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principles managerial finance
Principles Of Managerial Finance Study Guide 10th Edition Gitman - Solutions
6–3 For a given class of similar-risk securities, what does each of the following yield curves reflect about interest rates: (a) downward-sloping; (b) upwardsloping;and (c) flat? Which form has been historically dominant?
6–2 What is the term structure of interest rates, and how is it related to the yield curve?
6–1 What is the real rate of interest? Differentiate it from the nominal rate of interest for the risk-free asset, a 3-month U.S. Treasury bill.
5-2 Go to the RiskGrades Web site, www.riskgrades.com. This site, from RiskMetrics Group, provides another way to assess the riskiness of stocks and mutual funds. RiskGrades provide a way to compare investment risk across all asset classes, regions, and currencies. They vary over time to reflect
5-1 Junior Sayou, a financial analyst for Chargers Products, a manufacturer of stadium benches, must evaluate the risk and return of two assets, X and Y. The firm is considering adding these assets to its diversified asset portfolio. To assess the return and risk of each asset, Junior gathered data
5–28 Integrative—Risk, return, and CAPM Wolff Enterprises must consider several investment projects, A through E, using the capital asset pricing model (CAPM)and its graphical representation, the security market line (SML). Relevant information is presented in the following table.a. Calculate
5–27 Shifts in the security market line Assume that the risk-free rate, RF, is currently 8%, the market return, km, is 12%, and asset A has a beta, bA, of 1.10.a. Draw the security market line (SML) on a set of “nondiversifiable risk(x axis)–required return (y axis)” axes.b. Use the CAPM to
5–26 Security market line, SML Assume that the risk-free rate, RF, is currently 9%and that the market return, km, is currently 13%.a. Draw the security market line (SML) on a set of “nondiversifiable risk(x axis)–required return (y axis)” axes.b. Calculate and label the market risk premium
5–25 Portfolio return and beta Jamie Peters invested $100,000 to set up the following portfolio one year ago:a. Calculate the portfolio beta on the basis of the original cost figures.b. Calculate the percentage return of each asset in the portfolio for the year.c. Calculate the percentage return
5–24 Manipulating CAPM Use the basic equation for the capital asset pricing model(CAPM) to work each of the following problems.a. Find the required return for an asset with a beta of .90 when the risk-free rate and market return are 8% and 12%, respectively.b. Find the risk-free rate for a firm
5–23 Beta coefficients and the capital asset pricing model Katherine Wilson is wondering how much risk she must undertake in order to generate an acceptable return on her portfolio. The risk-free return currently is 5%. The return on the average stock (market return) is 16%. Use the CAPM to
5–22 Capital asset pricing model (CAPM) For each of the cases shown in the following table, use the capital asset pricing model to find the required return. Case Risk-free rate, RF Market return, km Beta, b A 5% 8% 1.30 B 8 13 .90 C 9 12 -.20 D 10 15 1.00 E 6 10 .60
5–21 Portfolio betas Rose Berry is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. She is particu- larly interested in using beta to compare the risks of the portfolios, so she has gathered the data shown in the following
5–20 Betas and risk rankings Stock A has a beta of .80, stock B has a beta of 1.40, and stock C has a beta of .30.a. Rank these stocks from the most risky to the least risky.b. If the return on the market portfolio increased by 12%, what change would you expect in the return for each of the
5–19 Betas Answer the following questions for assets A to D shown in the following table.a. What impact would a 10% increase in the market return be expected to have on each asset’s return?b. What impact would a 10% decrease in the market return be expected to have on each asset’s return?c.
5–18 Interpreting beta A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 1.20.a. If the market return increased by 15%, what impact would this change be expected to have on the asset’s return?b. If the market return decreased by 8%, what impact
5–17 Graphical derivation of beta A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the last ten years, 1994–2003.a. On a set of “market return (x
5–16 Total, nondiversifiable, and diversifiable risk David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio.He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After
5–15 International investment returns Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation.He purchased 1,000 shares at 20.50 pesos per share. Twelve months later, he sold them at 24.75 pesos per share. He received no dividends
5–14 Correlation, risk, and return Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfect positive, uncorrelated, and perfect negative.The expected return and risk values calculated
5–13 Portfolio analysis You have been given the return data shown in the first table on three assets—F, G, and H—over the period 2004–2007.Using these assets, you have isolated the three investment alternatives shown in the following table:a. Calculate the expected return over the 4-year
5–13 Portfolio analysis You have been given the return data shown in the first table on three assets—F, G, and H—over the period 2004–2007.a. Calculate the expected portfolio return, kp, for each of the 6 years.b. Calculate the expected value of portfolio returns, kp, over the 6-year
5–12 Portfolio return and standard deviation Jamie Wong is considering building a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected returns over the next 6 years, 2004–2009, for
5–11 Normal probability distribution Assuming that the rates of return associated with a given asset investment are normally distributed and that the expected return, k, is 18.9% and the coefficient of variation, CV, is .75, answer the following questions.a. Find the standard deviation of
5–10 Integrative—Expected return, standard deviation, and coefficient of variation Three assets—F, G, and H—are currently being considered by Perth Industries.The probability distributions of expected returns for these assets are shown in the following table.a. Calculate the expected value
5–9 Assessing return and risk Swift Manufacturing must choose between two asset purchases. The annual rate of return and the related probabilities given in the following table summarize the firm’s analysis to this point.a. For each project, compute:(1) The range of possible rates of return.(2)
5–8 Standard deviation versus coefficient of variation as measures of risk Greengage, Inc., a successful nursery, is considering several expansion projects. All of the alternatives promise to produce an acceptable return. The owners are extremely risk-averse; therefore, they will choose the least
5–7 Coefficient of variation Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The data gathered relative to each of these alternatives is summarized in the following table.a. Calculate the coefficient of variation for each alternative.b.
5–6 Bar charts and risk Swan’s Sportswear is considering bringing out a line of designer jeans. Currently, it is negotiating with two different well-known designers.Because of the highly competitive nature of the industry, the two lines of jeans have been given code names. After market
5–5 Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the following table of estimates of rates of return and
5–4 Risk analysis Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are being considered. After investigating the possible outcomes, the company made the estimates shown in the following tablea. Determine the range of the rates of return for
5–3 Risk preferences Sharon Smith, the financial manager for Barnett Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as
5–2 Return calculations For each of the investments shown in the following table, calculate the rate of return earned over the unspecified time period. Investment Cash flow during period ABCDE A -$ 100 $ 800 Beginning-of- period value End-of- period value $ 1,100 15,000 120,000 118,000 7,000
5–1 Rate of return Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Keel’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year earlier, investment
ST 5–2 Beta and CAPM Currently under consideration is a project with a beta,b, of 1.50. At this time, the risk-free rate of return, RF, is 7%, and the return on the market portfolio of assets, km, is 10%. The project is actually expected to earn an annual rate of return of 11%.a. If the return on
ST 5–1 Portfolio analysis You have been asked for your advice in selecting a portfolio of assets and have been given the following data:No probabilities have been supplied. You have been told that you can create two portfolios—one consisting of assets A and B and the other consisting of assets
5–15 Why do financial managers have some difficulty applying CAPM in financial decision making? Generally, what benefit does CAPM provide them?
5–14 What impact would the following changes have on the security market line and therefore on the required return for a given level of risk? (a) An increase in inflationary expectations. (b) Investors become less risk-averse.
5–13 Explain the meaning of each variable in the capital asset pricing model(CAPM) equation. What is the security market line (SML)?
5–12 What risk does beta measure? How can you find the beta of a portfolio?
5–11 How are total risk, nondiversifiable risk, and diversifiable risk related?Why is nondiversifiable risk the only relevant risk?
5–10 How does international diversification enhance risk reduction? When might international diversification result in subpar returns? What are political risks, and how do they affect international diversification?
5–9 Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in it?
5–8 What is an efficient portfolio? How can the return and standard deviation of a portfolio be determined?
the degree of asset risk?5–7 When is the coefficient of variation preferred over the standard deviation for comparing asset risk?
5–6 What relationship exists between the size of the standard deviation and
5–5 What does a plot of the probability distribution of outcomes show a decision maker about an asset’s risk?
5–4 Explain how the range is used in sensitivity analysis.
5–3 Compare the following risk preferences: (a) risk-averse, (b) risk-indifferent, and (c) risk-seeking. Which is most common among financial managers?
5–2 Define return, and describe how to find the rate of return on an investment.
5–1 What is risk in the context of financial decision making?
1-1 Go to Web site www.arachnoid.com/lutusp/finance_old.html. Page down to the portion of this screen that contains the financial calculator.1. To determine the FV of a fixed amount, enter the following:Into PV, enter 1000; into np, enter 1; into pmt, enter 0; and, into ir, enter 8.Now click on
1-1 Sunrise Industries wishes to accumulate funds to provide a retirement annuity for its vice president of research, Jill Moran. Ms. Moran by contract will retire at the end of exactly 12 years. Upon retirement, she is entitled to receive an annual end-of-year payment of $42,000 for exactly 20
4–59 Time to repay installment loan Mia Salto wishes to determine how long it will take to repay a loan with initial proceeds of $14,000 where annual end-of-year installment payments of $2,450 are required.a. If Mia can borrow at a 12% annual rate of interest, how long will it take for her to
4–58 Number of years—Annuities In each of the following cases, determine the number of years that the given annual end-of-year cash flow must continue in order to provide the given rate of return on the given initial amount. Case Initial amount Annual cash flow Rate of return ABC $ 1,000 $ 250
4–57 Time to accumulate a given sum Manuel Rios wishes to determine how long it will take an initial deposit of $10,000 to double.a. If Manuel earns 10% annual interest on the deposit, how long will it take for him to double his money?b. How long will it take if he earns only 7% annual
4–56 Number of years—Single amounts For each of the following cases, determine the number of years it will take for the initial deposit to grow to equal the future amount at the given interest rate. Case Initial deposit Future amount Interest rate A $ 300 $ 1,000 7% B 12,000 15,000 S C 9,000
4–55 Loan rates of interest John Flemming has been shopping for a loan to finance the purchase of a used car. He has found three possibilities that seem attractive and wishes to select the one with the lowest interest rate. The information available with respect to each of the three $5,000 loans
4–54 Interest rate for an annuity Anna Waldheim was seriously injured in an industrial accident. She sued the responsible parties and was awarded a judgment of$2,000,000. Today, she and her attorney are attending a settlement conference with the defendants. The defendants have made an initial
4–53 Choosing the best annuity Raina Herzig wishes to choose the best of four immediate-retirement annuities available to her. In each case, in exchange for paying a single premium today, she will receive equal annual end-of-year cash benefits for a specified number of years. She considers the
4–52 Rate of return—Annuity What is the rate of return on an investment of $10,606 if the company will receive $2,000 each year for the next 10 years?
4–51 Rate of return and investment choice Clare Jaccard has $5,000 to invest.Because she is only 25 years old, she is not concerned about the length of the investment’s life. What she is sensitive to is the rate of return she will earn on the investment. With the help of her financial advisor,
4–50 Rate of return Rishi Singh has $1,500 to invest. His investment counselor suggests an investment that pays no stated interest but will return $2,000 at the end of 3 years.a. What annual rate of return will Mr. Singh earn with this investment?b. Mr. Singh is considering another investment, of
4–49 Growth rates You are given the series of cash flows shown in the following table.a. Calculate the compound annual growth rate associated with each cash flow stream.b. If year-1 values represent initial deposits in a savings account paying annual interest, what is the annual rate of interest
4–48 Monthly loan payments Tim Smith is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that if he can come up with a down payment of $500, the dealer will finance the balance of the price at a 12%annual rate over 2 years (24 months).a. Assuming that Tim
4–47 Loan interest deductions Liz Rogers just closed a $10,000 business loan that is to be repaid in three equal annual end-of-year payments. The interest rate on the loan is 13%. As part of her firm’s detailed financial planning, Liz wishes to determine the annual interest deduction
4–46 Loan amortization schedule Joan Messineo borrowed $15,000 at a 14%annual rate of interest to be repaid over 3 years. The loan is amortized into three equal annual end-of-year payments.a. Calculate the annual end-of-year loan payment.b. Prepare a loan amortization schedule showing the
4–45 Loan payment Determine the equal annual end-of-year payment required each year, over the life of the loans shown in the following table, to repay them fully during the stated term of the loan. Loan Principal Interest rate Term of loan (years) ABCD A $12,000 8% 3 60,000 12 10 75,000 10 30
4–44 Inflation, future value, and annual deposits While vacationing in Florida, John Kelley saw the vacation home of his dreams. It was listed with a sale price of$200,000. The only catch is that John is 40 years old and plans to continue working until he is 65. Still, he believes that prices
4–43 Deposits to create a perpetuity You have decided to endow your favorite university with a scholarship. It is expected to cost $6,000 per year to attend the university into perpetuity. You expect to give the university the endowment in 10 years and will accumulate it by making annual
4–42 Accumulating a growing future sum A retirement home at Deer Trail Estates now costs $85,000. Inflation is expected to cause this price to increase at 6%per year over the 20 years before C. L. Donovan retires. How large an equal annual end-of-year deposit must be made each year into an
4–41 Creating a retirement fund To supplement your planned retirement in exactly 42 years, you estimate that you need to accumulate $220,000 by the end of 42 years from today. You plan to make equal annual end-of-year deposits into an account paying 8% annual interest.a. How large must the annual
4–40 Deposits to accumulate future sums For each of the cases shown in the following table, determine the amount of the equal annual end-of-year deposits necessary to accumulate the given sum at the end of the specified period, assuming the stated annual interest rate. Case Sum to be accumulated
4–39 Annuities and compounding Janet Boyle intends to deposit $300 per year in a credit union for the next 10 years, and the credit union pays an annual interest rate of 8%.a. Determine the future value that Janet will have at the end of 10 years, given that end-of-period deposits are made and no
4–38 Comparing compounding periods René Levin wishes to determine the future value at the end of 2 years of a $15,000 deposit made today into an account paying a nominal annual rate of 12%.a. Find the future value of René’s deposit, assuming that interest is compounded(1) annually, (2)
4–37 Compounding frequency and future value You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a nominal annual rate of 8%, which is expected to apply to all future years.a. How much will you have in the account at the end of 10 years if interest is compounded (1)
4–36 Continuous compounding For each of the cases in the following table, find the future value at the end of the deposit period, assuming that interest is compounded continuously at the given nominal annual rate. Case Amount of initial deposit Nominal annual rate, i Deposit period (years), n
4–35 Compounding frequency, future value, and effective annual rates For each of the cases in the following table:a. Calculate the future value at the end of the specified deposit period.b. Determine the effective annual rate, EAR.c. Compare the nominal annual rate, i, to the effective annual
4–34 Changing compounding frequency Using annual, semiannual, and quarterly compounding periods, for each of the following: (1) Calculate the future value if $5,000 is initially deposited, and (2) determine the effective annual rate (EAR).a. At 12% annual interest for 5 years.b. At 16% annual
4–33 Relationship between future value and present value—Mixed stream Using only the information in the accompanying table, answer the questions that follow.a. Determine the present value of the mixed stream of cash flows using a 5%discount rate.b. How much would you be willing to pay for an
4–32 Funding budget shortfalls As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls.In other words, you will need the amounts shown in the following table at the end of the given year to balance your budget—that is, to
4–31 Present value of a mixed stream Harte Systems, Inc., a maker of electronic surveillance equipment, is considering selling to a well-known hardware chain the rights to market its home security system. The proposed deal calls for payments of $30,000 and $25,000 at the end of years 1 and 2 and
4–30 Present value—Mixed streams Consider the mixed streams of cash flows shown in the following table.a. Find the present value of each stream using a 15% discount rate.b. Compare the calculated present values and discuss them in light of the fact that the undiscounted cash flows total
4–29 Present value—Mixed streams Find the present value of the streams of cash flows shown in the following table. Assume that the firm’s opportunity cost is 12%. A B C Year Cash flow Year Cash flow Year Cash flow 1 -$2,000 1 $10,000 1-5 $10,000/yr 2345 3,000 2-5 5,000/yr 6-10 8,000/yr 4,000
4–28 Future value of a single amount versus a mixed stream Gina Vitale has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay $24,000 at the closing of the transaction or will pay the amounts shown in the following table at the beginning
4–27 Future value of a mixed stream For each of the mixed streams of cash flows shown in the following table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12%, assuming that no withdrawals are made during the period and
4–26 Creating an endowment Upon completion of her introductory finance course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were wealthy alums of the university she was attending, to create an endowment. The endowment
4–25 Perpetuities Consider the data in the following table.Determine, for each of the perpetuities:a. The appropriate present value interest factor.b. The present value. Perpetuity Annual amount Discount rate ABCD A $ 20,000 8% 100,000 3,000 10 6 60,000 5
4–24 Present value of an annuity versus a single amount Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (i.e., $1,000,000 over 25 years) or as a single amount of $500,000 paid immediately.a. If you expect to
4–23 Funding your retirement You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die after 30 years). You know that you will be able to earn 11%
4–22 Present value of a retirement annuity An insurance agent is trying to sell you an immediate-retirement annuity, which for a single amount paid today will provide you with $12,000 at the end of each year for the next 25 years. You currently earn 9% on low-risk investments comparable to the
4–21 Future value of a retirement annuity Hal Thomas, a 25-year-old college graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will be invested to earn an
4–20 Ordinary annuity versus annuity due Marian Kirk wishes to select the better of two 10-year annuities, C and D. Annuity C is an ordinary annuity of $2,500 per year for 10 years. Annuity D is an annuity due of $2,200 per year for 10 years.a. Find the future value of both annuities at the end
4–19 Present value of an annuity Consider the following cases.a. Calculate the present value of the annuity assuming that it is (1) an ordinary due.(2) an annuity due.b. Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or annuity due—is
4–18 Future value of an annuity For each case in the accompanying table, answer the questions that follow.a. Calculate the future value of the annuity assuming that it is (1) an ordinary annuity.(2) an annuity due.b. Compare your findings in parts a(1) and a(2). All else being identical, which
4–17 Cash flow investment decision Tom Alexander has an opportunity to purchase any of the investments shown in the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given for each investment.Which purchase recommendations would you make,
4–16 Present value comparisons of single amounts In exchange for a $20,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%.a. Find the value today of each alternative.b. Are all the alternatives
4–15 Present value and discount rates You just won a lottery that promises to pay you $1,000,000 exactly 10 years from today. Because the $1,000,000 payment is guaranteed by the state in which you live, opportunities exist to sell the claim today for an immediate single cash payment.a. What is
4–14 Present value An Iowa state savings bond can be converted to $100 at maturity 6 years from purchase. If the state bonds are to be competitive with U.S. Savings Bonds, which pay 8% annual interest (compounded annually), at what price must the state sell its bonds? Assume no cash payments on
4–13 Present value Jim Nance has been offered a future payment of $500 three years from today. If his opportunity cost is 7% compounded annually, what value should he place on this opportunity today? What is the most he should pay to purchase this payment today?
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