Question: You plan to retire in 10 years

> You own 200 shares of Somner Resources preferred stock, which currently sells for $40 per share and pays annual dividends of $3.40 per share. If the market’s required yield on similar shares is 10 percent, should you sell your shares or buy more?

> What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value and the market’s required yield on similar shares is 12 percent?

> Pioneer’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend. a. If the market’s required yield is 10 percent, what is the value of the stock to investors? b. Should investors acquire the stock?

> Assume the following: • The investor’s required rate of return is 15 percent. • The expected level of earnings at the end of this year (E1) is $5.00. • The retention ratio is 50 percent. • The return on equity (ROE) is 20 percent (that is, it can earn 20

> Assume the following: • The investor’s required rate of return is 13.5 percent. • The expected level of earnings at the end of this year (E1) is $6.00. • The retention ratio is 50 percent. • The return on equity (ROE) is 15 percent (that is, it can earn

> Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: • The investor’s required rate of return is 12 percent. • The expected level of earnings at the end of this year (E1) is $4.00. • The firm

> Dubai Metro’s stock price was at $100 per share when it announced that it would cut its dividends for next year from $10 per share to $6 per share, with the additional funds to be used for expansion. Prior to the dividend cut, Dubai Metro expected its di

> Duncan Motors is introducing a new product that it expects will increase its net operating income by $300,000. The company has a 34 percent marginal tax rate. This project will also produce $50,000 of depreciation per year. In addition, it will cause the

> Tyrion L.’s Gadgets Inc. is trying to decide whether to cut its expected dividends for next year from $8 per share to $5 per share in order to have more money to invest in new projects. If it does not cut the dividend, the firm’s expected rate of growth

> If Pepperdine, Inc.’s return on equity is 16 percent and the management plans to retain 60 percent of earnings for investment purposes, what will be the firm’s growth rate?

> A 20-year Fitzgerald bond pays 9 percent interest annually on a $1,000 par value. If the bond sells at $945, what is the bond’s yield to maturity? What would be the yield to maturity if the bond paid interest semiannually? Explain the difference.

> A bond’s market price is $750. It has a $1,000 par value, will mature in 8 years, and has a coupon interest rate of 9 percent annual interest but makes its interest payments semiannually. What is the bond’s yield to maturity? What happens to the bond’s y

> The market price is $900 for a 10-year bond ($1,000 par value) that pays 8 percent annual interest but makes interest payments on a semiannual basis (4 percent semiannually). What is the bond’s yield to maturity?

> Pybus, Inc., is considering issuing bonds that will mature in 20 years with an 8 percent annual coupon rate. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get an AA rating on its bonds but is not sure whet

> Enterprise, Inc., bonds have a 9 percent annual coupon rate. The interest is paid semiannually, and the bonds mature in eight years. Their par value is $1,000. If the market’s required yield to maturity on a comparable-risk bond is 8 percent, what is the

> Calculate the value of a bond that matures in 10 years and has a $1,000 par value. The annual coupon interest rate is 9 percent, and the market’s required yield to maturity on a comparable-risk bond is 15 percent. What would be the value of this bond if

> Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The coupon interest rate is 8 percent, and the market’s required yield to maturity on a comparable-risk bond is 12 percent.

> What would you expect the nominal rate of interest to be if the real rate of interest is 5 percent and the expected inflation rate is 3 percent?

> Tetious Dimensions is introducing a new product that it expects will increase its net operating income by $475,000. The company has a 30 percent marginal tax rate. This project will also produce $200,000 of depreciation per year. In addition, it will cau

> Assume the expected inflation rate is 3.8 percent. If the current real rate of interest is 6.4 percent, what should the nominal rate of interest be?

> What would you expect the nominal rate of interest to be if the real rate is 4.5 percent and the expected inflation rate is 7.3 percent?

> Stanley, Inc., issues a 15-year $1,000 bond that pays $85 annually. The market price for the bond is $960. The market’s required yield to maturity on a comparable-risk bond is 9 percent. a. What is the value of the bond to you? b. What happens to the val

> A bond of the Visador Corporation pays $70 in annual interest, with a $1,000 par value. The bond matures in 17 years. The market’s required yield to maturity on a comparable-risk bond is 8.5 percent. a. Calculate the value of the bond. b. How does the va

> A bond of the Telink Corporation pays $110 in annual interest, with a $1,000 par value. The bond matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 9 percent. a. Calculate the value of the bond. b. How does the valu

> After looking at a fixed-rate loan, Ace-Campbell Manufacturing entered into a floating-rate loan agreement. This loan is set at 40 basis points (or .40 percent) over an index based on LIBOR. Ace-Campbell is concerned that the LIBOR index may go up, causi

> Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 7 percent. a. Calculate the value of the bond. b. How does the value c

> You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The market’s required yield to maturity on a comparable-risk bond is 12 percent. a. Calculate the value of the bond. b. How does the value change if the yi

> The 15-year, $1,000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is $1,085, and the market’s required yield to maturity on a comparable-risk bond is 10 percent. a. Compute the bond’s yield to maturity.

> The Saleemi Corporation’s $1,000 bonds pay 5 percent interest annually and have 12 years until maturity. You can purchase a bond for $915. a. What is the yield to maturity on this bond? b. Should you purchase the bond if the yield to maturity on a compar

> Fruity Stones is considering introducing a variation of its current breakfast cereal, Jolt ’n Stones. This new cereal will be similar to the old with the exception that it will contain more sugar in the form of small pebbles. The new cereal will be calle

> The seven-year $1,000 par bonds of Vail Inc. pay 9 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,100. a. Determine the yield to maturity. b. What is the value

> Corporation’s bonds mature in 15 years and pay 9 percent interest annually. If you purchase the bonds for $1,250, what is your yield to maturity?

> A 14-year, $1,000 par value Fingen bond pays 9 percent interest annually. The market price of the bond is $1,100, and the market’s required yield to maturity on a comparable-risk bond is 10 percent. a. Compute the bond’s yield to maturity. b. Determine t

> Hoyden Company’s bonds mature in 15 years and pay 8 percent interest annually. If you purchase the bonds for $1,175, what is their yield to maturity?

> Five years ago XYZ International issued some 30-year zero-coupon bonds that were priced with a market’s required yield to maturity of 8 percent. What did these bonds sell for when they were issued? Now that five years have passed and the market’s require

> Doisneau 20-year bonds have a 10 percent annual coupon interest, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a 12 percent market’s required yield to maturity, are these premium or discount bond

> The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating interest rate that was 30 basis points (.30 percent) over an index b

> The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends: a. Calculate the annual rate of return for each year from this information. b. What is the arithmetic average

> Marsh Inc. had the following end-of-year stock prices over the last five years and paid no cash dividends: a. Calculate the annual rates of return for each year from this information. b. What is the arithmetic average rate of return earned by investing

> Syntex, Inc., is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Retur

> Captain’s Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cere

> The Dunder Muffin Company is considering purchasing a new commercial oven that costs $350,000. This new oven will produce cash inflows of $125,000 at the end of Years 1 through 10. In addition to the cash inflows, at the end of Year 5 there will be a net

> B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.9 percent. Calculate the following investment’s expected return and its standard deviation. Should Gautney invest in this security?

> From the following price data, compute the annual rates of return for Asman and Salinas. How would you interpret the relationship between the annual rates of return of these companies? Time Asman Salinas 1 $10 $30 2 12 28 3 11 32 13 35 44

> Blaxo Balloons manufactures and distributes birthday balloons. At the beginning of the year, Blaxo’s common stock was selling for $20, but by year end, it was only $18. If the firm paid a total cash dividend of $2 during the year, what rate of return wou

> The common stock of Placo Enterprises had a market price of $12 on the day you purchased it just one year ago. During the past year, the stock paid a $1 dividend and closed at a price of $14. What rate of return did you earn on your investment in Placo’s

> The S&P 500 Index represents a portfolio comprised of 500 large publicly traded companies. On December 24, 2007, the index had a value of 1,410, and on December 23, 2008, the index was approximately 890. If the average dividend paid on the stocks in the

> Use the following end-of-year price data to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rat

> On December 24, 2007, the common stock of Google Inc. (GOOG) was trading for $700.73. One year later the shares sold for only $298.02. Google has never paid a common stock dividend. What rate of return would you have earned on your investment had you pur

> To pay for your education, you’ve taken out $25,000 in student loans. If you make monthly payments over 15 years at 7 percent compounded monthly, how much are your monthly student loan payments?

> Emily Morrison purchased a new house for $150,000. She paid $30,000 up front and agreed to pay the rest over the next 25 years in 25 equal annual payments that include both principal and 10 percent compound interest on the unpaid balance. What will these

> Aero Manufacturing Company is working on a new version of its tried-and-true wind-powered water pump. For 15 years, the firm had manufactured replacement parts for older-style windmills used on farms and ranches throughout the U.S. Southwest. However, th

> You have an opportunity to make an investment that will pay $100 at the end of the first year, $400 at the end of the second year, $400 at the end of the third year, $400 at the end of the fourth year, and $300 at the end of the fifth year. a. Find the p

> You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: What is the present value of each of these three investments if the appropriate discount rate is 10 percent? End of Year A B C 1 $2,

> Your firm has taken cost-saving measures that will provide a benefit of $10,000 in the first year. These cost savings will decrease each year at a rate of 3 percent forever. If the appropriate interest rate is 6 percent, what is the present value of thes

> As a result of winning the Gates Energy Innovation Award, you have been awarded a growing perpetuity. The first payment will occur in a year and will be for $20,000. You will continue receiving annual monetary awards forever, with each award increasing b

> A perpetuity pays $50,000 at the end of Year 1 and then grows at a rate of 6 percent per year indefinitely. What is the present value if the rate of interest used to discount the cash flows is 10 percent?

> A perpetuity pays $1,000 at the end of Year 1, and the annual cash flows grow at a rate of 4 percent per year indefinitely. What is the present value if the appropriate discount rate is 8 percent? If the appropriate discount rate is 6 percent?

> At a discount rate of 8.5 percent, find the present value of a perpetual payment of $1,000 per year. If the discount rate is cut in half (4.25 percent), what is the value of the perpetuity?

> Selma and Patty Bouvier, twins who work at the Springfield DMV, have decided to save for retirement, which is 35 years away. They will both receive an 8 percent annual return on their investment over the next 35 years. Selma invests $2,000 at the end of

> Let’s say you deposited $160,000 in a 529 plan (a tax-advantaged college savings plan), hoping to have $420,000 available 12 years later when your first child starts college. However, you didn’t invest very well, and two years later the account’s balance

> Calvin Johnson has a $5,000 debt balance on his Visa card that charges 12.9 percent APR compounded monthly. Let’s assume Calvin’s only needed to make a minimum monthly payment of 3 percent of his debt balance, which is $150. How many months (round up) wi

> Apple’s (AAPL) iPad jump-started the touchscreen computer market, driving it to levels few analysts had ever dreamed possible. Moreover, the popularity of the iPad pushed Apple’s competitors to offer similar touchscreen computers. Hewlett Packard (HPE) o

> Five years ago you took out a $300,000, 25-year mortgage with an annual interest rate of 7 percent and monthly payments of $2,120.34. What is the outstanding balance on your current loan if you just made the 60th payment?

> Ford Motor Company’s current incentives include a choice between 4.9 percent APR financing for 60 months and $1,000 cash back on a Mustang. Let’s assume Suzie Student wants to buy the premium Mustang convertible, which costs $25,000, and she has no down

> Professor Finance is thinking about trading cars. She estimates she will still have to borrow $25,000 to pay for her new car. How large will Prof. Finance’s monthly car loan payment be if she can get a five-year (60 equal monthly payments) car loan from

> Imagine that Homer Simpson actually invested the $100,000 he earned providing Mr. Burns entertainment five years ago at 7.5 percent annual interest and that he starts investing an additional $1,500 a year today and at the beginning of each year for 20 ye

> Lisa Simpson wants to have $1,000,000 in 45 years by making equal annual end-of-the year deposits in a tax-deferred account paying 8.75 percent annually. What must Lisa’s annual deposit be?

> Over the past few years, Microsoft founder Bill Gates’s net worth has fluctuated between $20 and $130 billion. In early 2006, it was about $26 billion—after he reduced his stake in Microsoft from 21 percent to around 14 percent by moving billions into hi

> You take out a 25-year mortgage for $300,000 to buy a new house. What will your monthly payments be if the interest rate on your mortgage is 8 percent? Use a spreadsheet to calculate your answer. Now calculate the portions of the 48th monthly payment tha

> Determine the present value of an ordinary annuity of $1,000 per year for 10 years, assuming it earns 10 percent. Assume that the first cash flow from the annuity comes at the end of Year 8 and the final payment at the end of Year 17. That is, no payment

> Determine the present value of an annuity due of $1,000 per year for 10 years discounted back to the present at an annual rate of 10 percent. What would be the present value of this annuity due if it was discounted at an annual rate of 15 percent?

> You are graduating from college at the end of this semester, and after reading the Finance for Life box in this chapter, you have decided to invest $5,000 at the end of each year into a Roth IRA for the next 45 years. If you earn 8 percent compounded ann

> The Louisiana Land and Cattle Company (LL&CC) is one of the largest cattle buyers in the country. It has buyers at all the major cattle auctions throughout the U.S. Southeast who buy on the company’s behalf and then have the cattle shipped to Sulpher Spr

> Find the future value at the end of Year 10 of an annuity that pays $1,000 per year for 10 years compounded annually at 10 percent. What would be the future value of this annuity if it was compounded annually at 15 percent?

> You’ve just taken on a $150,000, 20-year mortgage with a quoted interest rate of 6 percent calling for payments semiannually. How much of your first year’s loan payments (the initial two payments, with the first coming after six months have passed and th

> To buy a new house, you must borrow $150,000. To do this, you take out a $150,000, 30-year, 10 percent mortgage. Your mortgage payments, which are made at the end of each year (one payment each year), include both principal and 10 percent interest on the

> You plan to buy property in Florida five years from today. To do this, you estimate that you will need $30,000 at that time for the purchase. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 10

> You would like to have $75,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 8 percent interest compounded annually. Your first payment will be made at the end of the year. a. How much must

> You’ve just bought a new flat-screen TV for $3,000, and the store you bought it from offers to let you finance the entire purchase at an annual rate of 14 percent compounded monthly. If you take the financing and make monthly payments of $100, how long w

> You plan to buy some property in Florida five years from today. To do this, you estimate that you will need $20,000 at that time. You would like to accumulate these funds by making equal annual deposits in your savings account, which pays 12 percent annu

> What is the present value of the following annuities? a. $2,500 a year for 10 years discounted back to the present at 7 percent b. $70 a year for 3 years discounted back to the present at 3 percent c. $280 a year for 7 years discounted back to the presen

> You’ve been offered a loan of $30,000, which you will have to repay in five equal annual payments of $10,000, with the first payment to be received one year from now. What interest rate will you be paying if you take that loan?

> On December 31, Beth Klemkosky bought a yacht for $50,000. She paid $10,000 down and agreed to pay the balance in 10 equal annual installments that include both principal and 10 percent interest on the declining balance. How big will the annual payments

> The Minot Kit Aircraft Company of Minot, North Dakota, uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a used cutter it purchased four years ago. The cutter has a remaining $80,000 book value that

> Your folks would like some advice from you. An insurance agent just called and offered them the opportunity to purchase an annuity for $21,074.25 that will pay them $3,000 per year for 20 years. They don’t have the slightest idea what return they would b

> What is the present value of a 10-year annuity that pays $1,000 annually, given a 10 percent discount rate?

> Alex Karev has taken out a $200,000 loan with an annual rate of 8 percent compounded monthly to pay off hospital bills from his wife Izzy’s illness. If the most Alex can afford to pay is $1,500 per month, how long will it take for him to pay off the loan

> How long will it take to pay off a loan of $50,000 at an annual rate of 10 percent compounded monthly if you make monthly payments of $600?

> The Knutson Corporation needs to save $15 million to retire a $15 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into an account at the end of each year for 10 years. The Knutson Corporation ex

> Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to k

> What is the future value of each of the following streams of payments? a. $500 a year for 10 years compounded annually at 5 percent b. $100 a year for 5 years compounded annually at 10 percent c. $35 a year for 7 years compounded annually at 7 percent d.

> Having just inherited a large sum of money, you are trying to determine how much you should save for retirement and how much you can spend now. For retirement, you will deposit today (January 1, 2016) a lump sum in a bank account paying 10 percent compou

> Milhouse, 22, is about to begin his career as a rocket scientist for a NASA contractor. Being a rocket scientist, Milhouse knows that he should begin saving for retirement immediately. Part of his inspiration came from reading an article on Social Securi

> Baryla Inc. manufactures high-quality decorator lamps in a plant located in eastern Tennessee. Last year the firm had sales of $100 million and a gross profit margin of 40 percent. a. How much inventory can Baryla hold and maintain an inventory turnover

> Madrano’s Wholesale Fruit Company, located in McAllen, Texas, is considering the purchase of a new fleet of trucks to be used in the delivery of fruits and vegetables grown in the Rio Grande Valley of Texas. If the company goes through with the purchase,

> In 2016, the Allen Corporation had sales of $65 million, total assets of $42 million, and total liabilities of $20 million. The interest rate on the company’s debt is 6 percent, and its tax rate is 35 percent. The operating profit margin is 12 percent.

> The Karson Transport Company currently has net operating income of $500,000 and pays interest expense of $200,000. The company plans to borrow $1 million on which the firm will pay 10 percent interest. The borrowed money will be used to finance an invest

> The liabilities and stockholders’ equity for Campbell Industries are as follows: a. What fraction of the firm’s assets does the firm finance using debt (liabilities)? b. If Campbell were to purchase a new warehouse f

> The King Carpet Company has $3,000,000 in cash and a total of $12,000,000 in current assets. The firm’s current liabilities equal $6,000,000, so the firm’s current ratio equals 2. The company’s managers want to reduce the firm’s cash holdings down to $1,