Question: Vandalay Industries is considering the purchase of

> 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 18.6 percent, to 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! 18% Simple Interest! Three Years to Pay!

> Two banks in the area offer 30-year, $200,000 mortgages at 5.3 percent and charge a $2,400 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.

> 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 very common with home mortgages. Th

> Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Gut

> M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $7 million initial investment. M.V.P. expects a total annual operating cash flow of $1.3 million for the next 10 years. The relevant discount rate is 10

> 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

> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on t

> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $15 per share dividend in 10 years and will in

> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: Time………….………….……... Salary 0………..…….….….…. $8, 500,000 1…………….….………….3, 900,000 2……………….………….4, 600,000 3……………………………5, 300,000 4……………………….…..5

> Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 10 percent. a. Based on the payback period, which project should be accepted? b. Based on the NPV, which project should

> After deciding to buy a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $31,000. The dealer has a special leasing arrangement where you pay $1,500 today and $405 per month for the next three year

> Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $23,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he

> On September 1, 2009, Susan Chao bought a motorcycle for $30,000. She paid $1,000 down and financed the balance with a five-year loan at a stated annual interest rate of 7.2 percent, compounded monthly. She started the monthly payments exactly one month

> Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1.4 million. The fixed asset will be depreciated straight-line to zero over its threeyear tax life, after which it will be w

> You have 30 years left until retirement and want to retire with $2 million. Your salary is paid annually, and you will receive $70,000 at the end of the current year. Your salary will increase at 3 percent per year, and you can earn a return of 9 percent

> What is the equation for the present value of a growing perpetuity with a payment of C one period from today if the payments grow by C each period?

> You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options: a. You will receive 31 annual payments of $250,000, with the first payment being delivered today. Th

> Audrey Sanborn has just arranged to purchase a $550,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 6.1 percent stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 yea

> Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $55,000. He will receive his first annual salary payment one year from the day he begins to work. In addition, he will get an immed

> You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $45,000 per year

> You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at a 10.4 percent stated annual interest rate, compounded monthly. Because the clubs cost $2,300 retail, Pings wants the PV of the lease

> Find the APR, or stated rate, in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) Semiannually 9.8% Monthly 19.6 Weekly 8.3 Infinite 14.2

> Locate the Treasury bond in Figure 8.4 maturing in November 2039. 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? Figure 8.4 |Treasury Notes & Bonds Asked Maturity 2013 May 3

> You want to buy a new sports car from Muscle Motors for $73,000. The contract is in the form of a 60-month annuity due at a 6.45 percent APR. What will your monthly payment be?

> Suppose you are going to receive $20,000 per year for five years. The appropriate interest rate is 7 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 an

> A 5-year annuity of ten $5,300 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 12 percent compounded monthly, what is the value of this annuity five years from now? What is the va

> A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 7 percent interest per week. a. What APR must the store report to its customers? What is the EAR that the customers are actuall

> Sparkling Water, Inc., expects to sell 2.8 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.25 in real terms and will cost $.90 in real terms. Sales income and costs occur at year-end. Revenues will rise a

> Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The required return is .95 percent per month. Cur

> Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent and the company just paid a $2.80 di

> Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. If int

> The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues here? Why would a company want to sell “equity in disguise

> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for

> Consider the following cash flows on two mutually exclusive projects: The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflat

> Locate the Treasury bond in Figure 8.4 maturing in February 2037. What is its coupon rate? What is its bid price? What was the previous day’s asked price?

> Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the thr

> Find the EAR in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) 7% Quarterly 16 Monthly Daily 12 Infinite

> The Le Bleu Company has a ratio of long-term debt to total assets of .35 and a current ratio of 1.25. Current liabilities are $950, sales are $5,780, profit margin is 9.4 percent, and ROE is 18.2 percent. What is the amount of the firm’s net fixed assets

> Which of the following should be treated as an incremental cash flow when computing the NPV of an investment? a. A reduction in the sales of a company’s other products caused by the investment. b. An expenditure on plant and equipment that has not yet be

> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.40 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the

> Schwert Corp. shows the following information on its 2012 income statement: sales = $185,000; costs = $98,000; other expenses = $6,700; depreciation expense = $16,500; interest expense = $9,000; taxes = $19,180; dividends = $9,500. In addition, you’re to

> Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of €3.6 million in Year 1,€4.1 million in Year 2, and €5.1 million in Year 3. The current spot exchange rate is $1.09/€ and

> 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 after tax cash flow by $390,000 indefinitely. The current m

> The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. The required return is 2.5 percent per period. Curre

> Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 13 per

> Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of

> Why it that municipal bonds are not is taxed at the federal level, but are taxable across state lines? Why it is that U.S. Treasury bonds are not taxable at the state level?

> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for

> Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for Mari

> FFDP Corp. has yearly sales of $28 million and costs of $12 million. The company’s balance sheet shows debt of $54 million and cash of $18 million. There are 950,000 shares outstanding and the industry EV/EBITDA multiple is 7.5. What is the company’s ent

> It is sometimes stated that “the internal rate of return approach assumes reinvestment of the intermediate cash flows at the internal rate of return.” Is this claim correct? To answer, suppose you calculate the IRR of a project in the usual way. Next, su

> An investment project provides cash inflows of $840 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,800? What if it is $7,300?

> The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $15,000 per year forever. If the required return on this investment is 5.2 percent, how much will you pay for the policy? Suppose the Perpetual L

> A company has net income of $265,000, a profit margin of 9.3 percent, and an accounts receivable balance of $145,300. Assuming 80 percent of sales are on credit, what is the company’s days’ sales in receivables?

> During the year, the Senbet Discount Tire Company had gross sales of $1.06 million. The firm’s cost of goods sold and selling expenses were $525,000 and $215,000, respectively. Senbet also had notes payable of $800,000. These notes carried an interest ra

> Suppose the spot exchange rate for the Hungarian forint is HUF 206. The inflation rate in the United States is 2.8 percent per year and is 3.7 percent in Hungary. What do you predict the exchange rate will be in one year? In two years? In five years? Wha

> If a U.S. firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in the United States? How would you overcome them?

> Consider a project with a required return of R percent that costs $ I and will last for N years. The project uses straight-line depreciation to zero over the N -year life; there are neither salvage value nor net working capital requirements. a. At the ac

> Prove that when carrying costs and restocking costs are as described in the chapter, the EOQ must occur at the point where the carrying costs and restocking costs are equal.

> Bucksnort, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $3 per share for each of the next five years, and then never pay another dividend. If you require a

> You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $900 a month in a stock account in real dollars and $300 a month in a bond account in real dollars. The effective annual return of the stock account i

> You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 7 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in interest income will you have to declare on your tax return?

> You are considering a new product launch. The project will cost $820,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per year; price per unit will be $18,000; variable cost pe

> Cutler Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year …………………….Cash Flow 0 ………………………….−$ 85,000,000 1 …………..………………….125, 000,000 2 ……………………………..−15,000,000 a. If the company requires a 10 percent return

> Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.

> An investment offers $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years?

> Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $34 million. If the DVDR fails, the present value of the payoff is $12 million. If the product goes dir

> Why does traditional NPV analysis tend to underestimate the true value of a capital budgeting project?

> Your firm is contemplating the purchase of a new $670,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $240,000 before tax

> Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they are relevant at the firm level.” Critically evaluate th

> Compute the internal rate of return for the cash flows of the following two projects: Cash Flows ($) Year Project A Project B -$5,300 -$2,900 2,000 1,100 2 2,800 1,800 3. 1,600 1,200

> The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV to zero and solve for the variable in question. a. In

> What are some of the difficulties that might come up in actual applications of the various criteria we discussed in this chapter? Which one would be the easiest to implement in actual applications? The most difficult?

> At 8 percent interest, how long does it take to double your money? To quadruple it?

> If the Layla Corp. has a 13 percent ROE and a 20 percent payout ratio, what is its sustainable growth rate?

> One tool of financial analysis is common-size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is not converted into a common-size statement. Why do you thi

> The Optical Scam Company has forecast a 15 percent sales growth rate for next year. The current financial statements are shown here: a. Using the equation from the chapter, calculate the external funds needed for next year. b. Construct the firmâ

> Gordon Driving School’s 2011 balance sheet showed net fixed assets of $1.42 million, and the 2012 balance sheet showed net fixed assets of $1.69 million. The company’s 2012 income statement showed a depreciation expense of $145,000. What was Gordon’s net

> The Starr Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a return of 11 percent on the stock, what is the current price? What will

> Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?

> Suppose the Japanese yen exchange rate is ¥85 = $1, and the British pound exchange rate is £ 1 = $1.53. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is ¥131.4 = £ 1. Is there an arbitrage opportunity here? If there is, e

> 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 for accounting purposes. The market value of All Gold Mining’s fixed ass

> Use the sustainable growth rate equations from the previous problem to answer the following questions. No Return, Inc., had total assets of $285,000 and equity of $176,000 at the beginning of the year. At the end of the year, the company had total assets

> A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if: a. The discount is changed to 2 pe

> What are some of the factors that determine the length of the credit period? Why is the length of the buyer’s operating cycle often considered an upper bound on the length of the credit period?

> Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,500 checks per day. The daily interest rate is .015 percent. If the b

> Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the company’s stock?

> Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 19 years to maturity, and a coupon rate

> The Stancil Corporation provided the following current information: Proceeds from long-term borrowing……………….………… $17,000 Proceeds from the sale of common stock…………..…………. 4,000 Purchases of fixed assets………………………………..………….. 21,000 Purchases of inventorie

> How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

> Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $475,000 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

> What is the price of a 15-year, zero coupon bond paying $1,000 at maturity if the YTM is: a. 5 percent? b. 10 percent? c. 15 percent?

> Assume a firm is considering a new project that requires an initial investment and has equal sales and costs over its life. Will the project reach the accounting, cash, or financial break-even point first? Which will it reach next? Last? Will this order

> For each of the following, compute the present value: Present Value Years Interest Rate Future Value 7% $ 13,827 15 43,852 18 725,380 23 18 590,710 69

> In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

> Stone Sour, Inc., has a project with the following cash flows: Year ………………………..Cash Flows ($) 0 ………………………………….………….−$20,000 1 …………………………………………………….8,500 2 …………………………………………………..10,200 3 …………………………………………………….6,200 The company evaluates all projects by ap

> In October 2010, BMW announced plans to spend $1 billion to expand production at its plant in South Carolina. The plant produced the second generation BMW X3 as well as the company’s X5 and X6 models. BMW apparently felt it would be better able to compet

> Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 9% $ 1,284 810 4,341 18,400 17 402,662 21,500 8 173,439

> The most recent financial statements for Fontenot Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt–equity ratio. What is the maximum