Questions and Answers of Fundamentals Of Corporate Finance

What is the value of an investment that pays $5,200 every other year forever, if the first payment occurs one year from today and the discount rate is 14 percent compounded daily? What is the value
A 10-year annual annuity due with the first payment occurring at date t = 7 has a current value of $50,000. If the discount rate is 13 percent per year, what is the annuity payment amount?
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 11 percent interest per week.a. What APR must the store report to its
Look up Coca-Cola (KO), Gateway (GTW), Callaway Golf (ELY), and Navistar International (NAV). For each company, follow the “Financial Highlights” link and find the bond rating. Which companies
You can find current bond prices at www.bondsonline.com. You want to find the bond prices and yields for bonds issued by Georgia Pacific. To find these bonds at the site, click the “Bond Search”
You can find an online bond calculator at www.smartmoney.com. Follow the “Economy & Bonds” link and then click on the “Bond Calculator” link. What is the YTM for a bond that matures in August
WMS, Inc., has 7 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price?
Treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.
Finley Co. has 10 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,075.25, what is its YTM?
Mustaine Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $850. At this price, the bonds yield 7.4 percent. What must the coupon rate be on
Mullineaux Co. issued 11-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.5 percent, what is the current bond price?
Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?
Barely Heroes Corporation has bonds on the market with 14.5 years to maturity, a YTM of 9 percent, and a current price of $850. The bonds make semiannual payments. What must the coupon rate be on
If Treasury bills are currently paying 8 percent and the inflation rate is 6 percent, what is the approximate real rate of interest? The exact real rate?
Suppose the real rate is 3.5 percent and the inflation rate is 3 percent. What rate would you expect to see on a Treasury bill?
Peter Piper wants to sell you an investment contract that pays equal $10,000 amounts at the end of each of the next 20 years. If you require an effective annual return of 9.5 percent on this
You’re trying to choose between two different investments, both of which have up-front costs of $30,000. Investment G returns $55,000 in six years. Investment H returns $90,000 in 11 years. Which
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 10-year annuity of $2,000 per year at the current interest rate of 10 percent per
You’re prepared to make monthly payments of $95, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your
You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $825, but no more. Assuming monthly compounding, what is the highest rate you can
You need a 30-year, fixed-rate mortgage to buy a new home for $180,000. Your mortgage bank will lend you the money at a 7.5 percent APR for this 360-month loan. However, you can only afford monthly
In the 1994 NBA draft, no one was surprised when the Milwaukee Bucks took Glenn “Big Dog” Robinson with the first pick, but Robinson wanted big bucks from the Bucks: a 13-year deal worth a total
In our previous question, we looked at the numbers for Big Dog’s basketball contract. Now let’s take a look at the terms for Shaquille “Shaq” O’Neal, the number one pick in 1992 who was
An investment offers a 16 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 10 percent. What does Alan believe the inflation rate
Say you own an asset that had a total return last year of 13 percent. If the inflation rate last year was 4 percent, what was your real return?
Locate the Treasury issue in Figure 7.4 maturing in November 2016. Is this a note or a bond? What is its coupon rate? What is its bid price? What was the previous day’s asked price?FIGURE 7.4
Both Bond Bob and Bond Tom have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Bob has 2 years to maturity, whereas Bond Tom has 15 years to maturity. If interest
Bond J is a 5 percent coupon bond. Bond K is an 11 percent coupon bond. Both bonds have 8 years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise by
Lifehouse Software has 10 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on
BDJ Co. wants to issue new 10-year bonds for some much needed expansion projects. The company currently has 8 percent coupon bonds on the market that sell for $1,095, make semiannual payments, and
Massey Co. has 12 percent coupon bonds making annual payments with a YTM of 9 percent. The current yield on these bonds is 9.80 percent. How many years do these bonds have left until they mature?
HSD Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 20-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent.a. What
Suppose your company needs to raise $10 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 9 percent, and you’re evaluating two
Bond P is a premium bond with a 10 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 8 percent, and have eight years to
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding
Consider the prices on the following three Treasury issues as of February 24, 2002:Notice that the bond in the middle is callable. What is the implied value of the call feature? 6½ 8% 12 May 08n May
The Moulon Rouge Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays
Heard, Inc., just paid a dividend of $1.75 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. If investors require a 12 percent return
A drawback of the dividend growth model is the need to estimate the growth rate of dividends. One way to estimate this growth rate is to use the sustainable growth rate. Look back at Chapter 4 and
According to the 2001 Value Line Investment Survey, the dividend growth for Phillips Petroleum (P) is 2.5 percent. Find the current price quote and dividend information at finance.yahoo.com. If the
The next dividend payment by SAF, Inc., will be $2.50 per share. The dividends are anticipated to maintain a 5 percent growth rate, forever. If SAF stock currently sells for $48.00 per share, what is
Coca-Cola (KO) is a dividend-paying company. Recently, dividends for Coca-Cola have increased at about 5.5 percent per year. Find the most recent closing monthly stock price under the “Mthly. Adj.
Go to www.dividenddiscountmodel.com and enter ONE (for Bank One) as the ticker symbol. You can enter a required return in the Discount Rate box and the site will calculate the stock price using the
Cannone Corporation will pay a $4.00 per share dividend next year. The company pledges to increase its dividend by 4 percent per year, indefinitely. If you require a 13 percent return on your
Shocking Co. is expected to maintain a constant 7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.2 percent, what is the required return on the power
Suppose you know that a company’s stock currently sells for $60 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided
Kiessling Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this
Sowell, Inc., has an issue of preferred stock outstanding that pays an $8.50 dividend every year, in perpetuity. If this issue currently sells for $124 per share, what is the required return?
Smashed Pumpkin Farms (SPF) just paid a dividend of $3.00 on its stock. The growth rate in dividends is expected to be a constant 7.5 percent per year, indefinitely. Investors require an 18 percent
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company
Corn, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $2 per share for each of the next four years, and
South Side Corporation is expected to pay the following dividends over the next four years: $6.50, $5, $3, and $2. Afterwards, the company pledges to maintain a constant 5 percent growth rate in
Super Growth Co. is growing quickly. Dividends are expected to grow at a 32 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required
Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year,
Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return
Fernandez Corporation stock currently sells for $45 per share. The market requires a 12 percent return on the firm’s stock. If the company maintains a constant 8 percent growth rate in dividends,
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If
Bruin Bank just issued some new preferred stock. The issue will pay an $8 annual dividend in perpetuity, beginning six years from now. If the market requires a 6 percent return on this investment,
Consider four different stocks, all of which have a required return of 20 percent and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current
Tulip Mania, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should they accept either of them?
Warf Co. just paid a dividend of $4.00 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $104.05 and all the dividend information remains the same. What required return must investors be
An investment project provides cash inflows of $780 per year for eight years. What is the project payback period if the initial cost is $3,000? What if the initial cost is $5,000? What if it is
An investment project has annual cash inflows of $7,000, $7,500, $8,000, and $8,500, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost
An investment project costs $8,000 and has annual cash flows of $1,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5
The Moby Computer Corporation is trying to choose between the following two mutually exclusive design projects:a. If the required return is 9 percent and Moby Computer applies the profitability index
Bumble’s Bees, Inc., has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return was 21
Kong Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:a. If the company requires a 10 percent return on its investments, should it accept this project? Why?b.
A project that provides annual cash flows of $1,200 for nine years costs $6,000 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate
In 1996, Fuji Film, the Japanese manufacturer of photo film and related products, broke ground on a film plant in South Carolina. Fuji apparently thought that it would be better able to compete and
An investment has an installed cost of $412,670. The cash flows over the four-year life of the investment are projected to be $212,817, $153,408, $102,389, and $72,308. If the discount rate is zero,
An investment under consideration has a payback of seven years and a cost of $320,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain.
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash
Cheesy Poofs, Inc., is looking at setting up a new manufacturing plant in South Park to produce Cheesy Poofs. The company bought some land six years ago for $5 million in anticipation of using it as
Winnebagel Corp. currently sells 20,000 motor homes per year at $45,000 each, and 8,000 luxury motor coaches per year at $78,000 each. The company wants to introduce a new portable camper to fill out
A proposed new investment has projected sales of $700,000. Variable costs are 60 percent of sales, and fixed costs are $175,000; depreciation is $75,000. Prepare a pro forma income statement assuming
A proposed new project has projected sales of $85,000, costs of $43,000, and depreciation of $3,000. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches
A piece of newly purchased industrial equipment costs $847,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
A major college textbook publisher has an existing finance textbook. The publisher is debating whether or not to produce an “essentialized” version, meaning a shorter (and lower-priced) book.
Last year, Ripa Pizza Corporation reported sales of $61,800 and costs of $26,300. The following information was also reported for the same period:Based on this information, what was Ripa Pizza’s
Consider an asset that costs $320,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
In evaluating the Escalade, under what circumstances might GM have concluded that erosion of the Denali line was irrelevant?
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $8,400,000 and will be sold for $1,600,000 at the end of the project. If
GM was not the only manufacturer looking at the big sport-utility category. Chrysler, however, initially decided not to go ahead with an entry (Chrysler later reversed course on this issue). Why
In evaluating the Escalade, what do you think GM needs to assume regarding the enormous profit margins that exist in this market? Is it likely they will be maintained when GM and others enter this
Bush Boomerang, Inc., is considering a new three year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over
In the previous problem, suppose the required return on the project is 15 percent. What is the project’s NPV?Data from problem 10Bush Boomerang, Inc., is considering a new three year expansion
Dog Up! Franks is looking at a new sausage system with an installed cost of $410,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the
Your firm is contemplating the purchase of a new $750,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $80,000 at
In the previous problem, suppose your required return on the project is 20 percent and your pretax cost savings are only $300,000 per year. Will you accept the project? What if the pretax cost
A five-year project has an initial fixed asset investment of $225,000, an initial NWC investment of $20,000, and an annual OCF of –$25,000. The fixed asset is fully depreciated over the life of the
Aguilera Acoustics (AAI), Inc., projects unit sales for a new 7-octave voice emulation implant as follows:Production of the implants will require $1,500,000 in net working capital to start and
You are evaluating two different silicon wafer milling machines. The Techron I costs $195,000, has a three-year life, and has pretax operating costs of $32,000 per year. The Techron II costs
Guthrie Enterprises needs someone to supply it with 170,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the
Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $450,000 is estimated to result in $150,000 in annual pretax cost savings.
Pags Industrial Systems Company (PISC) is trying to decide between two different conveyor belt systems. System A costs $405,000, has a three-year life, and requires $105,000 in pretax annual
Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $750,000 five years ago; if the

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