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intermediate financial management
Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions
(Solving a comprehensive problem) Use the following end-of-year price data to answer the following questions for the Harris and Pinwheel companies.Time Harris Pinwheel 1 $10 $20 2 8 32 3 12 28 4 15 27a. Compute the annual rates of return for each time period and for both firms.b. Calculate both the
(Calculating the geometric and arithmetic average rates of return) The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends:Time Brangus Cattle Company 1 $15 2 10 3 12 4 23 5 25a. Calculate the annual rate of
(Calculating the geometric and arithmetic average rates of return) (Related to Checkpoint 7.2 on page 240) Marsh Inc. had the following end-of-year stock prices over the last five years and paid no cash dividends:Time Marsh 1 $10 2 12 3 18 4 7 5 10a. Calculate the annual rates of return for each
(Calculating expected rates of return and risk) Syntex, Inc., is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return?Common Stock A Common Stock B Probability Return
(Calculating expected rates of return and risk) (Related to Checkpoint 7.1 on page 232) B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.9 percent. Calculate the following investment’s expected return and its standard deviation. Should Gautney
(Computing rates of return) From the following price data, compute the annual rates of return for Asman and Salinas.Time Asman Salinas 1 $10 $30 2 12 28 3 11 32 4 13 35 How would you interpret the relationship between the annual rates of return of these companies?
(Calculating rates of return) Quick Learning PLC makes toys for young children. Last year, their shares were selling at $26. By the end of year they were being traded at$22. If the firm has paid a dividend of $5 during the year, what rate of return would have been earned if this stock had been
(Calculating rates of return) The common stock of Plasticoat PLC had a market value of €32 when you purchased it a year ago. During the past year it has paid a dividend of £3.50 and the share price is now at €40. What rate of return did you earn on your Plasticoat shares?
(Calculating rates of return) The FTSE 100 comprises the top 100 public companies listed on the London Stock Exchange. On April 10, 2015, this index had a value of 7089.77. On April 10, 2016, it was at 6204.41. If the average dividend paid on the stocks in the index is approximately 5 percent of
(Calculating rates of return) (Related to Checkpoint 7.1 on page 232) The shares of Tesco PLC were worth £2.51 on April 10, 2015. They were trading at £1.90 one year later.Assuming they did not pay any dividend in that year, what was the return offered by Tesco’s shares during this period?
What is the “behavioral view” of market efficiency?
Do you think that the capital markets are completely efficient, efficient most of the time, or completely inefficient? Support your position as if you were talking to your favorite nephew, who is only 10 years old.
Compare and contrast the notions of weak-form, semi-strong-form, and strong-form market efficiency.
What is the efficient markets hypothesis? Explain this concept in your own words.
Compare your results. How do you think factors like income, socioeconomic background, the number of dependents, expenses, etc. impact your scores?
Pick a friend and take the risk tolerance quiz referenced in Finance for Life: Your Personal Financial Risk Tolerance on page
Under what circumstances would you prefer to use the geometric average rate of return as opposed to the arithmetic average rate of return?
What is the relationship between the geometric average rate of return and compound interest?
What can you conclude about the relative risk of investing in the United States versus Japan from Figure 7.4?
What does Figure 7.4 tell us about how the U.S. stock market has performed when compared to all the alternatives included in the figure over the period 1988–2015?
What is the equity risk premium, and how is it calculated?
Describe the information contained in Figure 7.2, identifying which securities have performed the best over long periods of time. Some investors with long investment time horizons invest exclusively in bonds. Why do you think that is so?
Describe the five-step process used to calculate the variance in the rate of return for an investment.
Why is the volatility or variance in an investment’s rate of return a reasonable indication of the risk of the investment?
Describe the concept of an expected rate of return as if you were explaining it to your 10-year-old niece.
How does the expected rate of return concept differ from that of the realized rate of return?
How do cash dividends affect the realized rate of return from investing in shares of common stock?
Describe the concept of a realized rate of return as if you were explaining it to your grandfather, who has never had a finance class.
In Regardless of Your Major: Using Statistics on page 226, we note that statisticians analyze data. Moreover, in your statistics class you learned how to describe random outcomes using statistical measures such as expected value and variance. How does our knowledge of basic statistics help us
How do behavioral biases affect the efficiency of market prices?
What are the three categories of information that are commonly used to categorize tests of the efficient market hypothesis?
What is an “efficient market”?
Why is the geometric average different from the arithmetic average?
How is a geometric average rate of return computed? For example, what is the geometric average of the following annual rates of return: 10 percent, 210 percent, and 5 percent?
How is a simple arithmetic average computed? For example, what is the arithmetic average of the following annual rates of return: 10 percent, 210 percent, and 5 percent?
Does the historical evidence suggest that investing in emerging markets is more or less risky than investing in developed markets?
What is the equity risk premium, and how is it measured?
How well does the risk-return principle hold up in light of historical rates of return? Explain.
Why is variance used to measure risk?
What is the variance in the rate of return of an investment?
What is the expected rate of return, and how is it different than the realized rate of return?
If you invested $100 one year ago that is worth $110 today, what rate of return did you earn on your investment?
Explain the efficient market hypothesis and why it is important to stock prices.
Compute geometric (or compound) and arithmetic average rates of return.
Describe the historical pattern of financial market returns.
Calculate realized and expected rates of return and risk.
If the inflation rate averages 3 percent during her retirement, how old will she be when the prices have doubled from current levels? How much will a newspaper cost when she is 95 years old, in 35 years’ time, if it costs €2 today?
Considering the information obtained in Question 2, should Isabel wait till she is 65 to obtain her state pension? If she waits until the age of 70, how will this state pension change your answer to Question 2?
Ignoring her state pension, is the amount determined in Question 1 sufficient for meeting Isabel’s monthly expenses in addition to her pension of €2,000 per month? If not, how long will her retirement savings last if her current expenditure remains the same? What if she reduces her expenditure
Isabel has access to some money from her partner’s side. She can, therefore, use her overall receipts from her savings—€310,000—for retirement. If her savings pay her 5 percent per annum and she expects to live for another 35 years, how much can she withdraw on a monthly basis?
That is, the $2 million loan will be paid off with monthly payments, and there will also be a final payment of $500,000 at the end of the final month. How much will the monthly payments be?
(Analyzing a complex stream of cash flows) Roger Sterling has decided to buy an ad agency and is going to finance the purchase with seller financing—that is, a loan from the current owners of the agency. The loan will be for $2,000,000 financed at a 7 percent nominal annual interest rate.
If 8 percent is the appropriate discount rate, what is the present value of this contract?
(Calculating the present value of a complex stream) Don Draper has signed a contract that will pay him $80,000 at the beginning of each year for the next six years, plus an additional $100,000 at the end of Year
If 8 percent is the appropriate discount rate, what is the present value of this contract?
(Calculating the present value of a complex stream) Don Draper has signed a contract that will pay him $80,000 at the end of each year for the next six years, plus an additional $100,000 at the end of Year
(Solving a comprehensive problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the
(Calculating the future value of a complex annuity) Springfield mogul Montgomery Burns, age 80, wants to retire at age 100 so he can steal candy from babies full-time.Once Mr. Burns retires, he wants to withdraw $1 billion at the beginning of each year for 10 years from a special offshore account
(Solving a comprehensive problem) Having just inherited a large sum of money, you are trying to determine how much you should save for retirement and how much you can spend now. For retirement, you will deposit today (January 1, 2016) a lump sum in a bank account paying 10 percent compounded
(Calculating complex annuity payments) Milhouse, 22, is about to begin his career as a rocket scientist for a NASA contractor. Being a rocket scientist, Milhouse knows that he should begin saving for retirement immediately. Part of his inspiration came from reading an article on Social Security in
(Solving a comprehensive problem) You would like to have $50,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 7 percent interest compounded annually. Your first payment will be made at the end of the year.a. How much must you deposit
(Calculating the present value of complex cash flows) How much do you have to deposit in an account paying 8 percent per annum if you want to withdraw £15,000 at the end of Year 5 and then £5,000 each year for next five years (from Year 6 to Year 10)?
(Calculating the present value of complex cash flows) You have an opportunity to make an investment that will pay $100 at the end of the first year, $400 at the end of the second year, $400 at the end of the third year, $400 at the end of the fourth year, and $300 at the end of the fifth year.a.
(Calculating the present value of an uneven stream of payments) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:End of Year A B C 1 $2,000 $2,000 $ 5,000 2 3,000 2,000 5,000 3 4,000 2,000 (5,000)4 (5,000) 2,000 (5,000)5 5,000 5,000
(Calculating the present value of annuities and complex cash flows) You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:End of Year A B C 1 $15,000 $20,000 2 15,000 3 15,000 4 15,000 5 15,000 $15,000 6 15,000 60,000 7 15,000 8 15,000 9
(Calculating the present value of annuities and complex cash flows) (Related to Checkpoint 6.6 on page 209) You are given three investment alternatives to analyze.The cash flows from these three investments are as follows:End of Year A B C 1 $10,000 $10,000 2 10,000 3 10,000 4 10,000 5 10,000
(Calculating the present value of a negatively growing perpetuity) Your firm has taken cost-saving measures that will provide a benefit of $10,000 in the first year.These cost savings will decrease each year at a rate of 3 percent forever. If the appropriate interest rate is 6 percent, what is the
(Calculating the present value of a growing perpetuity) Jonathan Lee wants to start an annual bursary of €50,000 for his alma mater in Berlin. The first payment will occur at the end of this year and it will then grow by 5 percent each year to cover for inflation. If the bank account pays 8
(Calculating the present value of a growing perpetuity) A pension plan pays€30,000 at the end of Year 1 and then grows at the rate of 3 percent per year indefinitely. What is the present value if the rate of interest to discount the cash flow is 7 percent?
(Calculating the present value of a growing perpetuity) (Related to Checkpoint 6.5 on page 207) A perpetuity pays $1,000 at the end of Year 1, and the annual cash flows grow at a rate of 4 percent per year indefinitely. What is the present value if the appropriate discount rate is 8 percent? If the
(Calculating the present value of a perpetuity) What will be the present value of a perpetual payment of £400 per year if the applicable discount rate is 6 percent? What will be its value if the discount rate is changed to 3 percent?
(Calculating the present value of a perpetuity) (Related to Checkpoint 6.4 on page 206) What is the present value of the following?a. A $300 perpetuity discounted back to the present at 8 percentb. A $1,000 perpetuity discounted back to the present at 12 percentc. A $100 perpetuity discounted back
(Calculating the future value of an annuity) Selma and Patty Bouvier, twins who work at the Springfield DMV, have decided to save for retirement, which is 35 years away. They will both receive an 8 percent annual return on their investment over the next 35 years. Selma invests $2,000 at the end of
(Calculating the future value of an annuity) Let’s say you deposited $160,000 in a 529 plan (a tax-advantaged college savings plan), hoping to have $420,000 available 12 years later when your first child starts college. However, you didn’t invest very well, and two years later the account’s
(Calculating annuity payments) Calvin Johnson has a $5,000 debt balance on his Visa card that charges 12.9 percent APR compounded monthly. Let’s assume Calvin’s only needed to make a minimum monthly payment of 3 percent of his debt balance, which is $150. How many months (round up) will it take
(Determining the outstanding balance of a loan) (Related to Checkpoint 6.3 on page 202) Mrs. Khan took a mortgage of £140,000 at 5 percent per annum 10 years ago for a period of 25 years. She pays a monthly payment of £818.43. What is the outstanding balance on her current loan if she has just
(Calculating annuity payments) Ford Motor Company’s current incentives include a choice between 4.9 percent APR financing for 60 months and $1,000 cash back on a Mustang. Let’s assume Suzie Student wants to buy the premium Mustang convertible, which costs $25,000, and she has no down payment
(Calculating annuity payments) Professor Finance is thinking about trading cars.She estimates she will still have to borrow $25,000 to pay for her new car. How large will Prof. Finance’s monthly car loan payment be if she can get a five-year (60 equal monthly payments) car loan from the VTech
(Calculating the present value of annuity) (Related to Checkpoint 6.2 on page 199)Xiang Lu received €80,000 four years ago as an inheritance, which he immediately deposited in an account paying him 5 percent every year. Now he has started to put in €3,000 every year in the same account,
(Calculating annuity payments) (Related to Checkpoint 6.1 on page 196) Sheryl Williams wants to have a million dollars when she retires, 40 years from now. She is planning to do this by depositing an equal amount at the end of every year for the next 40 years. If her tax-free savings account pays
(Solving a comprehensive problem) Over the past few years, Microsoft founder Bill Gates’s net worth has fluctuated between $20 and $130 billion. In early 2006, it was about $26 billion—after he reduced his stake in Microsoft from 21 percent to around 14 percent by moving billions into his
(Calculating the components of an annuity payment) You have just bought a house for €270,000 by taking a 20-year mortgage for the same amount at 8 percent per annum payable in monthly installments. What will your monthly payments be? Use a spreadsheet to calculate your answer. Now calculate the
(Calculating the present value of annuity) You have agreed to invest in a new business scheme that has promised to pay £2,000 every year starting at the end of Year 5 from now, assuming it earns 9 percent per annum. This will continue to pay the same amount each year for 10 years once started.
(Calculating the present value of an annuity due) What will be the present value of an annuity due of £800 a year for 12 years, discounted back to the present at an annual rate of 5 percent? What will be the present value of this annuity if the discount rate is 8 percent?
(Calculating the future value of an annuity) Find the future value of an annuity that pays €8,000 a year for 10 years at 6 percent compounded annually. What will be the future value if it was compounded at 10 percent?
(Calculating the present value of annuity payments) (Related to Checkpoint 6.2 on page 199) The state lottery’s million-dollar payout provides for $1 million to be paid over the course of 19 years in amounts of $50,000. The first $50,000 payment is made immediately, and the 19 remaining $50,000
(Calculating components of annuity payments) Omar Khalid has started a new factory and bought a commercial building for $160,000 with an 8 percent mortgage to be paid over 20 years, calling for payment semi-annually. What will be the semiannual payment? What will the interest and principal
(Calculating annuity payments) Amrit Kolar bought a new house by borrowing£300,000 on a mortgage at 6 percent per annum repayable over 30 years in equal annual payments. How large will his annual payments be?
(Calculating annuity payments) On December 31, Son-Nan Chen borrowed$100,000, agreeing to repay this sum in 20 equal annual installments that include both principal and 15 percent interest on the declining balance. How large will the annual payments be?
(Calculating the future value of an annuity and annuity payments) You are trying to plan for retirement in 10 years, and, currently, you have $150,000 in a savings account and $250,000 in stocks. In addition, you plan to deposit $8,000 per year into your savings account at the end of each of the
(Calculating annuity payments) Shuting has given herself five years to save $40,000 to buy a commercial property in Hong Kong for her business. She plans to make annual deposits in an account paying 10 percent per annum. If she makes her first deposit at the end of this year, what amount does she
(Solving a comprehensive problem) You would like to have $75,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 8 percent interest compounded annually. Your first payment will be made at the end of the year.a. How much must you deposit
(Calculating the number of annuity periods) Rajesh has just bought a large flat screen TV for € 4,000 on hire purchase. He has agreed to pay 16 percent per annum compounded monthly interest on this amount. He has agreed to a monthly payment of€200. How long will he take to repay the loan? How
(Calculating annuity payments) Mike and Bethan plan to buy their dream house in six years’ time. They expect to need £30,000 to do so at that time. They are saving in an account that pays 10 percent per annum. How much do they have to deposit every year to have the required amount when the final
(Calculating annuity payments) (Related to Checkpoint 6.1 on page 196) Xiang Lu has started a business in Hong Kong and has borrowed $60,000 from a bank at 10 percent compounded annually. This loan will be repaid in equal installments at the end of each year over the next seven years. How much will
(Calculating an annuity’s interest rate) Rebecca Smyth has seen a deal for a new car worth £20,000 that she can take home now and start paying for only at the end of the year. She will have to make an annual payment of £6,000 every year for next four years. What will be the applicable rate of
(Calculating annuity payments) (Related to Checkpoint 6.1 on page 196) On December 31, Beth Klemkosky bought a yacht for $50,000. She paid $10,000 down and agreed to pay the balance in 10 equal annual installments that include both principal and 10 percent interest on the declining balance. How big
(Calculating an annuity’s interest rate) Your folks would like some advice from you.An insurance agent just called and offered them the opportunity to purchase an annuity for $21,074.25 that will pay them $3,000 per year for 20 years. They don’t have the slightest idea what return they would be
(Calculating the present value of annuity) What should be the present value of an eight-year annuity payment that pays $1,700 annually given an applicable discount rate of 5 percent?
(Calculating the number of annuity periods) Alex Karev has taken out a $200,000 loan with an annual rate of 8 percent compounded monthly to pay off hospital bills from his wife Izzy’s illness. If the most Alex can afford to pay is $1,500 per month, how long will it take for him to pay off the
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