Modern Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility that managers at the company are evaluating is to take over a station located at a site that has been leased from the county. The lease, originally for 99 years, currently has 73 years before expiration. The gas station generated a net cash flow of $92,500 last year, and the current owners expect an annual growth rate of 6.3 percent. If Modern Energy uses a discount rate of 14.5 percent to evaluate such businesses, what is the present value of this growing annuity?
> Brad is about to purchase an additional asset for his well-diversified portfolio. He notices that when he plots the historical returns of the asset against those of the market portfolio, the line of best fit tends to have a large amount of prediction err
> Explain why investors who have diversified their portfolios will determine the price and, consequently, the expected return on an asset?
> In order to expect that it will fund her retirement, Glenda needs her portfolio to have an expected return of 12 percent per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2,
> Peter knows that the covariance in the return on two assets is –0.0025. Without knowing the expected return of the two assets, explain what that covariance means?
> You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted to medical school is about 10 percent. If you are accepted to medical school, then your starting salary
> Evaluate the following statement: “By fully diversifying a portfolio, such as by buying every asset in the market, we can completely eliminate all types of risk, thereby creating a synthetic Treasury bill”?
> Write out the equation for the covariance in the returns of two assets, Asset 1 and Asset 2. Using that equation, explain the easiest way for the two asset returns to have a covariance of zero?
> The Ellicott City Ice Cream Company management has just completed an assessment of the company’s assets and liabilities and has obtained the following information. The firm has total current assets worth $625,000 at book value and $519,000 at market valu
> You have constructed a diversified portfolio of stocks such that there is no unsystematic risk. Explain why the expected return of that portfolio should be greater than the expected return of a risk-free security?
> Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 per
> Using the information from Problems 7.17, 7.18, and 7.19, calculate the coefficient of variation for each of the investments in those problems?
> John is watching an old game show rerun on television called Let’s Make a Deal in which the contestant chooses a prize behind one of two curtains. Behind one of the curtains is a gag prize worth $150, and behind the other is a round-the-world trip worth
> Ben would like to invest in gold and is aware that the returns on such an investment can be quite volatile. Use the following table of states, probabilities, and returns to determine the expected return and the standard deviation of the return on Ben&aci
> Barbara is considering investing in a company’s stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the retur
> The distribution of grades in an introductory finance class is normally distributed, with an expected grade of 75. If the standard deviation of grades is 7, in what range would you expect 95 percent of the grades to fall?
> Describe the Capital Asset Pricing Model (CAPM) and what it tells us?
> If the expected rate of return for the market is not much greater than the risk-free rate of return, what does this suggest about the general level of compensation for bearing systematic risk?
> Describe and justify what the value of the beta of a U.S. Treasury bill should be?
> Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for five years. The CD will pay interest of 9 percent. What is the future value of Amit’s investment?
> Susan is expecting the returns on the market portfolio to be negative in the near term. Since she is managing a stock mutual fund, she must remain invested in a portfolio of stocks. However, she is allowed to adjust the beta of her portfolio. What kind o
> Describe the difference between a total holding period return and an expected return?
> Robert Hobbes plans to invest $25,000 a year at the end of each year for the next seven years in an investment that will pay him a rate of return of 11.4 percent. How much money will Robert have at the end of seven years?
> Dynamics Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $22,500 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value o
> An investment opportunity requires a payment of $750 for 12 years, starting a year from today. If your required rate of return is 8 percent, what is the value of the investment to you today?
> Biogenesis Inc. management expects the following cash flow stream over the next five years. They discount all cash flows using a 23 percent discount rate. What is the present value of this cash flow stream? 1 2 4 5 Year -$1,133,676 -$978,452 $275,455
> Jeremy Fenloch borrowed some money from his friend and promised to repay him $1,225, $1,350, $1,500, $1,600, and $1,600 over the next five years. If the friend normally discounts investments at 8 percent annually, how much did Jeremy borrow?
> Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday. After retirement, you expect to live at least until you are
> The Yan family buying a new 3,500-square-foot house in Muncie, Indiana, and will borrow $237,000 from Bank One at a rate of 6.375 percent for 15 years. What will be their monthly loan payment? Prepare an amortization schedule using Excel.
> Trevor Diaz wants to purchase a Maserati Qattroporte sedan, which has an invoice price of $121,737 and a total cost of $129,482. Trevor plans to put down $20,000 and will pay the rest by taking on a 5.75 percent five-year bank loan. What is the monthly p
> You are given the following information about Clarkesville Plumbing Company. Revenues in 2017 totaled $896, depreciation expenses $75, costs of goods sold $365, and interest expenses $54. At the end of the year, current assets were $121 and current liabi
> Saul Cervantes has just purchased some equipment for his landscaping business. For this equipment he must pay the following amounts at the end of each of the next five years: $10,450, $8,500, $9,675, $12,500, and $11,635. If the appropriate, what is the
> You are now 50 years old and plan to retire at age 65. You currently have a stock portfolio worth $150,000, a 401(k) retirement plan worth $250,000, and a money market account worth $50,000. Your stock portfolio is expected to provide annual returns of 1
> Babu Baradwaj is saving for his son’s college tuition. His son is currently 11 years old and will begin college in seven years. Babu has an index fund investment of $7,500 that is earning 9.5 percent annually. Total expenses at the University of Maryland
> At what interest rate would you be indifferent between the cash and annual payment options in problem 6.36?
> The top prize for the state lottery is $100,000,000. You have decided it is time for you to take a chance and purchase a ticket. Before you purchase the ticket, you must decide whether to choose the cash option or the annual payment option. If you choose
> Gary Kornig is 30 years old and wants to retire when he is 65. So far he has saved (1) $6,950 in an IRA account in which his money is earning 8.3 percent annually and (2) $5,000 in a money market account in which he is earning 5.25 percent annually. Gary
> Tirade Owens, a professional athlete, currently has a contract that will pay him a large amount in the first year of his contract and smaller amounts thereafter. He and his agent have asked the team to restructure the contract. The team, though reluctant
> You have been offered the opportunity to invest in a project which is expected to provide you with the following cash flows: $4,000 in one year, $12,000 in two years, and $8,000 in three years. If the appropriate interest rates are 6 percent for the firs
> You are considering three alternative investments: (1) A three-year bank CD paying 7.5 percent compounded quarterly; (2) A three-year bank CD paying 7.3 percent compounded monthly; and (3) A three-year bank CD paying 7.75 percent compounded annually. Whi
> Which of the following investments has the highest effective annual interest rate (EAR)? a. A bank CD that pays 8.25 percent compounded quarterly. b. A bank CD that pays 8.25 percent compounded monthly. c. A bank CD that pays 8.45 percent compounded annu
> You lent $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. Did you experience an increase or decrease in the purchasing power of your money? How much did it increase or decrease?
> Find the effective annual interest rate (EAR) on each of the following: a. 6 percent compounded quarterly. b. 4.99 percent compounded monthly. c. 7.25 percent compounded semiannually. d. 5.6 percent compounded daily.
> You are a freshman in college and are planning a trip to Europe when you graduate from college at the end of four years. You plan to save the following amounts annually, starting today: $625, $700, $700, and $750. If you can earn 5.75 percent annually, h
> Calculate the present value of the following perpetuities: a. $1,250 discounted to the present at 7 percent b. $7,250 discounted to the present at 6.33 percent c. $850 discounted to the present at 20 percent
> Suppose that the networking company in problem 6.27 will not start paying you until the first of new systems that uses your software is sold in two years. What is the present value of that annuity? Assume that the appropriate interest rate is still 6 per
> You wrote a piece of software that does a better job of allowing computers to network than any other program designed for this purpose. A large networking company wants to incorporate your software into its systems and is offering to pay you $500,000 tod
> Sharon Kabana has won a state lottery and will receive a payment of $89,729.45 every year, starting today, for the next 20 years. If she invests the proceeds at a rate of 7.25 percent, what is the present value of the cash flows that she will receive? Ro
> Grant Productions borrowed some money from the California Finance Company at a rate of 17.5 percent for a seven-year period. The loan calls for a payment of $1,540,862.19 each year beginning today. How much did Grant borrow?
> Jeremy Denham plans to save $5,000 every year for the next eight years, starting today. At the end of eight years, Jeremy will turn 30 years old and plans to use his savings toward the down payment on a house. If his investment in a mutual fund will earn
> Gary Whitmore is a high school sophomore. He currently has $7,500 in a savings account that pays5.65 percent annually. Gary plans to use his current savings plus what he can save over the next four years to buy a car. He estimates that the car will cost
> The Huntington Rain Gear Company had $633,125 in taxable income in the year ending September 30, 2017. Calculate the company’s tax using the tax schedule in Exhibit 3.6?
> Carol Jenkins, a lottery winner, will receive the following payments over the next seven years. She has been approached by an investor who will pay Carol a lump sum today for the rights to those future cash flows. If she can invest her cash flows in a fu
> Stephanie Watson is 20 years old and plans to make the following investments beginning next year. She will invest $3,125 in each of the next three years and will then make investments of $3,650, $3,725, $3,875, and $4,000 over the following four years. I
> Ben Woolmer has an investment that will pay him the following cash flows over the next five years: $2,350, $2,725, $3,128, $3,366, and $3,695. If his investments typically earn 7.65 percent, what is the future value of the investment’s cash flows at the
> Trigen Corp. management will invest $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75 percent, what is the future value of these investments ei
> You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will grow at a rate of 3.4 percent annually. If you use a
> Cyclone Rentals borrowed $15,550 from a bank for three years. If the quoted rate (APR) is 6.75 percent, and the compounding is daily, what is the effective annual interest rate (EAR)?
> Marshall Chavez bought a Honda Civic for $17,345. He put down $6,000 and financed the rest through the dealer at an APR of 4.9 percent for four years. What is the effective annual interest rate (EAR) if the loan payments are made monthly?
> Calculate the annual cash flows for each of the following investments: a. $250,000 invested at 6% b. $50,000 invested at 12% c. $100,000 invested at 10%
> Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments of $10,000 a year forever, starting when he retires. If he can earn 6.5 percent annually, how much does your grandfather need to invest to produ
> The Elkridge Bar & Grill has a seven-year loan of $23,500 with Bank of America. It plans to repay the loan in seven equal installments starting today. If the rate of interest is 8.4 percent, how much will each payment be?
> What effect does an increase in the demand for business goods and services have on the real interest rate? What other factors can affect the real interest rate?
> Kevin Winthrop is saving for an Australian vacation in three years. He estimates that he will need $5,000 to cover his airfare and all other expenses for a week-long holiday in Australia. If he can invest his money in an S&P 500 equity index fund that is
> Refer to Problem 6.10. If Cecelia Thomas invests at the beginning of each year, how much will she have at age 65? Refer to problem 6.10: Cecelia Thomas is a sales executive at a Baltimore firm. She is 25 years old and plans to invest $3,000 every year i
> Cecelia Thomas is a sales executive at a Baltimore firm. She is 25 years old and plans to invest $3,000 every year in an IRA account, beginning at the end of this year until she reaches the age of 65. If the IRA investment will earn 9.75 percent annually
> Konerko, Inc., management expects the company to earn cash flows of $13,227, $15,611, $18,970, and $19,114 over the next four years. If the company uses an 8 percent discount rate, what is the future value of these cash flows at the end of year 4?
> Roy Gross is considering an investment that pays 7.6 percent, compounded annually. How much will he have to invest today so that the investment will be worth $25,000 in six years?
> Joe Mauer, a catcher for the Minnesota Twins, is expected to hit 15 home runs in 2018. If his home-run-hitting ability is expected to grow by 12 percent every year for the following five years, how many home runs is he expected to hit in 2023?
> Find the future value of a five-year $100,000 investment that pays 8.75 percent and that has the following compounding periods: a. Quarterly. b. Monthly. c. Daily. d. Continuous.
> Your birthday is coming up and instead of other presents, your parents promised to give you $1,000 in cash. Since you have a part time job and thus don’t need the cash immediately, you decide to invest the money in a bank CD that pays 5.2 percent, compou
> Your bank pays 5 percent interest semiannually on your savings account. You don’t expect to add to the current balance of $2,700 over the next four years. How much money can you expect to have at the end of this period?
> Kate Eden received a graduation present of $2,000 that she is planning on investing in a mutual fund that earns 8.5 percent each year. How much money will she have in three years?
> Kelly Martin has $10,000 that she can deposit into a savings account for five years. Bank A pays compounds interest annually, Bank B twice a year, and Bank C quarterly. Each bank has a stated interest rate of 4 percent. What amount would Kelly have at th
> You will be graduating in two years and are thinking about your future. You know that you will want to buy a house five years after you graduate and that you will want to put down $60,000. As of right now, you have $8,000 in your savings account. You are
> Surmec, Inc., reported sales of $2.1 million last year. The company’s primary business is the manufacture of nuts and bolts. Since this is a mature industry, analysts are confident that sales will grow at a steady rate of 7 percent per year. The company’
> Jared Goff, the number 1 draft pick of the NFL Los Angeles Rams in 2016, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life of the contract. Goff uses a 10.25 percent rate of ret
> When you were born your parents set up a bank account in your name with an initial investment of $5,000. You are turning 21 in a few days and will have access to all your funds. The account was earning 7.3 percent for the first seven years, but then the
> You have $12,000 in cash. You can deposit it today in a mutual fund earning 8.2 percent compounded semiannually, or you can wait, enjoy some of it, and invest $11,000 in your brother’s business in two years. Your brother is promising you a return of at l
> Patrick Seeley has $2,400 to invest. His brother approached him with an investment opportunity that could double his money in four years. What interest rate would the investment have to yield in order for Patrick’s brother to deliver on his promise?
> You have $2,500 that you want to invest in your classmate’s start-up business. You believe the business idea to be great and hope to get $3,700 back at the end of three years. If all goes according to the plan, what will be the return on your investment?
> Congress and the President have decided to increase the federal tax rate in an effort to reduce the budget deficit. Suppose that Caroline Weslin, from problem 5.29, will pay 35 percent of her bonus to the federal government for taxes if she accepts the b
> Your aunt is planning to invest in a bank CD that will pay 7.5 percent interest compounded semiannually. If she has $5,000 to invest, how much will she have at the end of four years?
> Caroline Weslin needs to decide whether to accept a bonus of $1,820 today or wait two years and receive $2,100 then. She can invest at 6 percent. What should she do?
> Emily Smith deposits $1,200 in her bank today. a. If the bank pays 4 percent simple interest, how much money will she have at the end of five years? b. What if the bank pays compound interest? c. How much of the earnings will be interest on interest?
> The Abercrombie Supply Company reported the following information for 2017. Prepare a common-size income statement for the year ended June 30, 2017? Abercrombie Supply Company Income Statement for the Fiscal Year Ended June 30, 2017 ($ thousands) Net sal
> Purchase Corporation purchased 60 percent of Steal Company ownership on January 1, 20X7, for $277,500. Steal reported the following net income and dividend payments: On January 1, 20X7, Steal had $250,000 of $5 par value common stock outstanding and re
> Punk Corporation purchased 80 percent of Soul Corporation’s stock on January 1, 20X2. At that date, Soul reported retained earnings of $80,000 and had $120,000 of stock outstanding. The fair value of its buildings was $32,000 more than the book value. Pu
> Public Corporation acquired 90 percent of Station Company’s voting common stock on January 1, 20X1, for $486,000. At the time of the combination, Station reported common stock outstanding of $120,000 and retained earnings of $380,000, and the fair value
> Select the most appropriate answer for each of the following questions. 1. If A Company acquires 80 percent of the stock of B Company on January 1, 20X2, immediately after the acquisition, which of the following is correct? a. Consolidated retained earni
> Softball Corporation reported the following balances at January 1, 20X9: On January 1, 20X9, Pitcher Corporation purchased 100 percent of Softball’s stock. All tangible assets had a remaining economic life of 10 years at January 1, 20
> Pitch Corporation purchased 100 percent ownership of Southpaw Corporation on January 1, 20X4, for $65,000, which was $10,000 above the underlying book value. Half the additional amount was attributable to an increase in the value of land held by Southpaw
> Pistol Corporation purchased 100 percent ownership of Scope Products on January 1, 20X6, for $56,000, at which time Scope Products reported retained earnings of $10,000 and capital stock outstanding of $30,000. The differential was attributable to patent
> Player Corporation purchased 100 percent of Scout Company’s common stock on January 1, 20X5, and paid $28,000 above book value. The full amount of the additional payment was attributed to amortizable assets with a life of eight years remaining at January
> Plastic Company purchased 100 percent of Spoon Company’s voting common stock for $648,000 on January 1, 20X4. At that date, Spoon reported assets of $690,000 and liabilities of $230,000. The book values and fair values of Spoon’s assets were equal except
> Planner Corporation purchased 100 percent of Schedule Company’s stock on January 1, 20X4, for $340,000. On that date, Schedule reported net assets with a historical cost of $300,000 and a fair value of $340,000. The difference was due to the increased va
> Select the correct answer for each of the following questions. 1. On December 31, 20X3, Saxe Corporation was merged into Poe Corporation. In the business combination, Poe issued 200,000 shares of its $10 par common stock, with a market price of $18 a sha
> Planet Corporation acquired 100 percent of the voting common stock of Saturn Company on January 1, 20X7, by issuing bonds with a par value and fair value of $670,000 and making a cash payment of $24,000. At the date of acquisition, Saturn reported assets
> Pop Company acquired all of Soda Corporation’s common shares on January 2, 20X3, for $789,000. At the date of combination, Soda’s balance sheet appeared as follows: The fair values of all of Soda’s
> Polka Corporation acquired 100 percent of Song Company’s voting stock on January 1, 20X4, at underlying book value. Polka uses the equity method in accounting for its ownership of Song. On December 31, 20X4, the trial balances of the tw
> Pony Corporation acquired all of Stallion Company’s common shares on January 1, 20X5, for $180,000. On that date, the book value of the net assets reported by Stallion was $150,000. The entire differential was assigned to depreciable as
