Questions and Answers of Principles Managerial Finance

Present values of single amounts and streams Below are two cash flow streams, A and B. Assuming that you have a 9% opportunity cost, which stream do you prefer?Under each stream is a lump sum. If you
Future values Freya has received a large inheritance from her grandmother and has decided to invest in fixed income securities. The following table shows the amount, applicable interest rate, and
An Iowa state savings bond can be converted to $100 at maturity six years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 3% annual interest (compounded
Calculating missing cash flow On the timeline below, what is the missing cash flow at time 2? The interest rate is 5% and the future value of the cash stream at time 3 is $567.75. 0 $0 1 $100 2 - 3
Your bank manager has offered you three different investment alternatives shown in the following table. You have saved €25,000 in your savings account and it is earning 7% interest annually.a. Find
Jacob Melipo is a businessman in Kano, Nigeria, who wants to invest his savings in any one of the alternatives shown in the following table.The table shows the purchase price, the amount of single
In recent years, interest rates in several countries (e.g., Japan) have been negative, at least for certain kinds of investments. Glance back at Figure 5.6 and describe how the figure would look if
John Pierce wishes to select one of the two annuities on offer.Annuity 1 is an ordinary annuity of £1,250 per year for 10 years. Annuity 2 is an annuity due of £1,150 per year for 10 years.a. Find
Future and present value of an annuity Use equations 5.3 and 5.4 to find the future and present value of a five-year ordinary annuity paying $100 per year at each of the following interest rates:a.
Value of an annuity versus a single amount Mark is due to retire in a month’s time and one of his pension funds has offered him two alternatives. His money can be received either in the form of
Perpetuities Yang is evaluating an investment that will pay CNY 150 in one year, and it will continue to make payments at annual intervals thereafter, but the payments will grow at 5% forever.a. What
Value of a mixed stream Cook Energy Ltd. plans to build a new low-cost nuclear power plant in France. The construction will cost €30 million right now, but cash flows of €12 million will start
Relationship between future value and present value: Mixed stream The table below shows a mixed cash flow stream starting in one year, except that the cash flow for year 4 is missing.You have been
Finding nominal rate of return Suppose the effective annual interest rate on some investment is 9.38%.a. What is the stated rate per month?b. Suppose you decide to kick your Starbucks habit to save
Choosing the best annuity Nikita Agarwal wishes to choose the best of four annuities available to her. In each case, in exchange for paying a lump sum today, she will receive equal, end-of-year cash
Peter Brierley, based in Singapore, wishes to determine how long it will take an initial investment of SGD 10,000 to double.a. If Peter earns 7% annual interest on his investment, how long will it
Jennifer wishes to determine how long it will take to repay a £7,000 loan given that the lender requires her to make annual end-of-year installment payments of £1,225.a. If the applicable interest
What is interest rate risk? How does a bond’s maturity affect its interest rate risk? How about the bond’s coupon rate?
Use Excel to find the value of a 9.8% annual coupon bond with a $1,000 par value, 25 years to maturity, and 12% required rate of return.
Use Excel to find the value of an 8% coupon bond with a $1,000 par value, 18 years to maturity, a 7% required rate of return, and semiannual versus monthly coupon payments.
Use Excel to find the YTM of a 7% annual coupon bond with a $1,000 par value, 15 years to maturity, and a market price of $1,145.
Bond yields Elliot Enterprises’ bonds currently sell for $1,026.57, have a 6.5% coupon rate and a $1,000 par value, pay interest annually, and have 18 years to maturity.a. Calculate the bonds’
The yields for Treasuries with differing maturities on a recent day are shown in the following table.a. Use this information to plot a yield curve for this date.b. If the expectations hypothesis is
A Eurobond with seven years to maturity and a coupon rate of 8% (paid annually) has a par, or face, value of €1,000. If the required return on this bond is 6%, what is the price of the bond?
Assume a five-year treasury bond has a coupon rate of 4%.a. Give examples of required rates of return that would make the bond sell at a discount, at a premium, and at par.b. If this bond’s par
Real and nominal rates of interest Notice that Equation 6.1 can be rewritten this way:In this equation there are three separate terms in parentheses.a. Which term represents the growth in money that
Paul loves to shop at Pound Place, where he can find many items priced at exactly £1. Paul has £300 to spend and is thinking of going on a shopping spree at his favorite store, but he is also
Several years ago you purchased a callable corporate bond at its $1,000 par value. The bond’s call price is $1,060. Since you purchased the bond, interest rates have fallen a little, and the
Today is January 1. You want to buy a $1,000 par bond that pays a $40 coupon each year on December 31. The bond matures in five years and currently sells at par.a. What is the required return on the
Valuation fundamentals Nelson wants to increase the production capacity of his cattle food plant in Pretoria, South Africa. He is trying to evaluate the economics of purchasing a pelleting machine
Lothar Drake wishes to estimate the value of an asset expected to provide cash inflows of $4,000 at the end of years 1 and 2, $5,000 at the end of years 3 and 4, and $4,500 at the end of year 5. His
Bond types and valuation A zero-coupon bond pays $1,000, 10 years from today, but it pays no interest between now and then.a. If you require a 5% return on such a bond, what would you be willing to
Apex Corp. has two outstanding bond issues. One issue consists of 7% annual coupon bonds and the other issue consists of zero-coupon bonds. Both bonds have a $1,000 par value. For each bond,
Bond value and interest rate risk For each pair of bonds say which one has more interest rate risk and why it has more interest rate risk.a. Bond A has a 5% annual coupon, 20-year maturity, and is
Anil Patel is considering investing in either of two outstanding bonds. The bonds both have 10,000 par values and 10% coupon rates and pay annual interest. Bond A has exactly five years to maturity,
Interest rate risk and bond price changes Fidelity Music Inc. has an older high-yield bond (i.e., junk bond) issue and a more recent investment grade bond issue, both with $1,000 par values.
Bond value, interest rate changes, and return You are interested in buying a bond with a 6% coupon rate (paid annually), a maturity in six years, and a yield to maturity of 7%. Assume that par value
Quarterly interest Calculate the value of a $1,000-par-value bond paying quarterly interest at an annual coupon rate of 12% and having eight years until maturity if the required return on
The stock of Darden Restaurants fell from $120.68 to $39 in just 22 days. Prior to the coronavirus outbreak, Darden was on pace to pay a dividend in 2020 of $3.52 per share. Given that dividend, and
A firm’s balance sheet shows the sources of finance (debt and equity) and how they have been used to acquire assets. If a firm has assets equal to €6.4 million and a debt ratio of 60%, how much
Preferred dividends Jane Motors has an outstanding issue of preferred stock with a£20 par value and an 6% annual dividend.a. What is the annual dividend amount paid? If it is paid quarterly, how
Voting rights and dual-class stock Investors valued the ride-hailing giant Lyft at more than $24 billion at the time of its 2019 IPO. The dual-class company had 273,097,591 shares of Class A common
Zero growth Boral Plc. is a well-established supplier of instruments to university laboratories. The company’s class A common stock has paid a dividend of £1.20 per share per year for the last 15
Christine Law is the Chief Investment Officer for Elite Investment Company. She is now calculating the equity value of Rays Food Company. In 2018, Elite paid a dividend of $5 per share. By 2022, that
Constant growth Blix Net services provides dedicated server facilities for small businesses. The company paid per share dividends of €1.21, €1.37, €1.46, €1.61, €1.76, and €1.87,
Nile Builders Ltd. is entering into a one-year overhaul and remodeling project. This will have a limiting effect on earnings during that time, but when completed, it should allow the company to enjoy
Free cash flow valuation Lin is evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating £32,000 of free cash flow 1FCF0 = +32,0002 every
Jackson Ltd. is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Jackson have
Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of Alumina Tech Ltd., an IPO being offered for £14.20 per share. Although you are very
Book and liquidation value The balance sheet for Macadamia Industries is as follows.Additional information with respect to the firm is available:(1) Accounts receivable and inventories can be
Stable Energy Ltd.’s stock has a required return of 13%. The company, which plans to pay a dividend of €3.00 per share in the coming year, anticipates that its future dividends will increase at
Is it true that negative correlation means that when one stock goes up the other goes down?
Rajesh is considering two investments. The expected returns are 8% for investment A and 15% for investment B. The standard deviations are 6% and 10% for investments A and B, respectively. Which
a. An asset has a beta of 1.4. Given a market return of 15% and a risk-free rate of 3%, calculate the required rate of return for this asset.b. Due to recent geopolitical events, investors have
Total rate of return You wish to calculate the total rate of return for General Electric (GE) and Netflix (NFLX). A year earlier, a share of GE stock sold for $10, and a share of Netflix stock sold
Risk preferences Investment 1 has a 50% chance of paying $100 and a 50% chance of paying $200. Investment 2 has a 50% chance of paying $50 and a 50% chance of paying $250. Both investments cost $130
Risk and Probability Dianne Hospitality is considering the purchase of one of two cooking units, A and B, for its pub in the Lake District region of UK. Each of the units requires an initial
Bar Charts and Risk Good Door Company plans to launch two new lines of composite security doors. Because of the highly competitive nature of the industry, the two lines of doors have been given code
Standard deviation versus coefficient of variation as measures of risk A1 Furniture Makers, a firm specializing in customized contemporary furniture, is considering several expansion projects. All
Rate of return, standard deviation, and coefficient of variation Jelena is searching for an IT stock to include in her current stock portfolio. She is interested in Perin Technologies; she believes
Rate of return, standard deviation, and coefficient of variation You have heard about the great returns that some private equity funds generate and have decided to evaluate BlackRock, Inc. (BLK) and
Portfolio weights You have a small portfolio of fast food restaurants consisting of Chipotle Mexican Grill, McDonalds, Shake Shack, and Wendy’s. Use the following information to answer the
Portfolio return and standard deviation David Choo is thinking of building an investment portfolio containing two stocks—H and G. He has assigned 40% of his portfolio to stock H and the remaining
Portfolio efficiency Is a portfolio that provides the minimum standard deviation for any level of expected return efficient?
Portfolio efficiency The following table provides the expected return and standard deviation for four portfolios. Plot each portfolio’s risk-return combination on a graph and identify which are the
Correlation, risk, and return Nikki Williams wishes to evaluate the risk and return behaviors associated with various combinations of assets X and Y under three assumed degrees of correlation:
Correlation, risk, and return The following table provides monthly stock returns for Snap Inc. (SNAP), Twitter, Inc. (TWTR), UnitedHealth Group Incorporated (UNH), and General Dynamics Corporation
Total, nondiversifiable, and diversifiable risk Peter McGill randomly selected securities from those listed on the London Stock Exchange for his portfolio.He began with a single security and added
Graphical derivation of beta A fund manager wishes to estimate graphically the betas for two assets, X and Y. It has gathered the return data shown in the following table for the market portfolio and
Betas and risk rankings Thomas Hill is considering three stocks—A, B, and C—for possible inclusions in his existing portfolio. Stock A has a beta of 0.75, stock B has a beta of 1.60, and stock C
Thermax Inc. has 10 million shares outstanding. The firm is planning to issue an additional 1 million shares. After selling these shares at their $15 per share offering price and netting 97% of sale
The common stock of Speedy PLC closed at £2.40 per share today, down £0.20 from yesterday. If the company has 5 million shares outstanding and annual earnings of £12.5 million, what is its P/E
Hills Ltd. has just announced a dividend of €2.50 per share for the year. It plans to increase this dividend by 5% next year and maintain it at the new level for the foreseeable future. If the
Martin International PLC initiated a new corporate strategy that fixes its annual dividend at £1.40 per share forever. If the risk-free rate is 3% and the risk premium on Martin International’s
Bruges Corporation’s Memorandum of Association authorizes issuance of 3,000,000 shares of common stock. Currently, Bruges has 2,200,000 million authorized and paid up shares and holds 500,000
Stanley Industries has a fixed conversion ratio of four common shares per one share of preferred stock. The preferred stock pays a dividend of £4.00 per share per year. The common stock currently
Segwick Manufacturing has an outstanding preferred stock issue with a par value of $50 per share. The preferred shares pay dividends annually at a rate of 5%.a. What is the annual dividend on
Liberia Publishing wishes to estimate the value of its outstanding preferred stock. The preferred issue has a £50 par value and pays an annual dividend of £7.50 per share. Similar-risk preferred
Moors Tools is considering a cash purchase of the stock of Crooks Moldings. During the year just completed, Crooks earned £4.50 per share and paid cash dividends of £2.30 per share (D0 = 2.30).
Bach Music’s most recent annual dividend was $1.50 per share (D0 = 1.50), and the firm’s required return is 9%. Find the market value of Bach’s shares when:a. Dividends are expected to grow at
Barnes Limited’s most recent dividend was €2.20 per share, its expected annual rate of dividend growth is 5%, and the required return is 12%. Its management is considering a variety of proposals
Manchester Hospitality owns a range of restaurants in Yorkshire, England. It wishes to determine the value of McDermot Limited, a firm that it is considering acquiring for cash. Manchester
An analyst predicted last year that the stock of Mallard Inc. would offer a total return of at least 8% in the coming year. At the beginning of the year, the firm had a total stock market
Four analysts cover the stock of Deng Chemical. One forecasts a 7% return for the coming year. The second expects the return to be 5%. The third predicts a 24% return. The fourth expects a 10% return
Space Software is considering an investment in a new software that detects malware threats in the financial industry. Two possible types of expansion are under review. After investigating the
Valley Forgings has identified four alternatives to meet its requirement for an additional production facility. The following table summarizes data gathered relative to each alternative.a. Calculate
Dacia Gears Ltd. has two alternative projects to choose from for their new distribution facility in Europe. The annual rate of return and the related probabilities given in the following table
CG Forest and Paper Ltd. raises capital by selling £5,000,000 worth of debt with flotation costs equal to 3% of its par value. If the debt matures in 15 years and has coupon rate of 6% (paid
Belle Fashions supplies garments to high street retailers. They have been paying dividends steadily for 10 years. During that time, dividends have grown at a compound annual rate of 5%. If Belle
Garba Exports Ltd. is a manufacturer of cotton yarn. It has 40% debt and 60% equity in its capital structure. The firm’s estimated after-tax cost of debt is 7% and its estimated cost of equity is
Currently, Jackson Real Estate Inc. can sell 10-year, $100-par-value bonds paying annual interest at a 6% coupon rate. Jackson can sell its bonds for $106.20 each. Jackson will incur flotation costs
Jim Paige is opening his own restaurant, and he is taking out a 10-year mortgage. Jim will borrow $400,000 from a bank, and to repay the loan he will make 120 monthly payments (principal and
Boots Mechanics is based in Manchester, United Kingdom. The market values and after-tax costs of various sources of capital used by the company are shown in the following table.a. Calculate the WACC
Company has compiled the information shown in the following table.a. Calculate the WACC using book value weights.b. Calculate the WACC using market value weights.c. Compare the answers obtained in
After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table.The cost of debt is
GB Timbers GmbH, based in Germany, supplies timber products to construction and manufacturing industries. The company reported after-tax earnings available to common stock of €3,200,000. From these
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the
Mandy Robertson has just bought a new house and wants to consolidate her finances. She has three loans outstanding. They all mature in 5 years, and she can repay them without penalty any time before
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21% tax bracket. Debt The firm can raise debt by
Tack Laser Ltd., a high-end medical equipment manufacturer, is trying to decide whether to revise its target capital structure. Currently, it targets a structure with 40% debt, but it is considering

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