Question: Consider the following simplified financial

> You have just arranged for a $750,000 mortgage to finance the purchase of a large tract of land. The mortgage has an 8.1 percent APR, and it calls for monthly payments over the next 30 years. However, the loan has an eight-year balloon payment, meaning t

> An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six

> Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $10,000 balance from your current credit card, which charges an annual rate of 19.8 percent, to a

> This is a classic retirement problem. A time line will help in solving it. Your friend is celebrating her 35th birthday today and wants to start saving for her anticipated retirement at age 65. She wants to be able to withdraw $105,000 from her savings a

> This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,000 Instant Credit! 14% Simple Interest! Three Years to Pay!

> Two banks in the area offer 30-year, $240,000 mortgages at 6.8 percent and charge a $2,300 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I.

> The interest rate on a one-year loan is quoted as 11 percent plus two points (see the previous problem). What is the EAR? Is your answer affected by the loan amount? Previous problem: You are looking at a one-year loan of $10,000. The interest rate is qu

> You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The int

> Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examini

> Could a company’s change in NWC be negative in a given year? Explain how this might come about. What about net capital spending?

> On subsidized Stafford loans, a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a senior? Explain. In words, how would you go about valuing the su

> A viatical settlement is a lump sum of money given to a terminally ill individual in exchange for his life insurance policy. When the insured person dies, the purchaser receives the payout from the life insurance policy. What factors determine the value

> Eligibility for a subsidized Stafford loan is based on current financial need. However, both subsidized and unsubsidized Stafford loans are repaid out of future income. Given this, do you see a possible objection to having two types?

> As you increase the length of time involved, what happens to the present value of an annuity? What happens to the future value?

> There are four pieces to an annuity present value. What are they?

> Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?

> If you were an athlete negotiating a contract, would you want a big signing bonus payable immediately and smaller payments in the future, or vice versa? How about looking at it from the team’s perspective?

> What do you think about the Tri-State Megabucks lottery discussed in the chapter advertising a $500,000 prize when the lump sum option is $250,000? Is it deceptive advertising?

> Imprudential, Inc. has an unfunded pension liability of $650 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 7.4 perc

> For each of the following, compute the present value: Present Value Years Interest Rate Future Value 6 7% $ 15,451 7 13 51,557 23 14 886,073 18 550,164

> Critics have charged that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Ray Irani of Occidental Petroleum has been one of the best-compensated CEOs in the United

> For each of the following, compute the future value: Present Value Years Interest Rate Future Value $ 2,250 11 10% 8,752 7 8 76,355 14 17 183,796 8 7

> You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 8.4 percent per year. How much will you have in eight years?

> You have just made your first $4,000 contribution to your retirement account. Assuming you earn an 11 percent rate of return and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years befo

> Suppose you are still committed to owning a $170,000 Ferrari (see Problem 9). If you believe your mutual fund can achieve a 12 percent annual rate of return and you want to buy the car in 9 years on the day you turn 30, how much must you invest today?

> Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2057, assuming they appreciate at a 4.5 percent annual rate?

> You have just received notification that you have won the $1 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you’re around to collect), 80 years from now. What is the present value of you

> In January 2007, the average house price in the United States was $314,600. In January 2000, the average price was $200,300. What was the annual increase in selling price?

> At 7 percent interest, how long does it take to double your money? To quadruple it?

> Assume the total cost of a college education will be $290,000 when your child enters college in 18 years. You presently have $55,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college educat

> Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 560 9% $ 1,284 810 10 4,341 18,400 17 364,518 21,500 15 173,439

> Corporate ownership varies around the world. Historically individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of

> Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $ 240 2 297 360 10 1,080 39,000 15 185,382 38,261 30 531,618

> You expect to receive $10,000 at graduation in two years. You plan on investing it at 11 percent until you have $75,000. How long will you wait from now?

> Referring to the TMCC security we discussed at the very beginning of the chapter: a. Based on the $24,099 price, what rate was TMCC paying to borrow money? b. Suppose that, on March 28, 2020, this security’s price is $38,260. If an investor had purchased

> Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, Sotheby’s sold the Edgar Degas bronze sculpture Petite Danseuse de Quatorze Ans at auction for a price of $10,311,500. Unfortunately for

> In 2008, a gold Morgan dollar minted in 1895 sold for $43,125. For this to have been true, what rate of return did this coin return for the lucky numismatist?

> In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2007, the winner’s check was $1,260,000. What was the percentage increase per year in the winner’s check over this period? If the winner’s prize increases at t

> You’re trying to save to buy a new $170,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 5.3 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

> What is compounding? What is discounting?

> The basic present value equation has four parts. What are they?

> Take a look back at Example 5.7. Is it deceptive advertising? Is it unethical to advertise a future value like this without a disclaimer? To answer the next five questions, refer to the TMCC security we discussed to open the chapter.

> Why might the revenue and cost figures shown on a standard income statement not be representative of the actual cash inflows and outflows that occurred during a period?

> What happens to a future value if you increase the rate r ? What happens to a present value?

> The most recent financial statements for Live Co. are shown here: Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout ratio. No external equity financing is possible. What is

> The most recent financial statements for Summer Tyme, Inc., are shown here: Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with

> The most recent financial statements for GPS, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,400 was paid, and the company wishes to maintain a constant payout ratio. Next yearâ€&#

> The most recent financial statements for Zoso, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $7,434.

> In the previous question, assume Phillips pays out half of net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. Prepare the pro forma statements and determine the external financing needed. Income S

> In the chapter, we discussed the two versions of the sustainable growth rate formula. Derive the formula ROE × b from the formula given in the chapter, where ROE is based on beginning of period equity. Also, derive the formula ROA × b from the internal g

> Based on the result in Problem 31, show that the internal and sustainable growth rates are as given in the chapter.

> Define the following: S=Previous year’s sales A=Total assets D=Total debt E=Total equity g=Projected growth in sales PM=Profit margin b=Retention (plowback) ratio Show that EFN can be written as follows: EFN=−PM(S)b + (A − PM(S)b)×g

> Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not?

> Nearside, Inc., wishes to maintain a growth rate of 12 percent per year and a debt–equity ratio of .30. Profit margin is 6.70 percent, and the ratio of total assets to sales is constant at 1.35. Is this growth rate possible? To answer, determine what the

> Redo Problem 27 using sales growth rates of 30 and 35 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the relationship between them. At what growth rate is the EF

> Redo Problem 25 using sales growth rates of 15 and 25 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the relationship between them. At what growth rate is the EF

> In Problem 25, suppose the firm wishes to keep its debt– equity ratio constant. What is EFN now? MOOSE TOURS, INC. 2008 Income Statement Sales $929,000 Costs 723,000 Other expenses 19,000 Earnings before interest and taxes $187,000

> In the previous problem, suppose the firm was operating at only 80 percent capacity in 2008. What is EFN now? MOOSE TOURS, INC. 2008 Income Statement Sales $929,000 Costs 723,000 Other expenses 19,000 Earnings before interest and taxes $187,000 Inter

> The most recent financial statements for Moose Tours, Inc., follow. Sales for 2009 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, cur

> Calculate the internal growth rate for the company in the previous problem. Now calculate the internal growth rate using ROA × b for both beginning of period and end of period total assets. What do you observe? Data from previous problem: Coheed, Inc.,

> Coheed, Inc., had equity of $135,000 at the beginning of the year. At the end of the year, the company had total assets of $250,000. During the year the company sold no new equity. Net income for the year was $19,000 and dividends were $2,500. What is th

> You’ve collected the following information about St. Pierre, Inc.: Sales=$195,000 Net income=$17,500 Dividends=$9,300 Total debt=$86,000 Total equity=$58,000 What is the sustainable growth rate for St. Pierre, Inc.? If it does grow at this rate, how much

> Based on the following information, calculate the sustainable growth rate for Hendrix Guitars, Inc.: Profit margin=4.8% Total asset turnover=1.25 Total debt ratio=.65 Payout ratio=30%

> Can our goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the environment, and the general good of society fi t in

> A firm wishes to maintain an internal growth rate of 7 percent and a dividend payout ratio of 25 percent. The current profit margin is 5 percent, and the firm uses no external financing sources. What must total asset turnover be?

> A firm wishes to maintain a growth rate of 11.5 percent and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at .60, and profit margin is 6.2 percent. If the firm also wishes to maintain a constant debt–equity ratio,

> McCormac Co. wishes to maintain a growth rate of 12 percent a year, a debt–equity ratio of 1.20, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at .75. What profit margin must the firm achieve?

> For the company in the previous problem, suppose fixed assets are $440,000 and sales are projected to grow to $630,000. How much in new fixed assets are required to support this growth in sales? Assume the company maintains its current operating capacity

> Seaweed Mfg., Inc., is currently operating at only 95 percent of fixed asset capacity. Current sales are $550,000. How fast can sales grow before any new fixed assets are needed?

> Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover=2.50 Profit margin=7.8% Equity multiplier=1.80 Payout ratio=60%

> Based on the following information, calculate the sustainable growth rate for Kaleb’s Kickboxing: Profit margin=8.2% Capital intensity ratio=.75 Debt–equity ratio=.40 Net income=$43,000 Dividends=$12,000

> If the Garnett Corp. has a 15 percent ROE and a 25 percent payout ratio, what is its sustainable growth rate?

> If the Baseball Shoppe has an 8 percent ROA and a 20 percent payout ratio, what is its internal growth rate?

> From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming a 15 percent increase in sales, no new external debt or equity financing, and a constant payout ratio. Data from previous two questions HEIR JORDAN CORPORATION I

> A firm’s enterprise value is equal to the market value of its debt and equity, less the firm’s holdings of cash and cash equivalents. This figure is particularly relevant to potential purchasers of the firm. Why?

> What are the four primary disadvantages of the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the corporate form?

> The Eastern Shuttle, Inc., is a regional airline providing shuttle service between New York and Washington, D.C. An analysis of the monthly demand for service has revealed the following demand relation: Q = 26,000 - 500P - 250POG + 200IB - 5,000S, where

> The following relations describe monthly demand and supply relations for dry cleaning services in the metropolitan area: QD = 500,000 - 50,000P (Demand) QS = -100,000 + 100,000P (Supply) where Q is quantity measured by the number of items dry cleaned per

> Olympia Natural Resources, Inc., and Yakima Lumber, Ltd., supply cut logs (raw lumber) to lumber and paper mills located in the Cascades Mountain region in the state of Washington. Each company has a different marginal cost of production depending on its

> The demand for housing is often described as being highly cyclical and very sensitive to housing prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the qu

> The use of regression analysis for demand estimation can be further illustrated by expanding the Electronic Data Processing (EDP), Inc., example described in the chapter. Assume that the link between units sold and personal selling expenditures described

> To ensure a big fan turnout for a traditional rival, suppose the Arizona State Sun Devils offer one-half off the $16 regular price of reserved seats for a women’s basketball game, and sales jumped from 1,750 to 2,750 tickets. a. Calculate ticket revenues

> Explain how shifting demand and supply curves make market demand estimation difficult.

> “When I go to the grocery store, I find cents-off coupons totally annoying. Why can’t they just cut the price and do away with the clutter?” Discuss this statement and explain why coupon promotions are an effective means of promotion for grocery retailer

> Describe some of the limitations of market experiments.

> Managers often study the profit margin-sales relation over the life cycle of individual products, rather than the more direct profit-sales relation. In addition to the economic reasons for doing so, are there statistical advantages as well?

> In a regression-based estimate of a demand function, the beta coefficient for advertising equals 3.75 with a standard deviation of 1.25 units. What is the range within which there can be 99 percent confidence that the actual parameter for advertising can

> A review of industry wide data for the jelly and jam manufacturing industry suggests the following industry supply function: Q = -59,000,000 + 500,000P - 125,000PL - 500,000PK + 2,000,000W, where Q is cases supplied per year, P is the wholesale price per

> A simple regression TR = a + bQ is not able to explain 19 percent of the variation in total revenue. What is the coefficient of correlation between TR and Q?

> If a regression model estimate of total profit is $50,000 with a standard error of the estimate of $25,000, what is the chance of an actual loss?

> How do linear and log-linear models differ in terms of their assumptions about the nature of demand elasticities?

> “Demand for higher education is highest among the wealthy. This has led to an upward sloping demand curve for college education. The higher the tuition charged, the greater is demand.” Discuss this statement.

> “Rapid innovation in the development, assembly, and delivery of personal computers has led to a sharply downward sloping market demand curve for Dell, Inc.” Discuss this statement.

> Xerox Corporation develops, manufactures, and services document equipment and software solutions worldwide. Assume the company offered $75 off the $1,475 regular price on the Phaser 6360, a durable high-speed colon copier, and Internet sales jumped from

> On weekends during summer months, Eric Cart man rents jet skis at the beach on an hourly basis. Last week, Cart man rented jet skis for 20 hours per day at a rate of $50 per hour. This week, rentals fell to 15 hours per day when Cart man raised the price

> The Creative Publishing Company (CPC) is a coupon book publisher with markets in several southeastern states. CPC coupon books are sold directly to the public, sold through religious and other charitable organizations, or given away as promotional items.

> Identify each of the following statements as true or false and explain why. a. The effect of a $1 change in price is constant, but the elasticity of demand will vary along a linear demand curve b. In practice, price and quantity tend to be individually r

> Kenny McCormick manages a 100-unit apartment building and knows from experience that all units will be occupied if rent is $900 per month. McCormick also knows that, on average, one additional unit will go unoccupied for each $10 increase in the monthly

> Identify each of the following statements as true or false and explain why: a. A parameter is a population characteristic that is estimated by a coefficient derived from a sample of data. b. A one-tail t test is used to indicate whether the independent v

> Business is booming for Consulting Services, Inc. (CSI), a local supplier of computer set-up consulting services. The company can profitably employ technicians as quickly as they can be trained. The average hourly rate billed by CSI for trained technicia