In Problem 20, McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?
Data from Problem 20:
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $845 per set and have a variable cost of $405 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,000 sets of its high-priced clubs. The high-priced clubs sell at $1,175 and have variable costs of $620. The company will also increase sales of its cheap clubs by 12,000 sets. The cheap clubs sell for $435 and have variable costs of $200 per set. The fixed costs each year will be $9.75 million. The company has also spent $1 million on research and development for the new clubs. The plant and equipment required will cost $37.1 million and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1.7 million that will be returned at the end of the project. The tax rate is 25 percent, and the cost of capital is 10 percent. Calculate the payback period, the NPV, and the IRR.
> You have just made your first $5,500 contribution to your retirement account. Assuming you earn a return of 10 percent per year and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years b
> Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 7.4 percent, has a YTM of 6.8 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6.8 percent, ha
> Suppose you are still committed to owning a $245,000 Ferrari (see Problem 9). If you believe your mutual fund can achieve an annual rate of return of 11.2 percent and you want to buy the car in 9 years (on the day you turn 30), how much must you invest t
> Refer back to the Series EE savings bonds we discussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of return you would earn if you held the bond for 20 years until it doubled in value?b. If
> You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.7 percent. If Stock X has an expected return of 11.4 percent and a beta of 1.25, and Stock Y has an expected r
> The “Brasher doubloon,” which was featured in the plot of the Raymond Chandler novel, The High Window, was sold at auction in 2014 for $4,582,500. The coin had a face value of $15 when it was first issued in 1787 and had been previously sold for $430,000
> In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2016, the winner’s check was $1,800,000. What was the percentage increase per year in the winner’s check over this period? If the winner’s prize increases at t
> 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 2067, assuming they appreciate at an annual rate of 4.3 percen
> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $25,000 for one year. The interest rate is 14.9 percent. You and the lender agree that the interest on
> You have just received notification that you have won the $2 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
> Imprudential, Inc., has an unfunded pension liability of $415 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 5.2 per
> You’re trying to save to buy a new $245,000 Ferrari. You have $50,000 today that can be invested at your bank. The bank pays 4.3 percent annual interest on its accounts. How long will it be before you have enough to buy the car?
> According to the Census Bureau, in October 2016, the average house price in the United States was $354,900. In October 2000, the average price was $215,100. What was the annual increase in the price of the average house sold?
> Locate the Treasury bond in Figure 7.4 maturing in February 2040. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in dollars? Assume a par value of $10,000.Figure 7.4:
> In the previous problem, suppose a sales associate told you the policy costs $800,000. At what interest rate would this be a fair deal?Data from Problem 10:The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and
> A proposed cost-saving device has an installed cost of $735,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $55,000, the tax rate
> At 6.1 percent interest, how long does it take to double your money? To quadruple it?
> Assume the total cost of a college education will be $345,000 when your child enters college in 18 years. You presently have $73,000 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:
> Solve for the unknown interest rate in each of the following:
> For each of the following, compute the present value:
> For each of the following, compute the future value:
> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:Time ……………………………………………………………………………..…….. Salary0 ……………………………………………………………………………….. $8,400,0001 …………………………………………………………………………………. $4,700,0002 ……………
> In Problem 4, over what range of lease payments will the lease be profitable for both parties?Problem 4:Assume that your company does not anticipate paying taxes for the next several years. What are the cash flows from leasing in this case?
> First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how much more money would you earn from your Second City B
> Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Be
> You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table:,,,
> Rework Problems 1 and 2 assuming the ending share price is $58.Data from Problem 2:In Problem 1, what was the dividend yield? The capital gains yield?Data from Problem 1:Suppose a stock had an initial price of $65 per share, paid a dividend of $1.45 per
> Suppose Sunburn Sunscreen and Frostbite Thermal wear in the previous problems have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 21 percent per year.a. What is the
> Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $185 million for Hybrid Golf. Both companies have niche markets in the golf
> As a new graduate, you’ve taken a management position with Exotic Cuisines, Inc., a restaurant chain that just went public last year. The company’s restaurants specialize in exotic main dishes, using ingredients such as alligator, bison, and ostrich. A c
> S&S Air is preparing its first public securities offering. In consultation with Renata Harper of underwriter Raines and Warren, Chris Guthrie decided that a convertible bond with a 20-year maturity was the way to go. He met the owners, Mark and Todd, and
> Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has approached her about a mortgage for a house he is building. The
> Sterling Wyatt, the president of Howlett Industries, has been exploring ways of improving the company’s financial performance. Howlett manufactures and sells office equipment to retailers. The company’s growth has been
> Webb Corporation was founded 20 years ago by its president, Bryan Webb. The company originally began as a mail-order company, but it has grown rapidly in recent years, in large part due to its website. Because of the wide geographical dispersion of the c
> Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 y
> After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $43,000. The dealer has a special leasing arrangement where you pay $4,300 today and $505 per month for the next three years.
> Consider the following information about three stocks:b. If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio?c. If the expected inflation rate is 3.30 percent, what are the approximate and exact expected real r
> Mark Sexton and Todd Story have been discussing the future of S&S Air. The company has been experiencing fast growth, and the two see only clear skies in the company’s future. However, the fast growth can no longer be funded by internal sources, so Mark
> Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Should you lease or buy?
> Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company&acir
> In Problem 8, are the shareholders of Firm T better off with the cash offer or the stock offer? At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers?Problem 8:Consider the following premerger in
> Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $9,300. a. If
> The shareholders of Bread Company have voted in favor of a buyout offer from Butter Corporation. Information about each firm is given here:Bread’s shareholders will receive one share of Butter stock for every three shares they hold in B
> Three Guys Burgers, Inc., has offered $16.5 million for all of the common stock in Two Guys Fries, Corp. The current market capitalization of Two Guys as an independent company is $13.4 million. Assume the required return on the acquisition is 9 percent
> Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.6 million indefinitely. The current market value of Teller is $38 million,
> Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting purposes. The following balance sheets represent the premerger
> Assume that the following balance sheets are stated at book value. Suppose that Meat Co. purchases Loaf, Inc.The fair market value of Loaf’s fixed assets is $9,800 versus the $6,900 book value shown. Meat pays $17,800 for Loaf and raise
> Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $17,500 per month for 25 years, with the first payment received 30 years and 1 month from now. Second, he wo
> Locate the Treasury issue in Figure 7.4 maturing in May 2038. What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume a par value of $10,000. Figure 7.4:
> Consider the following premerger information about Firm X and Firm Y:Assume that Firm X acquires Firm Y by issuing new long-term debt for all the shares outstanding at a merger premium of $6 per share. Assuming that neither firm has any debt before the m
> Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants.Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $375,000 indefinitely. The current mar
> You are given the following information concerning options on a particular stock:a. What is the intrinsic value of the call option? Of the put option?b. What is the time value of the call option? Of the put option?c. Does the call or the put have the lar
> Consider the following premerger information about Firm A and Firm B:Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B’s stock. Both Firm A and Firm B have no debt outstanding.a. What will
> Pearl, Inc., has offered $228 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $214 million as an independent operation. If the merger makes economic sense for Pearl, what is the minimum estima
> You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,250,000. Over the past five years, the price of land in the area has increased 7 percent per year, with an annual standard deviation of 30 percent. A buy
> What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?,,,
> Assume that the historical return on large-company stocks is a predictor of the future returns. What return would you estimate for large-company stocks over the next year? The next 10 years? 20 years? 40 years?
> What are the prices of a call option and a put option with the following characteristics?,,,
> A put option and call option with an exercise price of $50 expire in four months and sell for $5.99 and $8.64, respectively. If the stock is currently priced at $52.27, what is the annual continuously compounded rate of interest?
> A put option and a call option with an exercise price of $70 and three months to expiration sell for $1.30 and $6.25, respectively. If the risk-free rate is 3.1 percent per year, compounded continuously, what is the current stock price?
> Say you own an asset that had a total return last year of 11.65 percent. If the inflation rate last year was 2.75 percent, what was your real return?
> Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $14,300 every year instead of equal annual payments.Data from Problem 55:Prepare an amortization schedule for a five-year loan of $71,500. The interest rate is 7 percen
> A put option that expires in six months with an exercise price of $45 sells for $2.34. The stock is currently priced at $48, and the risk-free rate is 3.5 percent per year, compounded continuously. What is the price of a call option with the same exercis
> A stock is currently selling for $67 per share. A call option with an exercise price of $70 sells for $3.21 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option
> If you need $20,000 in 12 years, how much will you need to deposit today if you can earn 9 percent per year compounded continuously?
> A call option has an exercise price of $60 and matures in six months. The current stock price is $64, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent
> A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded continuously. If the exercise price is $0, what is the pr
> A stock has a beta of 1.12 and an expected return of 10.8 percent. A risk-free asset currently earns 2.7 percent.
> A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded continuously. What is the price of a put option with the s
> In Problem 9, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of the transaction today?Problem 9:You own a lot in Key West, F
> If you have $1,275 today, how much will it be worth in six years at 8 percent per year compounded continuously?
> A $1,000 par convertible debenture has a conversion price for common stock of $27 per share. With the common stock selling at $31, what is the conversion value of the bond?
> An investment offers a total return of 12.3 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 8 percent. What does Janice believe the inflation rate will be over the next year?
> Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,040. Urban Meyer, the CEO, believes that the assets in the company will be worth either $940 or $1,270 in a
> Prepare an amortization schedule for a five-year loan of $71,500. The interest rate is 7 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? How much total interest is paid over the life of the loa
> Rackin Pinion Corporation’s assets are currently worth $1,065. In one year, they will be worth either $1,000 or $1,340. The risk-free interest rate is 3.9 percent. Suppose the company has an outstanding debt issue with a face value of $1,000.a. What is t
> A one-year call option contract on Cheesy Poofs Co. stock sells for $845. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current value of the stock if the risk-free rate is 3 percent?
> The price of Cilantro, Inc., stock will be either $70 or $90 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.a. Suppose the current price of the company’s stock is $80. What is the value o
> You own a portfolio that has $3,480 invested in Stock A and $7,430 invested in Stock B. If the expected returns on these stocks are 8 percent and 11 percent, respectively, what is the expected return on the portfolio?
> The price of Chive Corp. stock will be either $67 or $91 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.a. Suppose the current price of the company’s stock is $75. What is the value of th
> Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $40.a. Suppose you buy 10 contracts of the February 38 call option. How much will you pay, ignoring commissions?b. In part (a), suppose th
> You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3.15 million this year. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. You
> Pearl Corp. is expected to have an EBIT of $1.8 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $155,000, $75,000, and $115,000, respectively.All are expected to grow at 18 percent per year fo
> Minder Industries stock has a beta of 1.08. The company just paid a dividend of $.65, and the dividends are expected to grow at 4 percent. The expected return on the market is 10.5 percent, and Treasury bills are yielding 3.4 percent. The most recent sto
> Suppose the real rate is 2.1 percent and the inflation rate is 3.4 percent. What rate would you expect to see on a Treasury bill?
> Consider the following project of Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $14 million that will be depreciated straight-line to zero
> You have been hired to value a new 25-year callable, convertible bond. The bond has a coupon rate of 2.3 percent, payable annually. The conversion price is $68, and the stock currently sells for $27.83. The stock price is expected to grow at 11 percent p
> You want to buy a new sports car from Muscle Motors for $57,500. The contract is in the form of a 60-month annuity due at an APR of 5.9 percent. What will your monthly payment be?
> Liberty Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $5.3 million for the next eight years. The company uses a discount rate of 11 percent for new product launches. The initial investment is
> In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?Previous problem:Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .80 and an expected return of 7.85 percen
> Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $85.a. Are the call options in the money? What is the intrinsic value of an RWJ Corp. call option?b. Are the put options in the money? Wha
> Campbell, Inc., has a $1,000 face value convertible bond issue that is currently selling in the market for $960. Each bond is exchangeable at any time for 18 shares of the company’s stock. The convertible bond has a 4.9 percent coupon, payable semiannual
> Which of the following two sets of relationships, at time of issuance for convertible bonds, is more typical? Why?,,,
> Suppose a share of stock sells for $63. The risk-free rate is 5 percent, and the stock price in one year will be either $70 or $80.a. What is the value of a call option with an exercise price of $70?b. What’s wrong here? What would you do?
> In Problem 15, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project is a success. This implies that if the project is a suc
> In Problem 14, suppose you think it is likely that expected sales will be revised upward to 10,800 units if the first year is a success and revised downward to 3,900 units if the first year is not a success. Problem 14:We are examining a new project. We
> If Treasury bills are currently paying 4.7 percent and the inflation rate is 2.2 percent, what is the approximate real rate of interest? The exact real rate?
> Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $275,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will
> A bond with 20 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $24. Each warrant gives the owner the right to purchase two shares of stock in the company at $45 per share. Ordinary bo
