Question: Suppose you are still committed to owning

> Workman Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 94.31 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?

> What is the value of an investment that pays $25,000 every other year forever, if the first payment occurs one year from today and the discount rate is 7 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 an annual perpetuity of $35,000 per year. Plan Y is an annuity for 15 years and an annual payment of $47,000. Both plans will make their first payment one year from today. At wha

> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $15,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will

> You have just arranged for a $2,350,000 mortgage to finance the purchase of a large tract of land. The mortgage has an APR of 5.2 percent, and it calls for monthly payments over the next 30 years. However, the loan has an eight-year balloon payment, mean

> 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 purchaser (say, the parent) makes the following six payments to the insurance company:First b

> 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 $15,000 balance from your current credit card, which charges an annual rate of 17.5 percent, to a

> Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock B’s beta by .35, what is the expecte

> Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS (see Chapter 10 for the depreciation allowances).Problem 1:Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Should you leas

> You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is interested in your company, but he does not have the necessary

> 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! 17.3% Simple Interest! Three Years to Pa

> Two banks in the area offer 30-year, $275,000 mortgages at 5.1 percent and charge a $4,300 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.

> Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 14 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 ercent, what is the percentage price change of

> In the previous problem, suppose that you believe that you will only live in the house for eight years before selling the house and buying another house. This means that in eight years, you will pay off the remaining balance of the original mortgage. Wha

> You are buying a house and will borrow $225,000 on a 30-year fixed rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.3 percent. Alternatively, she tells you that you can “buy down”

> The interest rate on a one-year loan is quoted as 12 percent plus 3 points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?

> Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm’s founders, has been talking to Joey about the firm’s investment portfolio. As with any investment, Paul is concerned

> Suppose you observe the following situation:

> Shelley Couts, the owner of Conch Republic Electronics, has received the capital budgeting analysis from Jay McCanless for the new smartphone the company is considering. Shelley is pleased with the results, but she still has concerns about the new smartp

> Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other hou

> Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after

> Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a propriet

> 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

> Investment X offers to pay you $4,200 per year for eight years, whereas Investment Y offers to pay you $6,100 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate i

> After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for investment needs. As a result, the compan

> Chris Guthrie was recently hired by S&S Air, Inc., to assist the company with its financial planning and to evaluate the company’s performance. Chris graduated from college five years ago with a finance degree. He has been employed

> The All Day Company is currently holding $690,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by $140,000 per month. How much of the current cash holdings should be retained, and how much should be used to incr

> You are looking at a one-year loan of $10,000. The interest rate is quoted as 9.8 percent plus 2 points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rat

> Consider the following information about Stocks I and II:The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is “ri

> Debit and Credit Bookkeepers needs a total of $21,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells $1,500 in securities and transfers in the cash. The interest rate is 4 percent per year, and selling secur

> White Whale Corporation has an average daily cash balance of $1,700. Total cash needed for the year is $64,000. The interest rate is 5 percent, and replenishing the cash costs $8 each time. What are the opportunity cost of holding cash, the trading cost,

> Given the following information, calculate the target cash balance using the BAT model:Annual interest rate ………………………………………………………………………. 4.5%Fixed order cost ………………………………………………………………………………. $25Total cash needed ………………………………………………………………………. $10,200How do

> Rise Against Corporation has determined that its target cash balance if it uses the BAT model is $5,100. The total cash needed for the year is $31,000, and the order cost is $10. What interest rate must Rise Against be using?

> The variance of the daily cash flows for the Pele Bicycle Shop is $890,000. The opportunity cost to the firm of holding cash is 4.1 percent per year. What should the target cash level and the upper limit be if the tolerable lower limit has been establish

> Based on the Miller-Orr model, describe what will happen to the lower limit, the upper limit, and the spread (the distance between the two) if the variation in net cash flow grows. Give an intuitive explanation for why this happens. What happens if the v

> Both Bond Sam and Bond Dave have 7.3 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the perce

> All Night, Inc., uses a Miller-Orr cash management approach with a lower limit of $43,000, an upper limit of $125,000, and a target balance of $80,000. Explain what each of these points represents; then explain how the system will work

> Suppose a corporation currently sells Q units per month for a cash-only price of P. Under a new credit policy that allows one month’s credit, the quantity sold will be Q′ and the price per unit will be P′. Defaults will be π percent of credit sales. The

> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.25 percent per year, compounded monthly for the first six months, increasing thereafter to 17.8 percent compounded monthly. Assuming you transfer t

> Consider the following information about two alternative credit strategies:The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the existence of a cash discount. The credit period will be 90

> 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

> Silicon Wafers, Inc. (SWI), is debating whether or not to extend credit to a particular customer. SWI’s products, primarily used in the manufacture of semiconductors, currently sell for $975 per unit. The variable cost is $540 per unit. The order under c

> The Johnson Company sells 2,400 pairs of running shoes per month at a cash price of $99 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to $100 per pair on credit sales. The cash price will remain at

> You expect to receive $10,000 at graduation in two years. You plan on investing it at 9 percent until you have $60,000. How long will you wait from now?

> You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 6.8 percent per year. How much will you have in eight years?

> 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

> 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

> 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

> 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