management recently accepted a new business opportunity that
28. Reconsider Example 7A.2 part (a) assuming Prudential estimates that the railroad cars will be worth $3 million at the end of the 20-year lease. Calculate the lease payment that will bring Prudential a 6% return on its investment.
27. Suppose the Prudential Insurance Co. is looking for a safe, long-term investment that will earn 6%. Further assume that Ford Motor Company wants to acquire a number of special purpose railroad cars to transport new automobiles to distribution hubs around the country. Ford wants to buy railroad
26. Emeral Inc. is a moderately sized construction company that operates in upstate New York.Last year it leased a crane from GD Credit Corp. for a term of 15 years at an annual rental of$20,000 payable at the end of each year. The crane is expected to be completely worn out and valueless at the
25. Use BONDVAL to find the YTM of the following $1,000 par value bonds. 1 2 3 Market price Coupon rate $752.57 6.5% $1,067.92 7.24% $915.05 Term 15.5 yrs 8.5 yrs 12.5% 2.5 yrs
24. You are a securities salesperson. Many of your clients are elderly people who want very secure investments. They remember the days when interest rates were very stable (before the 1970s) and bond prices hardly fluctuated at all regardless of their terms. You’ve had a hard time convincing some
23. A broad range of bond information is available at http://www.Bondsonline.com.Visit the site, scroll down to “site search” at the left margin, and type in “downgrades”to view companies that have had their bond ratings lowered recently.Choose two firms and write a short report explaining
22. Your friend Marvin is excited because he believes he’s found an investment bargain.A broker at QuickCash Investments has offered him an opportunity to buy a bond issued by Galveston Galleries Inc. at a very attractive price. The 30-year bond was issued ten years ago at a face value of $1,000,
21. Lindstrom Corp. reported earnings after tax (EAT) of $2,160,000 last year along with basic EPS of $3. All of Lindstrom’s bonds are convertible and, if converted, would increase the number of shares of the firm’s stock outstanding by 15%.Lindstrom is subject to a total effective tax rate of
20. The Maritime Engineering Corp. sold 1,500 convertible bonds two years ago at their $1,000 par value. The 20-year bonds carried a coupon rate of 8% and were convertible into stock at $20 per share. At the time, the firm’s stock was selling for $15, and similar bonds without a conversion
19. Pacheco Inc. issued convertible bonds 10 years ago. Each bond had an initial term of 30 years, had a face value of $1,000, paid a coupon rate of 11%, and was convertible into 20 shares of Pacheco stock, which was selling for $30 per share at the time. Since then the price of Pacheco shares has
18. Snyder Mfg. issued a $1,000 face value 30-year bond 5 years ago with an 8%coupon. The bond is subject to call after 10 years, and the current interest rate is 7%. What call premium will make a bondholder indifferent to the call?(Hint: Equate the formulas for the bond’s price with and without
17. Apollo’s Beta bond has just reached the end of its period of call protection, has 10 years to go until maturity, and has a face value of $1,000. Its coupon rate is 16%and the interest rate is currently 10%. Should Apollo refund this issue if refunding costs a total of 8% of the value of the
16. Apollo’s Alpha-1 bond was issued at a time when interest rates were even higher.It has a coupon rate of 22%, a $1,000 face value, an initial term of 30 years, and is now 13 years old. Calculate its price if interest rates are now 12%, compare it with the price that would exist if there were
15. Apollo’s Alpha bond was issued 10 years ago for 30 years with a face value of$1,000. Interest rates were very high at the time, and the bond’s coupon rate is 20%. The interest rate is now 10%.a. At what price should an Alpha bond sell?b. At what price would it sell without the call feature?
14. Ernie Griffin just purchased a five-year zero coupon corporate bond for $680.60 and plans to hold it until maturity. Assume Ernie has a marginal tax rate of 25%.a. Calculate Ernie’s after-tax cash flows from the bond for the first two years.Assume annual compounding.b. Describe in words the
13. Hoste Corp. issued a $1,000 face value 20-year bond 7 years ago with a 12%coupon rate. The bond is currently selling for $1,143.75. What is its yield to maturity (YTM)?
12. Pam Smith just inherited a $1,000 face value K-S Inc. bond from her grandmother.The bond clearly indicates a 12% coupon rate, but the maturity date has been smudged and can’t be read. Pam called a broker and determined that similar bonds are currently returning about 8% and that her bond is
11. Smithson Co.’s Class A bonds have 10 years to go until maturity. They have a$1,000 face value and carry coupon rates of 8%. Approximately what do the bonds yield at the following prices?a. $770b. $1,150c. $1,000
10. John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a seasoned issue of the Capri Fashion Company that was first sold 22 years ago at a face value of $1,000, with a 25-year term, paying 6%. The other is a new 30-year issue of the Gantry
9. Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute the coupon rate on this bond. (In practice we generally aren’t asked to find coupon rates.)
8. Daubert, Inc., planned to issue and sell at par 10-year, $1,000 face value bonds totaling $400 million next month. The bonds have been printed with a 6%coupon rate. Since that printing, however, Moody’s downgraded Daubert’s bond rating from Aaa to Aa. This means the bonds will have to be
7. Longly Trucking is issuing a 20-year bond with a $2,000 face value tomorrow. The issue is to pay an 8% coupon rate, because that was the interest rate while it was being planned. However, rates increased suddenly and are expected to be 9%when the bond is marketed. What will Longly receive for
6. The Mariposa Co. has two bonds outstanding. One was issued 25 years ago at a coupon rate of 9%. The other was issued 5 years ago at a coupon rate of 9%. Both bonds were originally issued with terms of 30 years and face values of $1,000. The going interest rate is 14% today.a. What are the prices
5. Fix-It Inc. recently issued 10-year, $1,000 par value bonds at an 8% coupon rate.a. Two years later, similar bonds are yielding investors 6%. At what price are Fix-It’s bonds selling?b. What would the bonds be selling for if yields had risen to 12%?c. Assume the conditions in parta. Further
4. The Sampson Company issued a $1,000 bond 5 years ago with an initial term of 25 years and a coupon rate of 6%. Today’s interest rate is 10%.a. What is the bond’s current price if interest is paid semiannually as it is on most bonds?b. What is the price if the bond’s interest is paid
3. What is the current yield on each of the bonds in the previous problem?
2. Calculate the market price of a $1,000 face value bond under the following conditions. Coupon Rate Time Until Maturity Current Market Rate a. 12% 15 years 10% b. C. d. e. 915 14 7 5 12 25 6 30 CO 6 9 88
1. The Altoona Company issued a 25-year bond 5 years ago with a face value of$1,000. The bond pays interest semiannually at a 10% annual rate.a. What is the bond’s price today if the interest rate on comparable new issues is 12%?b. What is the price today if the interest rate is 8%?c. Explain the
4. Paliflex Corp. needs new capital, but is having difficulty raising it. The firm’s stock price is at a 10-year low, so selling new equity means giving up an interest in the company for a very low price. The debt market is tight and interest rates are unusually high, making borrowing difficult
3. You’re the CFO of Nildorf Inc., a maker of luxury consumer goods that, because of its product, is especially sensitive to economic ups and downs (people cut back drastically on luxury items during recessionary times). In an executive staff meeting this morning, Charlie Suave, the president,
2. The Everglo Corp., a manufacturer of cosmetics, is financed with a 50–50 mix of debt and equity. The debt is in the form of debentures that have a relatively weak indenture. Susan Moremoney, the firm’s president and principal stockholder, has proposed doubling the firm’s debt by issuing
1. You’re an analyst in the finance department of Flyover Corp., a new firm in a profitable but risky high-tech business. Several growth opportunities have come along recently, but the company doesn’t have enough capital to undertake them.Stock prices are down, so it doesn’t make sense to try
15. How and why do sinking funds enhance the safety of lenders?
14. Under what conditions is a bond almost certain to be called at a particular date in the future? How does this condition affect its price?
13. Using words only, describe the process of finding a bond’s yield at a given selling price.
12. What causes maturity risk? In other words, why do long-term bonds respond differently to interest rate changes than short-term bonds? (Hint: Think about how the present value formulas work.)
11. What is interest rate or price risk? Why is it sometimes called maturity risk?Explain fully.
10. What is the relationship between bond prices and interest rates? Verbally describe how this relationship comes about. How can we use this relationship to estimate the value of a bond?
9. Describe bond pricing as two time value of money problems.
8. Why do bonds have indentures?
7. If bonds pay fixed interest rates, how can they be sold year after year on the secondary market? Include the idea of how yields adjust to changing market interest rates.
6. Two interest rates are associated with pricing a bond. Name and describe each.How are they used? Describe a third rate not used in pricing.
5. What is a call provision? Why do companies put them in bonds? Define callprotected period and call premium/penalty.
4. Describe the nature of a bond. Include at least the following ideas.term/maturity face value debt versus equity “buying” a bond non-amortized one borrower/many lenders risk conflict with stockholders
3. How can two knowledgeable people come to different conclusions about the value of the same security? Can this happen if they have access to the same information?
2. Contrast real assets and financial (paper) assets. What is the basis for the value of each?
1. What is valuation, and why are we interested in the results?
46. Suppose a firm borrows through a bond issue with a relatively weak indenture that doesn’t say anything about additional future debt. Then suppose it wants to borrow more later on, but the new lender is concerned about safety, and insists that its debt be made senior to existing debt.If the
45. Montgomery Inc. is a small manufacturer of men’s clothing with operations in southern California.It issued 2,000 convertible bonds in 1999 at a coupon rate of 8% and a par value of $1,000.Each bond is convertible into Montgomery’s common stock at $40 per share.Management expected the stock
44. What was the conversion premium of the Algo convertible in Example 7.5 at the time it was issued?
43. Harry Jenson purchased one of Algo Corp.’s 9%, 25-year convertible bonds at its $1,000 par value a year ago when the company’s common stock was selling for $20. Similar bonds without a conversion feature returned 12% at the time. The bond is convertible into stock at a price of $25. The
42. Write your own program to amortize a 10-year, $20,000 loan at 10% compounded annually. Input the loan amount, the payment, and the interest rate. Set up your spreadsheet just like Table 6.4, and write your program to duplicate the calculation procedure described.
41. The Centurion Corp. is putting together a financial plan for the company covering the next three years, and it needs to forecast its interest expense and the related tax savings. The firm’s most significant liability is a fully amortized mortgage loan on its real estate. The loan was made
40. Amitron Inc. is considering an engineering project that requires an investment of$250,000 and is expected to generate the following stream of payments (income)in the future. Use the TIMEVAL program to determine if the project is a good idea in a present value sense. That is, does the present
39. At any particular time, home mortgage rates are determined by market forces, and individual borrowers can’t do much about them. The length of time required to pay off a mortgage loan, however, varies a great deal with the size of the monthly payment made, which is under the borrower’s
38. Assume you will retire at age 65. Use the “investment” calculator at http://www.tcalc.com to determine how much you would need to save each month if your goal is to accumulate a $1 million retirement nest egg. Plan a 6% annual return and a 0% tax rate assuming you’ll invest in tax exempt
37. Joan Colby is approaching retirement and plans to purchase a condominium in Florida in three years. She now has $40,000 saved toward the purchase in a bank account that pays 8% compounded quarterly. She also has five $1,000 face value corporate bonds that mature in two years. She plans to
36. Carol Pasca just had her fifth birthday. As a birthday present, her uncle promised to contribute $300 per month to her education fund until she turns 18 and starts college. Carol’s parents estimate college will cost $2,500 per month for four years, but don’t think they’ll be able to save
35. Merritt Manufacturing needs to accumulate $20 million to retire a bond issue that matures in 13 years. The firm’s manufacturing division can contribute $100,000 per quarter to an account that will pay 8%, compounded quarterly. How much will the remaining divisions have to contribute every
34. Janet Elliott just turned 20 and received a gift of $20,000 from her rich uncle. Janet plans ahead and would like to retire on her 55th birthday. She thinks she’ll need to have about $2 million saved by that time in order to maintain her lavish lifestyle.She wants to make a payment at the end
33. Joe Trenton expects to retire in 15 years and has suddenly realized that he hasn’t saved anything toward that goal. After giving the matter some thought, he has decided that he would like to retire with enough money in savings to withdraw$85,000 per year for 25 years after he retires. Assume
4. Clyde’s uncle is going to give him $1,500 a quarter starting today for one year.In addition, Clyde will save up money in a credit union through monthly payroll deductions at his part-time job. The credit union pays 12% compounded monthly.If the car is expected to cost $40,000 (Clyde has
3. He’ll take out a car loan at the time of purchase on which he’ll make $500 monthly payments at 18% compounded monthly over four years.
2. He will receive $2,000 in one year from a trust.
1. He has $5,000 now in the bank in an account paying 8% compounded quarterly.
32. Clyde Atherton wants to buy a car when he graduates from college in two years.He has the following sources of money.
3. At the time of purchase, they’ll take out a mortgage. They anticipate being able to make payments of about $300 a month on a 15-year, 12% loan.In addition, they plan to make quarterly deposits to an investment account to cover any shortfall in the amount required. How much must those additions
2. Uncle Murray has promised to give them $1,000 a month for 18 months starting today.
1. They have $10,000 currently in a bank account that pays 6% compounded monthly.
31. The Stein family wants to buy a small vacation house in a year and a half. They expect it to cost $75,000 at that time. They have the following sources of money.
30. The Tower family wants to make a home improvement that is expected to cost$60,000. They want to fund as much of the cost as possible with a home equity loan but can afford payments of only $600 per month. Their bank offers equity loans at 12% compounded monthly for a maximum term of 10 years.a.
29. The Orion Corp. is evaluating a proposal for a new project. It will cost $50,000 to get the undertaking started. The project will then generate cash inflows of$20,000 in its first year and $16,000 per year in the next five years, after which it will end. Orion uses an interest rate of 15%
28. Referring to the previous problem, Lee wants to receive the payments for his work sooner than Haas proposes to make them. He has counterproposed that the payments be made at the beginning of the third, fourth, and fifth years rather than at the end. What will the contract be worth to Lee if
27. Lee Childs is negotiating a contract to do some work for Haas Corp. over the next five years. Haas proposes to pay Lee $10,000 at the end of each of the third, fourth, and fifth years. No payments will be received prior to that time. If Lee discounts these payments at 8%, what is the contract
26. Amy’s uncle died recently and left her some money in a trust that will pay her$500 per month for five years starting on her 25th birthday. Amy is getting married soon, and she would like to use this money as a down payment on a house now. If the trust allows her to assign its future payments
25. Adam Wilson just purchased a home and took out a $250,000 mortgage for 30 years at 8%, compounded monthly.a. How much is Adam’s monthly mortgage payment?b. How much sooner would Adam pay off his mortgage if he made an additional$100 payment each month?The financial tables in Appendix A are
24. What are the payments to interest and principal during the 25th year of the loan in Problem 21?
23. How soon would the loan in Problem 21 pay off if the borrower made a single additional payment of $17,936.29 to reduce principal at the end of the fifth year?
22. Construct an amortization schedule for the last six months of the loan in Problem 21. (Hint: What is the unpaid balance at the end of 291/2 years?)
21. What are the monthly mortgage payments on a 30-year loan for $150,000 at 12%? Construct an amortization table for the first six months of the loan.
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