Question: Find the amount to which $500 will

> Refer to Problem 11-1. What is the project’s discounted payback? Problem 11-1 Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%.

> MIRR Refer to Problem 11-1. What is the project’s MIRR? Problem 11-1 Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%.

> A project has the following cash flows: This project requires two outflows at Years 0 and 2, but the remaining cash flows are positive. Its WACC is 10%, and its MIRR is 14.14%. What is the Year 2 cash outflow? 1 2 4 + $196 + -$500 $202 -$X $350 $451

> Project X costs $1,000, and its cash flows are the same in Years 1 through 10. Its IRR is 12%, and its WACC is 10%. What is the project’s MIRR?

> A project has annual cash flows of $7,500 for the next 10 years and then $10,000 each year for the following 10 years. The IRR of this 20-year project is 10.98%. If the firm’s WACC is 9%, what is the project’s NPV?

> A mining company is deciding whether to open a strip mine, which costs $2 million. Net cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a cost of $12 million, payable at the end of Year 2. a.

> A store has 5 years remaining on its lease in a mall. Rent is $2,000 per month, 60 payments remain, and the next payment is due in 1 month. The mall’s owner plans to sell the property in a year and wants rent at that time to be high so that the property

> A company has a 12% WACC and is considering two mutually exclusive investments (that cannot be repeated) with the following net cash flows: a. What is each project’s NPV? b. What is each project’s IRR? c. What is each

> A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.4 million per year for 20 years. Plan B requires a $12 million expen

> Assume that the real risk-free rate is 2% and that the maturity risk premium is zero. If the 1-year bond yield is 5% and a 2-year bond (of similar risk) yields 7%, what is the 1-year interest rate that is expected for Year 2? What inflation rate is expec

> An oil drilling company must choose between two mutually exclusive extraction projects, and each costs $12 million. Under Plan A, all the oil would be extracted in 1 year, producing a cash flow at t = 1 of $14.4 million. Under Plan B, cash flows would be

> K. Kim Inc. must install a new air conditioning unit in its main plant. Kim must install one or the other of the units; otherwise, the highly profitable plant would have to shut down. Two units are available, HCC and LCC (for high and low capital costs,

> A company is analyzing two mutually exclusive projects, S and L, with the following cash flows: The company’s WACC is 10%. What is the IRR of the better project? (Hint: The better project may or may not be the one with the higher IRR.)

> Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flows would be $11,100 per year for 5 years. If both projects have a WACC of 14%, which project w

> You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the esti

> Your division is considering two projects. Its WACC is 10%, and the projects’ after-tax cash flows (in millions of dollars) would be as follows: a. Calculate the projects’ NPVs, IRRs, MIRRs, regular paybacks, and disc

> The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Wou

> Suppose a firm estimates its WACC to be 10%. Should the WACC be used to evaluate all of its potential projects, even if they vary in risk? If not, what might be “reasonable” costs of capital for average-, high-, and low-risk projects?

> How should the capital structure weights used to calculate the WACC be determined?

> Suppose 2-year Treasury bonds yield 4.5%, while 1-year bonds yield 3%. r* is 1%, and the maturity risk premium is zero. a. Using the expectations theory, what is the yield on a 1-year bond 1 year from now? b. What is the expected inflation rate in Year 1

> Suppose a new and more liberal Congress and administration are elected. Their first order of business is to take away the independence of the Federal Reserve System and to force the Fed to greatly expand the money supply. What effect will this have: a. O

> Donna Jamison, a 2003 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D’Leon Inc., a small food producer that operates in north Florida an

> An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is its present value? Its future value?

> What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be?

> Should stockholder wealth maximization be thought of as a long-term or a short-term goal? For example, if one action increases a firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years but another action keeps the sto

> You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal?

> If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?

> A father is now planning a savings program to put his daughter through college. She is 13, she plans to enroll at the university in 5 years, and she should graduate in 4 years. Currently, the annual cost (for everything—food, clothing, tuition, books, tr

> Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $40,000 has today. (The real value

> It is now December 31, 2008 (t = 0), and a jury just found in favor of a woman who sued the city for injuries sustained in a January 2007 accident. She requested recovery of lost wages plus $100,000 for pain and suffering plus $20,000 for legal expenses.

> Simon recently received a credit card with an 18% nominal interest rate. With the card, he purchased a new stereo for $350. The minimum payment on the card is only $10 per month. a. If Simon makes the minimum monthly payment and makes no other charges, h

> a. You plan to make five deposits of $1,000 each, one every 6 months, with the first payment being made in 6 months. You will then make no more deposits. If the bank pays 4% nominal interest, compounded semiannually, how much will be in your account afte

> Laiho Industries’ 2007 and 2008 balance sheets (in thousands of dollars) are shown. a. Sales for 2008 were $455,150,000, and EBITDA was 15% of sales. Furthermore, depreciation and amortization were 11% of net fixed assets, interest was

> What is a loan amortization schedule, and what are some ways these schedules are used?

> You want to buy a house that costs $100,000. You have $10,000 for a down payment, but your credit is such that mortgage companies will not lend you the required $90,000. However, the realtor persuades the seller to take a $90,000 mortgage (called a selle

> a. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 10% compounded annually. b. What percentage of the payment represents interest and what percentage repre

> You want to buy a house within 3 years, and you are currently saving for the down payment. You plan to save $5,000 at the end of the first year, and you anticipate that your annual savings will increase by 10% annually thereafter. Your expected annual re

> What are the four forms of business organization? What are the advantages and disadvantages of each?

> Six years from today you need $10,000. You plan to deposit $1,500 annually, with the first payment to be made a year from today, in an account that pays an 8% effective annual rate. Your last deposit, which will occur at the end of Year 6, will be for le

> Starting next year, you will need $10,000 annually for 4 years to complete your education. (One year from today you will withdraw the first $10,000.) Your uncle deposits an amount today in a bank paying 5% annual interest, which will provide the needed $

> Erika and Kitty, who are twins, just received $30,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her “early retirement fund” on her birthday, beginning a year from t

> Your firm sells for cash only; but it is thinking of offering credit, allowing customers 90 days to pay. Customers understand the time value of money, so they would all wait and pay on the 90th day. To carry these receivables, you would have to borrow fu

> As a jewelry store manager, you want to offer credit, with interest on outstanding balances paid monthly. To carry receivables, you must borrow funds from your bank at a nominal 6%, monthly compounding. To offset your overhead, you want to charge your cu

> Indicate whether the following instruments are examples of money market or capital market securities. a. U.S. Treasury bills b. Long-term corporate bonds c. Common stocks d. Preferred stocks e. Dealer commercial paper

> Bank A pays 4% interest compounded annually on deposits, while Bank B pays 3.5% compounded daily. a. Based on the EAR (or EFF%), which bank should you use? b. Could your choice of banks be influenced by the fact that you might want to with draw your fund

> Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were comparing the costs of loans from different lenders, could

> You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $350. The loan will have a 12% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? for 60

> Find the future values of the following ordinary annuities: a. FV of $400 paid each 6 months for 5 years at a nominal rate of 12% compounded semiannually b. FV of $200 paid each 3 months for 5 years at a nominal rate of 12%compounded quarterly c. These a

> Find the present value of $500 due in the future under each of these conditions: a. 12% nominal rate, semiannual compounding, discounted back 5 years b. 12% nominal rate, quarterly compounding, discounted back 5 years c. 12% nominal rate, monthly compoun

> If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how sh

> Jan sold her house on December 31 and took a $10,000 mortgage as part of the payment. The 10-year mortgage has a 10% nominal interest rate, but it calls for semiannual payments beginning next June 30. Next year Jan must report on Schedule B of her IRS Fo

> You have applied for a job with a local bank. As part of its evaluation process, you must take an examination on time value of money analysis covering the following questions: a. Draw time lines for (1) A $100 lump sum cash flow at the end of Year 2; (

> Answer the following questions: a. Assuming a rate of 10% annually, find the FV of $1,000 after 5 years. b. What is the investment’s FV at rates of 0%, 5%, and 20% after 0, 1, 2, 3, 4, and 5 years? c. Find the PV of $1,000 due in 5 year

> Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

> Over the past year, M. D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company’s sales, cash and equivalents, DSO, and fixed assets turnover ratio remained constant. What balance sheet

> Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company?

> If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.

> Financial ratio analysis is conducted by three main groups of analysts: credit analysts, stock analysts, and managers. What is the primary emphasis of each group, and how would that emphasis affect the ratios they focus on?

> Indicate the effects of the transactions listed in the following table on total current assets, current ratio, and net income. Use (+) to indicate an increase, (−) to indicate a decrease, and (0) to indicate either no effect or an indet

> Suppose you were comparing a discount merchandiser with a high-end merchandiser. Suppose further that both companies had identical ROEs. If you applied the DuPont equation to both firms, would you expect the three components to be the same for each compa

> Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?

> Give some examples that illustrate how (a) Seasonal factors and (b) Different growth rates might distort a comparative ratio analysis. How might these problems be alleviated?

> Is it better for a firm’s actual stock price in the market to be under, over, or equal to its intrinsic value? Would your answer be the same from the standpoints of stockholders in general and a CEO who is about to exercise a million dollars in options a

> If a firm’s ROE is low and management wants to improve it, explain how using more debt might help.

> How does a cost-efficient capital market help reduce the prices of goods and services?

> How does inflation distort ratio analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance sheet and income statement items affected?

> Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between the turnover ratios, profit margins, and DuPont equations for a grocery chain and a steel company?

> Assume the following relationships for the Brauer Corp.: Sales total assets………………………..1.5× Return on assets (ROA) ………………3% Return on equity (ROE) ………………..5% Calculate Brauer’s profit margin and debt ratio.

> Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the second series contains an annuity.

> You are given the following information: Stockholders’ equity = $3.75 billion, price/earnings ratio = 3.5, common shares outstanding = 50 million, and market/book ratio = 1.9. Calculate the price of a share of the company’s common stock.

> Duval Manufacturing recently reported the following information: Net income……………………….$600,000 ROA…………………………………..8% Interest expense………………..$225,000 Duval’s tax rate is 35%. What is its basic earning power (BEP)?

> Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2×. The company is 50% equity financed. What is its net income?

> Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?

> A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The mo

> Data for Barry Computer Co. and its industry averages follow. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation for both Barry and the industry. c. Outline Barry’s strengths and weaknesses as revealed by your

> Explain whether the following statements are true or false. a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns. b. Hedge funds typically have large minimum inves

> Suppose three honest individuals gave you their estimates of Stock X’s intrinsic value. One person is your current roommate, the second person is a professional security analyst with an excellent reputation on Wall Street, and the third person is Company

> Complete the balance sheet and sales information using the following financial data: Debt ratio: 50% Current ratio: 1.8x Total assets tumover: 1.5x Days sales outstanding: 365 days Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25

> Fontaine Inc. recently reported net income of $2 million. It has 500,000 shares of common stock, which currently trades at $40 a share. Fontaine continues to expand and anticipates that 1 year from now, its net income will be $3.25 million. Over the next

> Harrelson Inc. currently has $750,000 in accounts receivable, and its day’s sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company’s

> Crissie just won the lottery, and she must choose between three award options. She can elect to receive a lump sum today of $61 million, to receive 10 end-of-year payments of $9.5 million, or to receive 30 end-of-year payments of $5.5 million. a. If she

> The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (not

> TIE RATIO AEI Incorporated has $5 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 10%, and its return on assets (ROA) is 5%. What is AEI’s times interest- earned (TIE) ratio? Answer TA = $5,000,000,000; T = 40%; EBIT

> Which of the following statements is most correct? a. If a firm’s expected basic earning power (BEP) is constant for all of its assets and exceeds the interest rate on its debt, adding assets and financing them with debt will raise the firm’s expected re

> Central City Construction (CCC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CCC will own no securities, so all of its income will be operating income. If it so chooses, CCC can finance up to 50% o

> Lloyd Inc. has sales of $200,000, a net income of $15,000, and the following balance sheet: The new owner thinks that inventories are excessive and can be lowered to the point where the current ratio is equal to the industry average, 2.5×, w

> Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the brokerage firm of Smyth Barry & Co. Your first assignment is to explain the nature of the U.S. financial markets to Michelle Varga,

> Midwest Packaging’s ROE last year was only 3%; but its management has developed a new operating plan that calls for a total debt ratio of 60%, which will result in annual interest charges of $300,000. Management projects an EBIT of $1,000,000 on sales of

> Graser Trucking has $12 billion in assets, and its tax rate is 40%. Its basic earning power (BEP) ratio is 15%, and its return on assets (ROA) is 5%. What is its times-interest-earned (TIE) ratio?

> When is a stock said to be in equilibrium? At any given time, would you guess that most stocks are in equilibrium as you defined it? Explain.

> D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to “go national.â€&#157

> The Corrigan Corporation’s 2007 and 2008 financial statements follow, along with some industry average ratios. a. Assess Corrigan’s liquidity position and determine how it compares with peers and how the liquidity posi

> A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 10%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

> Explain the following statement: While the balance sheet can be thought of as a snapshot of a firm’s financial position at a point in time, the income statement reports on operations over a period of time.

> How does the deductibility of interest and dividends by the paying corporation affect the choice of financing (that is, the use of debt versus equity)?

> What does double taxation of corporate income mean? Could income ever be subject to triple taxation? Explain your answer.

> Would it be possible for a company to report negative free cash flow and still be highly valued by investors; that is, could a negative free cash flow ever be a good thing in the eyes of investors? Explain your answer.

> a. Find the present values of the following cash flow streams at 8% compounded annually. b. What are the PVs of the streams at 0% compounded annually? 2 3 + + $400 + $400 Stream A $0 $100 $400 $300 Stream B $0 $300 $400 $400 $400 $100

> What is free cash flow? If you were an investor, why might you be more interested in free cash flow than net income?

> Financial statements are based on generally accepted accounting principles (GAAP) and are audited by CPA firms. Therefore, do investors need to worry about the validity of those statements? Explain your answer.