Questions and Answers of Fundamentals Of Corporate Finance 10th

The following table contains information about Walmart (WMT) and Macy’s (M). Compute their respective ROEs and then determine how much Walmart would need to increase its profit margin in order to
Suppose a firm’s tax rate is 35%.a. What effect would a $9.58 million operating expense have on this year’s earnings?What effect would it have on next year’s earnings?b. What effect would a
Quisco Systems has 6.4 billion shares outstanding and a share price of $17.93. Quisco is considering developing a new networking product in house at a cost of $498 million.Alternatively, Quisco can
Suppose your firm receives a $4.79 million order on the last day of the year. You fill the order with $1.87 million worth of inventory. The customer picks up the entire order the same day and pays
Nokela Industries purchases a $37.2 million cyclo-converter. The cyclo-converter will be depreciated by $9.3 million per year over four years, starting this year. Suppose Nokela’s tax rate is
In December 2015, General Electric (GE) had a book value of equity of $97.6 billion, 9.6 billion shares outstanding, and a market price of $32.79 per share. GE also had cash of $103.4 billion, and
In December 2015, Apple had cash of $38.42 billion, current assets of $76.47 billion, and current liabilities of $76.29 billion. It also had inventories of $2.45 billion.a. What was Apple’s current
In early-2016, the following information was true about Abercrombie and Fitch (ANF)and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars.a. What is
Local Co. has sales of $10.3 million and cost of sales of $5.6 million. Its selling, general, and administrative expenses are $520,000 and its research and development is$1.3 million. It has annual
Chutes & Co. has interest expense of $1.03 million and an operating margin of 10.7%on total sales of $30 million. What is Chutes’ interest coverage ratio?
Ladders, Inc., has a net profit margin of 5.2% on sales of $51.2 million. It has book value of equity of $38.6 million and total liabilities with a book value of $30.5 million.What is Ladders’ ROE?
Suppose that in 2019, Global launched an aggressive marketing campaign that boosted sales by 14.2%. However, their operating margin fell from 5.78% to 3.81%. Suppose that they had no other income,
In January 2019, United Airlines (UAL) had a market capitalization of $22.74 billion, debt of $13.19 billion, and cash of $3.84 billion. United Airlines had revenues of $41.06 billion. Southwest
Consider a retail firm with a net profit margin of 3.17%, a total asset turnover of 1.73, total assets of $44.2 million, and a book value of equity of $18.5 million.a. What is the firm’s current
You have just won a radio contest and are disappointed to learn that the prize is four tickets to the Def Leppard reunion tour (face value $40 each). Not being a fan of 1980s power rock, you have no
You are the operations manager at your firm. Due to a pre-existing contract, you have the opportunity to acquire 200 barrels of oil and 3000 pounds of copper for a total of $25,000. The current
The launch of Sony’s PlayStation 3 was delayed until November 2006, giving Microsoft’s Xbox 360 a full year on the market without competition. Sony did not repeat this mistake in 2013 when PS4
You are considering investing in a savings bond that will pay $15,000 in 10 years. If the competitive market interest rate is fixed at 6% per year, what is the bond worth today?
If crude oil trades in a competitive market, would an oil refiner that has a use for the oil value it differently than another investor would?
Can you compare or combine cash flows at different times?
Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,600 to $28,600. The marketing group estimates that this rebate will increase sales
You are an international shrimp trader. A food producer in the Czech Republic offers to pay you 2.3 million Czech koruna today in exchange for a year’s supply of frozen shrimp. Your Thai supplier
Suppose your employer offers you a choice between a $5100 bonus and 100 shares of the company’s stock. Whichever one you choose will be awarded today. The stock is currently trading at $62.66 per
Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, suppose TrenchCall Limited (TRNC), a maker of mobile devices, trades on both the
Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him. Assume he produces
You have $900 and a bank is offering 4% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
You expect to have $5000 in one year. A bank is offering loans at 3.5% interest per year. How much can you borrow today?
Due to your good credit, your bank reduces the interest rate on your $14,000 loan from 9.3% to 7% per year. Thanks to the change, how much will you save in interest this year?
A friend asks to borrow $54 from you and in return will pay you $57 in one year. If your bank is offering a 5.8% interest rate on deposits and loans:a. How much would you have in one year if you
What is the discount factor that is equivalent to a 5% discount rate?
You plan to borrow $5000 from a bank. In exchange for $5000 today, you promise to pay $5400 in one year. What does the cash flow timeline look like from your perspective?What does it look like from
The local electronics store is offering a promotion “1-year: same as cash,” meaning that you can buy a TV now, and wait a year to pay (with no interest). So, if you take home a $1250 TV today,
Suppose the interest rate is 3.9%.a. Having $500 today is equivalent to having what amount in one year?b. Having $500 in one year is equivalent to having what amount today?c. Which would you prefer,
Consider the following alternatives:i. $140 received in one year ii. $230 received in 5 years iii. $320 received in 10 yearsa. Rank the alternatives from most valuable to least valuable if the
Suppose you invest $800 in an account paying 2% interest per year.a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”?b. What is
Calculate the future value of $4000 ina. 3 years at an interest rate of 6% per year.b. 6 years at an interest rate of 6% per year.c. 5 years at an interest rate of 10% per year.d. Why is the amount
What is the present value of $13,000 receiveda. 10 years from today when the interest rate is 4% per year?b. 20 years from today when the interest rate is 8% per year?c. 5 years from today when the
Your bank pays 2.8% interest per year. You put $1300 in the bank today and $750 more in the bank in one year. How much will you have in the bank in 2 years?
Your cousin is currently 14 years old. She will be going to college in 4 years. Your aunt and uncle would like to have $120,000 in a savings account to fund her education at that time. If the account
Your mom is thinking of retiring. Her retirement plan will pay her either $100,000 immediately on retirement or $140,000 five years after the date of her retirement.Which alternative should she
You just won a prize that comes with two payout choices. The first option is to get $140,000 right now and nothing hereafter. The second option is to get $94,000 right now and $9000 three years from
You are planning to invest $1000 in an account earning 7% per year for retirement.a. If you put the $1000 in an account at age 23, and withdraw it 34 years later, how much will you have?b. If you
Your grandfather put some money in an account for you on the day you were born.You are now 18 years old and are allowed to withdraw the money for the first time.The account currently has $4200 in it
You have just graduated and need money to buy a new car. Your rich Uncle Henry will lend you the moneyas long as you agree to pay him back within four years, and you offer to pay him the rate of
Let’s revisit the savings plan we considered earlier: We plan to save $1000 today and at the end of each of the next two years. At a fixed 10% interest rate, how much will we have in the bank three
You want to endow an annual graduation party at your alma mater. You want the event to be memorable, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its
You are the lucky winner of a $30 million state lottery. You can take your prize money either as (a) 30 payments of $1 million per year (starting today), or (b) $15 million paid today. If the
Ellen is 35 years old and she has decided it is time to plan seriously for her retirement. At the end of each year until she is 65, she will save $10,000 in a retirement account. If the account earns
In Example 4.3, you planned to donate money to your alma mater to fund an annual $30,000 graduation party. Given an interest rate of 8% per year, the required donation was the present value of:Before
In Example 4.5, Ellen considered saving $10,000 per year for her retirement. Although $10,000 is the most she can save in the first year, she expects her salary to increase each year so that she will
Your firm plans to buy a warehouse for $100,000. The bank offers you a 30-year loan with equal annual payments and an interest rate of 8% per year. The bank requires that your firm pays 20% of the
Let’s return to the lottery prize in Example 4.4. How high of a rate of return do you need to earn by investing on your own in order to prefer the $15 million payout?
Let’s return to your savings for a down payment on a house. Imagine that some time has passed and you have $10,050 saved already, and you can now afford to save $5000 per year at the end of each
You are about to purchase a new car and have two payment options. You can pay $20,000 in cash immediately, or you can get a loan that requires you to pay $500 each month for the next 48 months (four
Why does a growing stream of cash flows have a greater present value than a flat stream?
What is an example of a growing perpetuity?
What are examples of times you would need to solve for the cash flow in an annuity?
When you are solving for the interest rate, if you keep PV and FV constant, but extend the time period, will the interest rate be higher or lower?
Do the present and future value formulas depend upon the cash flows occurring at annual intervals?
When cash flows occur at a non-annual interval, what interest rate must you use? What number of periods must you use?
What is the present value of the following set of cash flows, discounted at 15% per year? Year CF 1 100 2 -100 3 200 4 -200
You have just received a windfall from an investment you made in a friend’s business.She will be paying you $22,012 at the end of this year, $44,024 at the end of next year, and $66,036 at the end
Suppose you receive $180 at the end of each year for the next three years.a. If the interest rate is 9%, what is the present value of these cash flows?b. What is the future value in three years of
You have a loan outstanding. It requires making seven annual payments of $2000 each at the end of the next seven years. Your bank has offered to allow you to skip making the next six payments in lieu
Assume you can earn 8.7% per year on your investments.a. If you invest $160,000 for retirement at age 30, how much will you have 35 years later for retirement?b. If you wait until age 40 to invest
The British government has a consol bond outstanding paying £300 per year forever.Assume the current interest rate is 8% per year.a. What is the value of the bond immediately after a payment is
You have $200,000 to donate to your college. You want to endow a perpetual scholarship that makes its first payment in 1 year. If the college’s discount rate is 4%, how large will the annual
What is the present value of $3000 paid at the end of each of the next 52 years if the interest rate is 4% per year?
Your grandmother has been putting $1000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 6%. How much money will be in
Assume that your parents wanted to have $180,000 saved for college by your 18th birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and
When you purchased your car, you took out a five-year annual-payment loan with an interest rate of 6.1% per year. The annual payment on the car is $5300. You have just made a payment and have now
You figure that the total cost of college will be $96,000 per year 18 years from today.If your discount rate is 6% compounded annually, what is the present value today of four years of college costs
Assume that Social Security promises you $41,000 per year starting when you retire 45 years from today (the first $41,000 will be paid 45 years from now). If your discount rate is 5%, compounded
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $3000. Each year after that, you will receive a payment on the anniversary of the last
You are thinking of building a new machine that will save you $2000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 4% per year forever. What is
When Alfred Nobel died, he left the majority of his estate to fund five prizes, each to be awarded annually in perpetuity starting one year after he died (the sixth one, in economics, was added
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug’s profits will be $2 million in its first year and that this
A rich aunt has promised you $5000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 2% larger than the last
You are thinking about buying a savings bond. The bond costs $52 today and will mature in 15 years with a value of $104. What annual interest rate will the bond earn?
You have an investment account that started with $4000 10 years ago and which now has grown to $6000.a. What annual rate of return have you earned (you have made no additional contributions to the
You have an investment opportunity that requires an initial investment of $2400 today and will pay $3800 in one year. What is the rate of return of this opportunity?
You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If the bond initially costs $2000, what is the payment every year?
You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment
You receive a $11,000 check from your grandparents for graduation. You decide to save it toward a down payment on a house. You invest it earning 12% per year and you think you will need to have
A local bank is running the following advertisement: “For just $1000 we will pay you $80 forever!” The fine print says that for a $1000 deposit, the bank will pay $80 every year in perpetuity,
You are thinking of making an investment in a new factory. The factory will generate revenues of $1.71 million per year for as long as you maintain it. You expect that the maintenance costs will
You have just turned 22 years old, received your bachelor’s degree, and accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as follows:
Suppose you currently have $5200 in your savings account, and your bank pays interest at a rate of 0.45% per month. If you make no further deposits or withdrawals, how much will you have in the
Your firm spends $4500 every month on printing and mailing costs, sending statements to customers. If the interest rate is 1.47% per month, what is the present value of eliminating this cost by
You are looking to buy a car and can afford to pay $195 per month. If the interest rate on a car loan is 0.72% per month for a 60-month loan, what is the most expensive car you can afford to buy?
You have just entered college and have decided to pay for your living expenses using a credit card that has no minimum monthly payment. You intend to charge $1000 per month on the card for the next
You intend to endow a scholarship that pays $5000 every 6 months, starting 6 months from now. If the appropriate discount rate is 5% per 6-month period, how much money will you have to donate today
You have just deposited $1000 in an unusual bank account that pays interest biannually (once every 2 years). If the 2-year interest rate is 10% (total interest over 2 years is 10%, not 10% per year),
Suppose your bank account pays interest monthly with an effective annual rate of 6%. What amount of interest will you earn each month?If you have no money in the bank today, how much will you need to
Your firm is purchasing a new telephone system that will last for four years. You can purchase the system for an up-front cost of $150,000, or you can lease the system from the manufacturer for $4000
Let’s say that you are now three years into your $30,000 car loan from the previous section and you decide to sell the car. When you sell the car, you will need to pay whatever the remaining
At the start of 2008, one-year U.S. government bond rates were about 3.3%, while the inflation rate that year was 0.1%. At the start of 2018, one-year interest rates were about 1.8%, and the
You work for a bank that has just made two loans. In one, you lent $909.09 today in return for $1000 in one year. In the other, you lent $909.09 today in return for $15,863.08 in 30 years. The
Suppose a friend offers to borrow $100 from you today and in return pay you $110 one year from today. Looking in the market for other options for investing the $100, you find your best alternative
You are considering a car loan with a stated APR of 6.04% based on monthly compounding.What is the effective annual rate of this loan?

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