Question: A friend asks to borrow $55 from

> Consider again the setting of Problem 19. Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can afford to pay an extra $250 per month in addition to y

> You have an outstanding student loan with required payments of $500 per month for the next four years. The interest rate on the loan is 9% APR (monthly). You are considering making an extra payment of $100 today (i.e., you will pay an extra $100 that you

> You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 7%, your loan payments are $600 per month, and you have 36 months left on your loan. If you pay an additional $1000 with your next regular

> You are thinking about leasing a car. The purchase price of the car is $30,000. The residual value (the amount you could pay to keep the car at the end of the lease) is $15,000 at the end of 36 months. Assume the first lease payment is due one month afte

> You have just purchased a car and taken out a $50,000 loan. The loan has a five-year term with monthly payments and an APR of 6%. a. How much will you pay in interest, and how much will you pay in principal, during the first month, second month, and firs

> AFW Industries has 200 million shares outstanding and expects earnings at the end of this year of $700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using 20% to repurchase shares. If AFW’s earnings are expected

> You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18 1/2 years old, and you have just made a payment. If the i

> You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2356 and you have made every payment on time. The original term of the mortgage was 30 years, and the mortga

> When you purchased your car, you took out a five-year annual-payment loan with an interest rate of 6% per year. The annual payment on the car is $5000. You have just made a payment and have now decided to pay the loan off by repaying the outstanding bala

> You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your twenty-second birthday, and you decide, starting today and continuing on every birthday up to and including your 65th bi

> Assume that your parents wanted to have $160,000 saved for college by your eighteenth birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned 8% per year on their investments. a. How much

> 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 3%. How much money will be in the account immediately after your grandmother makes the

> You would like to buy the house and take the mortgage described in Problem 27. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), yo

> What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per 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 every two years for the next 20 years (i.e., a total of 10

> You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annua

> 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 $1000, what is the payment every year?

> You have an investment opportunity that requires an initial investment of $5000 today and will pay $6000 in one year. What is the rate of return of this opportunity?

> You have an investment account that started with $1000 ten years ago and which now has grown to $5000. a. What annual rate of return have you earned (you have made no additional contributions to the account)? b. If the savings bond earns 15% per year fro

> You are thinking about buying a savings bond. The bond costs $50 today and will mature in 10 years with a value of $100. What annual interest rate will the bond earn?

> 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 3% larger than the last payment. She will continue to show this generosity for 20 y

> 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 amount will grow at a rate of 5% per year for the next 1

> 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 later). a. If he wanted the cash award of each of the five p

> Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate’s earnings are expected to grow at the current industry average of 5.2% per

> The British government has a consol bond outstanding paying £100 per year forever. Assume the current interest rate is 4% per year. a. What is the value of the bond immediately after a payment is made? b. What is the value of the bond immediately before

> You are thinking of building a new machine that will save you $1000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2% per year forever. What is the present value of the savings if the interest rate is

> A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1000. Each year after that, you will receive a payment on the anniversary of the last payment that is 8% larger than the last payment. This patte

> You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first investment made 1 year from now. You think you can earn 10% per year on your investments and you plan to retire in 43 years, immediately after

> When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his “$252 million” contract (the total of the payments promised was $252 million). Assume the following about the contract: Rod

> Assume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will come 45 years from now). If your discount rate is 7%, compounded annually, and you plan to live for 15 years after retiring (so

> You figure that the total cost of college will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of 4 years of college costs starting 18 years from today?

> 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 1000 tons of almonds and his neighbor produces 800 tons o

> Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,000 per ton. a. What is the value of a ton of shrimp to him? b. Would

> Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, Research In Motion, the maker of BlackBerry mobile devices, trades on both the Toronto Stock Exchange and NASDAQ. If its price in Toront

> Suppose Big Bank offers an interest rate of 5.5% on both savings and loans, and Bank Enn offers an interest rate of 6% on both savings and loans. a. What profit opportunity is available? b. Which bank would experience a surge in the demand for loans? Whi

> How would your answer to Problem 7 change if you endow it now, but it makes the first award to a student 10 years from today? Information from Problem 7: You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now.

> Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model

> Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose

> 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 $3996 in it and pays an 8% interest rate. a. How much money would

> Your mom is thinking of retiring. Her retirement plan will pay her either $250,000 immediately on retirement or $350,000 five years after the date of her retirement. Which alternative should she choose if the interest rate is a. 0% per year? b. 8% per ye

> Your cousin is currently 12 years old. She will be going to college in 6 years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 4% per year,

> Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?

> What is the present value of $10,000 received a. 12 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. 6 years from today when the interest rate is 2% per year?

> Calculate the future value of $2000 in a. 5 years at an interest rate of 5% per year. b. 10 years at an interest rate of 5% per year. c. 5 years at an interest rate of 10% per year. d. Why is the amount of interest earned in part (a) less than half the a

> Suppose you invest $1000 in an account paying 8% 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 the balance in the account after 25 years? How much of thi

> Consider the following alternatives: i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 years a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year. b. What is your ranking if t

> You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now. If the school’s endowment discount rate is 7%, what amount must you donate to endow the scholarship?

> Suppose the interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer, $200 today or $200 in one year? Does your answer depen

> Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a 3% rate, and its share price was $50. With the planned expa

> You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?

> Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are $500,000 and its research and development is $1 million. It has annual depreciation charges of $1 million and a tax rate of 35%. a. W

> Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the income statement: a. What were Peet’s revenues for 2008? By what percentage did revenues grow from 2007? b. What were Peet’s operating a

> In April 2010, 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 the market-to-book ratio of each company? b. What concl

> In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, and current liabilities of $6.99 billion. It also had inventories of $0.25 billion. a. What was Apple’s current ratio? b. What was Apple’s quick ratio? c. In July 2007, Dell

> In June 2007, General Electric (GE) had a book value of equity of $117 billion, 10.3 billion shares outstanding, and a market price of $38.00 per share. GE also had cash of $16 billion, and total debt of $467 billion. a. What was GE’s market capitalizati

> Consider the following potential events that might have occurred to Global on December 30, 2010. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s book value of equit

> You have a loan outstanding. It requires making three annual payments of $1000 each at the end of the next three years. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan’s t

> For 2010, Wal-Mart and Target had the following information (all values are in millions of dollars): a. What is each company’s accounts receivable days? b. What is each company’s inventory turnover? c. Which company is

> You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage r

> DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 15% per year. Suppose DFB will maintain the

> Suppose a firm’s tax rate is 35%. a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings? b. What effect would a $10 million capital expense have on this year’s earnings, if th

> Suppose that in 2010, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4.50%. Suppose that they had no other income, interest expenses were unchanged, and taxes were the same p

> If JPJ Corp (the company from the previous question) is able to increase sales by 10% but keep its total and fixed asset growth to only 5%, what will its new asset turnover ratios be?

> JPJ Corp has sales of $1 million, accounts receivable of $50,000, total assets of $5 million (of which $3 million are fixed assets), inventory of $150,000, and cost of goods sold of $600,000. What is JPJ’s accounts receivable days? Fixed asset turnover?

> Ladders, Inc. has a net profit margin of 5% on sales of $50 million. It has book value of equity of $40 million and total liabilities with a book value of $30 million. What is Ladders’ ROE? ROA?

> If Local Co., the company in Problem 12, had interest expense of $800,000, how would that affect each of its margins? Problem 12 data Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are

> If Local Co., the company in Problem 12, had an increase in selling expenses of $300,000, how would that affect each of its margins? Problem 12 data: Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrat

> Zoom Enterprises expects that one year from now it will pay a total dividend of $5 million and repurchase $5 million worth of shares. It plans to spend $10 million on dividends and repurchases every year after that forever, although it may not always be

> The balance sheet information for Clorox Co. (CLX) in 2004–2005 is shown here (all values in thousands of dollars) a. What change in the book value of Clorox’s equity took place at the end of 2004? b. Is Clorox&acir

> Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%. a. What impact will the cost of the purchase have on earning

> Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million up front in cash; you also issue a bill for the cust

> Laurel Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on new investment. Its earnings are expected to grow forever

> See the cash flow statement below for H. J. Heinz (HNZ) (all values in thousands of dollars) a. What were Heinz’s cumulative earnings over these four quarters? What were its cumulative cash flows from operating activities? b. What fra

> Find online the 2008 annual 10-K report for Peet’s Coffee and Tea (PEET), filed in early 2009. Answer the following questions from its cash flow statement: a. How much cash did Peet’s generate from operating activities in 2008? b. What was Peet’s depreci

> Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million. a. What is the firm’s current ROE? b. If the firm increased its net profit margin to 4%, what

> Repeat the analysis from parts a and b of the previous problem using Starbucks Corporation (SBUX) instead. Based on the DuPont Identity, what explains the difference between the two firms’ ROEs?

> Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008 (filed in early 2009). a. Compute Peet’s net profit margin, total asset turnover, and equity multiplier. b. Verify the DuPont Identity for Peet’s ROE. c. If Peet’s managers want

> In January 2009, American Airlines (AMR) had a market capitalization of $1.7 billion, debt of $11.1 billion, and cash of $4.6 billion. American Airlines had revenues of $23.8 billion. British Airways (BABWF) had a market capitalization of $2.2 billion, d

> Suppose you receive $100 at the end of each year for the next three years. a. If the interest rate is 8%, what is the present value of these cash flows? b. What is the future value in three years of the present value you computed in (a)? c. Suppose you d

> Quisco Systems has 6.5 billion shares outstanding and a share price of $18.00. Quisco is considering developing a new networking product in-house at a cost of $500 million. Alternatively, Quisco can acquire a firm that already has the technology for $900

> What are some of the similarities and differences among mutual funds, pension funds, and hedge funds?

> Think back to the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more food (or more expensive food) when your parents paid

> How do financial institutions help with risk-bearing?

> Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s share

> What is the financial cycle?

> You are a shareholder in a C corporation. The corporation earns $2.00 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. Assume the corporate tax rate is 40% and the personal tax rate on (both

> What are some of the differences between the NYSE and NASDAQ?

> Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest rate is 4.5%, what is the implied credit spre

> Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. Tax law in the Unites States requires U.S. corporations to pay taxes on their foreign earnings at the same rate as profits earned in the United St

> You have just received a windfall from an investment you made in a friend’s business. She will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today)

> Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm will retain 50% of its earnings. It will retain 20% of its

> Krell Industries has a share price of $22.00 today. If Krell is expected to pay a dividend of $0.88 this year and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital?

> Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 60; and it currently pays after 5 days and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much ad

> Jackson Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various

> Why some trade credit is called free while other credit is called costly? If a firm buys on terms of 2/10, net 30, pays at the end of the 30th day, and typically shows $300,000 of accounts payable on its balance sheet, would the entire $300,000 be free c

> Which of the following would likely encourage a firm to increase the debt in its capital structure? a. The corporate tax rate increases. b. The personal tax rate increases. c. Due to market changes, the firm’s assets become less liquid. d. Changes in the

> The Weaver Watch Company sells watches for $25, the fixed costs are $140,000, and variable costs are $15 per watch. a. What is the firm’s gain or loss at sales of 8,000 watches? at 18,000 watches? b. What is the breakeven point? Illustrate by means of a

> Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of $6 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 da

> Is the debt level that maximizes a firm’s expected EPS the same as the debt level that maximizes its stock price? Explain.

> Why are accruals called spontaneous sources of funds, what are their costs, and why don’t firms use more of them?