Question: One of your customers is delinquent on

> Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction

> Why is it that municipal bonds are not taxed at the federal level, but are taxable across state lines? Why are U.S. Treasury bonds not taxable at the state level? (You may need to dust off the history books for this one.)

> Your company will generate $73,000 in annual revenue each year for the next eight years from a new information database. If the appropriate interest rate is 8.5 percent, what is the present value of the savings?

> Suppose an investment offers to triple your money in 12 months (don’t believe it). What rate of return per quarter are you being offered?

> If the appropriate discount rate for the following cash flows is 8.45 percent per year, what is the present value of the cash flows? Year …………………………………… Cash Flow 1…………………………………………………………$1,650 2………………………………………………………………..0 3…………………………………………………..……..4,200

> Beginning three months from now, you want to be able to withdraw $2,300 each quarter from your bank account to cover college expenses over the next four years. If the account pays .65 percent interest per quarter, how much do you need to have in your ban

> The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 7.2 percent, how much will you pay for the policy?

> You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already decided

> In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?

> 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 15 percent. You and the lender agree that the interest on t

> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: Time ……………………………………………….Salary 0…………………………………………………………$7,000,000 1………………………………………………………….$4,500,000 2…………………………………………………………$5,000,000 3…………………

> 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 $32,000. The dealer has a special leasing arrangement where you pay $99 today and $450 per month for the next three years. If

> 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 $20,000 per month for 25 years, with the first payment received 30 years and 1 month from now. Second, he wo

> Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $8,400 every year instead of equal annual payments. Data from problem 55: Prepare an amortization schedule for a five-year loan of $42,000. The interest rate is 8 perc

> Prepare an amortization schedule for a five-year loan of $42,000. The interest rate is 8 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

> You want to buy a new sports car from Muscle Motors for $68,000. The contract is in the form of a 60-month annuity due at an 7.85 percent APR. What will your monthly payment be?

> Suppose you are going to receive $10,000 per year for five years. The appropriate interest rate is 11 percent. a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an a

> A 5-year annuity of ten $7,000 semiannual payments will begin 8 years from now, with the first payment coming 8.5 years from now. If the discount rate is 10 percent compounded monthly, what is the value of this annuity five years from now? What is the va

> A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $25,000, the interest for the year will be $4,000. Because you must repay a total of $29,000 in one year, the finance company requires you to pay $29,000/12, o

> Referring back to the General Motors example used at the beginning of the chapter, note that we suggested that General Motors’ stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?

> Given an interest rate of 6.2 percent per year, what is the value at date t =7 of a perpetual stream of $3,500 payments that begins at date t= 15?

> You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,200 payments and has an interest rate of 8.5 percent compounded monthly. Investment B is an 8 percent continuously compounded lump sum invest

> A 15-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 11 percent compounded monthly for the first seven years, and 7 percent compounded monthly thereafter, what is the present value of the annuit

> What is the present value of $4,000 per year, at a discount rate of 10 percent, if the first payment is received 8 years from now and the last payment is received 25 years from now?

> Consider a firm with a contract to sell an asset for $165,000 four years from now. The asset costs $94,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset? At what rate does

> You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $2,900,000 purchase price. The monthly payment on this loan will be $15,000. What is the APR on this loan? The EAR?

> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $500,000 per year. Thus, in one year, you receive $1.5 million. In two years you get $2 million, and so on. If the appropriate interest rate

> The present value of the following cash flow stream is $6,550 when discounted at 10 percent annually. What is the value of the missing cash flow? Year ……………………….…………… Cash Flow 1………………………………………………………….$1,700 2………………………………………………………………….? 3………………………………………

> You need a 30-year, fixed-rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at a 6.35 percent APR for this 360-month loan. However, you can afford monthly payments of only $1,150, so you offer to pay off any remaini

> You want to borrow $73,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,450, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?

> Could a company’s cash flow to stockholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?

> You’re prepared to make monthly payments of $340, beginning at the end of this month, into an account that pays 6 percent interest compounded monthly. How many payments will you have made when your account balance reaches $20,000?

> What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $9,000 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if in

> Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $50,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. Y

> You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 30 years, which will increase 5 percent per year. If the appropriate discount rate is 8 percent, what is the present value of your winnings?

> You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $95,000 per year for the next two years, or you can have $70,000 per year for the next two years, along with a

> You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn a 12 percent annual return? How much do you have to save if you wait 10 years before you begin your deposits? 20 years?

> You have an investment that will pay you 1.17 percent per month. How much will you have per dollar invested in one year? In two years?

> You are planning to save for retirement over the next 30 years. To do this, you will invest $700 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 6

> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.5 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the

> You are looking at an investment that has an effective annual rate of 17 percent. What is the effective semiannual return? The effective quarterly return? The effective monthly return?

> Suppose a company’s operating cash flow has been negative for several years running. Is this necessarily a good sign or a bad sign?

> What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.

> First Simple Bank pays 7 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 ye

> If the appropriate discount rate for the following cash flows is 11 percent compounded quarterly, what is the present value of the cash flows? Year Cash …………….………………Flow 1………………………………………….……….$ 725 2………………………………………….…..…….980 3………………………………………………….…….0 4

> In the previous problem, suppose you make $3,600 annual deposits into the same retirement account. How large will your account balance be in 30 years? Data from previous problem: You are planning to make monthly deposits of $300 into a retirement accoun

> You are planning to make monthly deposits of $300 into a retirement account that pays 10 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 30 years?

> Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,800 monthly. The contract currently sells for $95,000. What is the monthly return on this investment vehicle? What is the APR? The effective annual return?

> Friendly’s Quick Loans, Inc., offers you “three for four or 1 knock on your door.” This means you get $3 today and repay $4 when you get your paycheck in one week (or else). What’s the effective annual return Friendly’s earns on this lending business? If

> You want to buy a new sports coupe for $68,500, and the finance office at the dealership has quoted you a 6.9 percent APR loan for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

> Big Dom’s Pawn Shop charges an interest rate of 30 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What is the effective annual rate?

> An investment will pay you $58,000 in seven years. If the appropriate discount rate is 10 percent compounded daily, what is the present value?

> Suppose a company’s cash flow from assets is negative for a particular period. Is this necessarily a good sign or a bad sign?

> Gold Door Credit Bank is offering 9.3 percent compounded daily on its savings accounts. If you deposit $4,500 today, how much will you have in the account in 5 years? In 10 years? In 20 years?

> What is the future value of $2,100 in 17 years assuming an interest rate of 8.4 percent compounded semiannually?

> Barcain Credit Corp. wants to earn an effective annual return on its consumer loans of 16 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this ra

> First National Bank charges 14.2 percent compounded monthly on its business loans. First United Bank charges 14.5 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

> Find the APR, or stated rate, in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) Semiannually 8.6% Monthly 19.8 Weekly 9.4 Infinite 16.5

> Find the EAR in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) 8% Quarterly 16 Monthly 12 Daily 15 Infinite

> In the previous problem, suppose a sales associate told you the policy costs $375,000. At what interest rate would this be a fair deal?

> Dinero Bank offers you a $50,000, seven-year term loan at 7.5 percent annual interest. What will your annual loan payment be?

> You want to have $90,000 in your savings account 10 years from now, and you’re prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.8 percent interest, what amount must you deposit each year?

> If you deposit $4,000 at the end of each of the next 20 years into an account paying 11.2 percent interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?

> What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.

> If you put up $34,000 today in exchange for a 7.65 percent, 15-year annuity, what will the annual cash flow be?

> An investment offers $5,300 per year for 15 years, with the first payment occurring one year from now. If the required return is 7 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years?

> Paradise, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in year 4? What is the future value at a discount rate of 11 percent? At 24 percent? Year

> Investment X offers to pay you $6,000 per year for nine years, whereas Investment Y offers to pay you $8,000 per year for six years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is

> Seaborn Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent? Year ………….………………Cash Flow 1…………………

> Earlier, we discussed the Rule of 72, a useful approximation for many interest rates and periods for the time it takes a lump sum to double in value. For a 10 percent interest rate, show that the “Rule of 73” is slightly better. For what rate is the Rule

> You have 40 years left until retirement and want to retire with $2 million. Your salary is paid annually, and you will receive $40,000 at the end of the current year. Your salary will increase at 3 percent per year, and you can earn an 11 percent return

> As discussed in the text, an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period and not at the end of the period. Show that the relationship between the value of an ordinary annuity and

> What is the value of an investment that pays $15,000 every other year forever, if the first payment occurs one year from today and the discount rate is 10 percent compounded daily? What is the value today if the first payment occurs four years from today

> Your financial planner offers you two different investment plans. Plan X is a $20,000 annual perpetuity. Plan Y is a 20-year, $28,000 annual annuity. Both plans will make their fi rst payment one year from today. At what discount rate would you be indiff

> Companies often try to keep accounting earnings growing at a relatively steady pace, thereby avoiding large swings in earnings from period to period. They also try to meet earnings targets. To do so, they use a variety of tactics. The simplest way is to

> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $9,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will p

> 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