Your firm is considering the purchase of a new office phone system. You can either pay $32,000 now, or $1000 per month for 36 months. a. Suppose your firm currently borrows at a rate of 6% per year (APR with monthly compounding). Which payment plan is more attractive? b. Suppose your firm currently borrows at a rate of 18% per year (APR with monthly compounding). Which payment plan would be more attractive in this case?
> You are considering a safe investment opportunity that requires a $1000 investment today, and will pay $500 two years from now and another $750 five years from now. a. What is the IRR of this investment? b. If you are choosing between this investment and
> Consider two investment projects, both of which require an upfront investment of $10 million and pay a constant positive amount each year for the next 10 years. Under what conditions can you rank these projects by comparing their IRRs?
> You are evaluating the following two projects: Use the incremental IRR to determine the range of discount rates for which each project is optimal to undertake. Note that you should also include the range in which it does not make sense to take either p
> You work for an outdoor play structure manufacturing company and are trying to decide between two projects: You can undertake only one project. If your cost of capital is 8%, use the incremental IRR rule to make the correct decision. Year-End Cash
> You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm’s manufacturing facility. You find that the prior analysis ranked
> You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate additional revenue of $500 per month. What is the payback per
> You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, it will generate cash flows of
> You are considering investing in a start-up company. The founder asked you for $200,000 today and you expect to get $1,000,000 in nine years. Given the riskiness of the investment opportunity, your cost of capital is 20%. What is the NPV of the investmen
> Your firm has been hired to develop new software for the university’s class registration system. Under the contract, you will receive $500,000 as an upfront payment. You expect the development costs to be $450,000 per year for the next three years. Once
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco’s costs and expenses had been the same fraction of revenues in 2013–2016 as they were in 2012. What would Mydecoâ
> Your firm spends $500,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next three years. If it does so, it expects it will need to spend $2 million in year
> You have 3 projects with the following cash flows: a. For which of these projects is the IRR rule reliable? b. Estimate the IRR for each project (to the nearest 1%). c. What is the NPV of each project if the cost of capital is 5%? 20%? 50%? Year 2
> How many IRRs are there in part (a) of Problem 5? Does the IRR rule give the right answer in this case? How many IRRs are there in part (b) of Problem 5? Does the IRR rule work in this case? Data from Problem 5: Bill Clinton reportedly was paid $15 mil
> You have been offered a very long term investment opportunity to increase your money one hundredfold. You can invest $1000 today and expect to receive $100,000 in 40 years. Your cost of capital for this (very risky) opportunity is 25%. What does the IRR
> Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it
> Explain why the yield of a bond that trades at a discount exceeds the bond’s coupon rate.
> The prices of several bonds with face values of $1000 are summarized in the following table: For each bond, state whether it trades at a discount, at par, or at a premium. Bond A В D Price $972.50 $1040.75 $1150.00 $1000.00
> Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74. a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)? b. If the bond’s yield to maturity changes to 9% AP
> In the Global Financial Crisis box in Section 6.1, www.Bloomberg.com reported that the three month Treasury bill sold for a price of $100.002556 per $100 face value. What is the yield to maturity of this bond, expressed as an EAR?
> Suppose the current zero-coupon yield curve for risk-free bonds is as follows: a. What is the price per $100 face value of a two-year, zero-coupon, risk-free bond? b. What is the price per $100 face value of a four-year, zero-coupon, risk-free bond? c.
> Describe the important changes that have occurred in stock markets over the last decade.
> Suppose the yield on German government bonds is 1%, while the yield on Spanish government bonds is 6%. Both bonds are denominated in euros. Which country do investors believe is more likely to default? How can you tell?
> What does it mean for a country to “inflate away” its debt? Why might this be costly for investors even if the country does not default?
> The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $74. You have purchased this bond and intend to hold it until maturity. a. What is the y
> The following table summarizes prices of various default-free, zero-coupon bonds (expressed as a percentage of face value): a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield
> Grummon Corporation has issued zero-coupon corporate bonds with a five-year maturity. Investors believe there is a 20% chance that Grummon will default on these bonds. If Grummon does default, investors expect to receive only 50 cents per dollar they are
> In the Data Case in Chapter 5, we suggested using the yield on Florida Sate bonds to estimate the State of Florida’s cost of capital. Why might this estimate overstate the actual cost of capital?
> Explain why the expected return of a corporate bond does not equal its yield to maturity.
> Suppose you are given the following information about the default-free, coupon-paying yield curve: a. Use arbitrage to determine the yield to maturity of a two-year, zero-coupon bond. b. What is the zero-coupon yield curve for years 1 through 4? Ma
> Assume there are four default-free bonds with the following prices and future cash flows: Do these bonds present an arbitrage opportunity? If so, how would you take advantage of this opportunity? If not, why not? Cash Flows Bond Price Today Year 1
> Prices of zero-coupon, default-free securities with face values of $1000 are summarized in the following table: Suppose you observe that a three-year, default-free security with an annual coupon rate of 10% and a face value of $1000 has a price today o
> What is the difference between a public and a private corporation?
> Consider a five-year, default-free bond with annual coupons of 5% and a face value of $1000. a. Without doing any calculations, determine whether this bond is trading at a premium or at a discount. Explain. b. What is the yield to maturity on this bond?
> Consider a four-year, default-free security with annual coupon payments and a face value of $1000 that is issued at par. What is the coupon rate of this bond? Data for Problem 21: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.8
> What is the maturity of a default-free security with annual coupon payments and a yield to maturity of 4%? Why? Data for Problem 20: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.80%
> What is the price of a three-year, default-free security with a face value of $1000 and an annual coupon rate of 4%? What is the yield to maturity for this bond? Data for Problem 19: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70%
> What is the price of a five-year, zero-coupon, default-free security with a face value of $1000? Data for Problem 18: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.80%
> What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 6%? Does this bond trade at a discount, at par, or at a premium? Data for Problem 17: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00
> Suppose the current yield on a one-year, zero coupon bond is 3%, while the yield on a five-year, zero coupon bond is 5%. Neither bond has any risk of default. Suppose you plan to invest for one year. You will earn more over the year by investing in the f
> Suppose you purchase a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years’ time, the bond’s yield to maturity has risen to 7% (EAR). a. If you sell the bond now, what internal rate of return will you have earned on your
> Consider the following bonds: a. What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%? b. Which of the bonds A–D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? W
> Suppose that Ally Financial Inc. issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity on this bond when it was issued was 6%. a. What was the price of this bond when it was is
> Are hostile takeovers necessarily bad for firms or their investors? Explain.
> Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. b. If the yield to maturity of the bond rises
> A 30-year bond with a face value of $1000 has a coupon rate of 5.5%, with semiannual payments. a. What is the coupon payment for this bond? b. Draw the cash flows for the bond on a timeline.
> Suppose you invest $100 in a bank account, and five years later it has grown to $134.39. a. What APR did you receive, if the interest was compounded semiannually? b. What APR did you receive if the interest was compounded monthly?
> You can earn $50 in interest on a $1000 deposit for eight months. If the EAR is the same regardless of the length of the investment, determine how much interest you will earn on a $1000 deposit for a. 6 months. b. 1 year. c. 1⁄2 years.
> You are considering moving your money to a new bank offering a one-year CD that pays an 8% APR with monthly compounding. Your current bank’s manager offers to match the rate you have been offered. The account at your current bank would pay interest every
> After reading the Novy-Marx and Rauh article (see the Common Mistake Box on page 161), you decide to compute the total obligation of the state you live in. After some research you determine that your state’s promised pension payments amount to $1 billion
> In the summer of 2008, at Heathrow Airport in London, Best of the best (BB), a private company, offered a lottery to win a Ferrari or 90,000 British pounds, equivalent at the time to about $180,000. Both the Ferrari and the money, in 100-pound notes, wer
> Suppose you have outstanding debt with an 8% interest rate that can be repaid any time, and the interest rate on U.S. Treasuries is only 5%. You plan to repay your debt using any cash that you don’t invest elsewhere. Until your debt is repaid, what cost
> Your best friend consults you for investment advice. You learn that his tax rate is 35%, and he has the following current investments and debts: A car loan with an outstanding balance of $5000 and a 4.8% APR (monthly compounding) Credit cards with an out
> You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company
> You are enrolling in an MBA program. To pay your tuition, you can either take out a standard student loan (so the interest payments are not tax deductible) with an EAR of 51⁄2% or you can use a tax-deductible home equity loan with an APR (monthly) of 6%.
> Your uncle Fred just purchased a new boat. He brags to you about the low 7% interest rate (APR, monthly compounding) he obtained from the dealer. The rate is even lower than the rate he could have obtained on his home equity loan (8% APR, monthly compoun
> Your best taxable investment opportunity has an EAR of 4%. Your best tax-free investment opportunity has an EAR of 3%. If your tax rate is 30%, which opportunity provides the higher after-tax interest rate?
> Figure 5.4 shows that Johnson and Johnson’s five-year borrowing rate is 1.9% and Xerox’s is 4.0%. Which would you prefer? $500 from Johnson and Johnson paid today or a promise that the firm will pay you $575 in five ye
> Suppose the current one-year interest rate is 6%. One year from now, you believe the economy will start to slow and the one-year interest rate will fall to 5%. In two years, you expect the economy to be in the midst of a recession, causing the Federal Re
> What is the shape of the yield curve given the term structure in Problem 29? What expectations are investors likely to have about future interest rates? Data from Problem 29: Suppose the term structure of risk-free interest rates is as shown below: a
> Using the term structure in Problem 29, what is the present value of an investment that pays $100 at the end of each of years 1, 2, and 3? If you wanted to value this investment correctly using the annuity formula, which discount rate should you use? Da
> Many academic institutions offer a sabbatical policy. Every seven years a professor is given a year free of teaching and other administrative responsibilities at full pay. For a professor earning $70,000 per year who works for a total of 42 years, what i
> Suppose the term structure of risk-free interest rates is as shown below: a. Calculate the present value of an investment that pays $1000 in two years and $2000 in five years for certain. b. Calculate the present value of receiving $500 per year, with
> Consider a project that requires an initial investment of $100,000 and will produce a single cash flow of $150,000 in five years. a. What is the NPV of this project if the five-year interest rate is 5% (EAR)? b. What is the NPV of this project if the fiv
> Suppose that in 2016, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same pe
> Can the nominal interest rate available to an investor be significantly negative? Can the real interest rate be negative? Explain.
> You need a new car and the dealer has offered you a price of $20,000, with the following payment options: (a) pay cash and receive a $2000 rebate, or (b) pay a $5000 down payment and finance the rest with a 0% APR loan over 30 months. But having just qui
> Your friend tells you he has a very simple trick for shortening the time it takes to repay your mortgage by one-third: Use your holiday bonus to make an extra payment on January 1 of each year (that is, pay your monthly payment due on that day twice). As
> Oppenheimer Bank is offering a 30-year mortgage with an APR of 5.25% based on monthly compounding. With this mortgage your monthly payments would be $2,000 per month. In addition, Oppenheimer Bank offers you the following deal: Instead of making the mont
> Your mortgage has 25 years left, and has an APR of 7.625% with monthly payments of $1449. a. What is the outstanding balance? b. Suppose you cannot make the mortgage payment and you are in danger of losing your house to foreclosure. The bank has offered
> You have just purchased a home and taken out a $500,000 mortgage. The mortgage has a 30-year term with monthly payments and an APR of 6%. a. How much will you pay in interest, and how much will you pay in principal, during the first year? b. How much wil
> Oppenheimer Bank is offering a 30-year mortgage with an EAR of 53⁄8%. If you plan to borrow $150,000, what will your monthly payment be?
> You make monthly payments on your mortgage. It has a quoted APR of 5% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?
> Your son has been accepted into college. This college guarantees that your son’s tuition will not increase for the four years he attends college. The first $10,000 tuition payment is due in six months. After that, the same payment is due every six months
> You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 five years after the date of your retirement. Which alternative should you choose if the interest rate is a. 0% per year? b. 8% per year
> Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated t
> What is the most important difference between a corporation and all other organizational forms?
> On March 31, 2018, the balances of the accounts appearing in the ledger of Royal Furnishings Company, a furniture wholesaler, are as follows: A. Prepare a multiple-step income statement for the year ended March 31, 2018. B. Compare the major advantages
> Alert Security Services Co. offers security services to business clients. Complete the following end-of-period spreadsheet for Alert Security Services Co.: Alert Security Services Co. End-of-Period Spreadsheet For the Year Ended October 31, 2018 Adj
> The following expenses were incurred by a merchandising business during the year. In which expense section of the income statement should each be reported: (A) selling, (B) administrative, or (C) other? 1. Advertising expense 2. Depreciation expense on s
> Financial information related to Ebony Interiors for February and March 2018 is as follows: A. Prepare balance sheets for Ebony Interiors as of February 28 and March 31, 2018. B. Determine the amount of net income for March, assuming that no additional
> Rearrange the following steps in the accounting cycle in proper sequence: A. A post-closing trial balance is prepared. B. Adjustment data are assembled and analyzed. C. Adjusting entries are journalized and posted to the ledger. D. An adjusted trial bala
> After all revenue and expense accounts have been closed at the end of the fiscal year, Income Summary has a debit of $2,450,000 and a credit of $3,000,000. At the same date, Retained Earnings has a credit balance of $8,222,600 and Dividends has a balance
> Prior to its closing, Income Summary had total debits of $1,190,500 and total credits of $1,476,300. Briefly explain the purpose served by the income summary account and the nature of the entries that resulted in the $1,190,500 and the $1,476,300.
> The debits and credits for five related transactions, A through E, are presented in the following T accounts. Describe each transaction. Cash Sales 39,200 A 41,160 Accounts Recelvable Cost of Goods Sold 41,160 C 1,960 25,200 A E 39,200 Inventory 1,2
> The following revenue and expense account balances were taken from the ledger of Acorn Health Services Co. after the accounts had been adjusted on January 31, 2018, the end of the fiscal year: Prepare an income statement. Depreciation Expense Insur
> The following account balances were taken from the adjusted trial balance for Urgent Messenger Service, a delivery service firm, for the fiscal year ended November 30, 2018: Prepare an income statement. $ 75,000 $ 10,650 Rent Expense 724,500 Salari
> The controller of New Wave Sounds Inc. prepared the following product profitability report for management, using activity-based costing methods for allocating both the factory overhead and the marketing expenses. As such, the controller has confidence in
> Triton Consulting is a consulting firm owned and operated by Jayson Neese. The following end-of-period spreadsheet was prepared for the year ended April 30, 2018: Based on the preceding spreadsheet, prepare an income statement, retained earnings statem
> Inspirational Inc. is a motivational consulting business. At the end of its accounting period, October 31, 2017, Inspirational has assets of $5,250,000 and liabilities of $1,600,000. Using the accounting equation and considering each case independently,
> On January 2, Yorkshire Company acquired 40% of the outstanding stock of Fain Company for $500,000. For the year ended December 31, Fain earned income of $140,000 and paid dividends of $50,000. Journalize the entries for Yorkshire Company for the purchas
> The total assets and total liabilities (in millions) of Keurig Green Mountain Coffee, Inc. and Starbucks Corporation follow: Determine the stockholders’ equity of each company. Keurig Starbucks Assets $4.797 $10,753 Liabilities 1,
> On January 1, 20Y5, Valuation Allowance for Available-for-Sale Investments had a zero balance. On December 31, 20Y5, the cost of the available-for-sale securities was $24,260, and the fair value was $26,350. Journalize the adjusting entry to record the u
> A fertilizer manufacturing company wants to relocate to Yellowstone County. A report from a fired researcher at the company indicates the company’s product is releasing toxic by-products. The company suppressed that report. A later report commissioned by
> From the following list of selected items taken from the records of Bobcat Appliance Service as of a specific date, identify those that would appear on the balance sheet: 1. Accounts Receivable 2. Cash 3. Common Stock 4. Fees Earned 5. Land 6. Supplies 7
> Jets Bancorp Inc. purchased a portfolio of trading securities during 20Y3. The cost and fair value of this portfolio on December 31, 20Y3, was as follows: Journalize the entry to record the adjustment of the trading security portfolio to fair value on
> Portions of the salaries expense account of a business follow: A. Indicate the nature of the entry (payment, adjusting, closing, reversing) from which each numbered posting was made. B. Journalize the complete entry from which each numbered posting was
> Storm, Inc. purchased the following available-for-sale securities during 20Y9, its first year of operations: The market price per share for the available-for-sale security portfolio on December 31, 20Y9, was as follows: Market Price per
> In teams, select a company from one of the following industries: banking, food service, manufacturing, or retail. For this company: A. Identify the primary activities that the company must perform to provide its product or service. B. Identify an activit
> Taser Consulting is a consulting firm owned and operated by Annamarie Phipps. The following end-of-period spreadsheet was prepared for the year ended October 31, 2018: Based on the preceding spreadsheet, prepare an income statement, retained earnings s
> The accountant for Eva’s Laundry prepared the following unadjusted and adjusted trial balances. Assume that all balances in the unadjusted trial balance and the amounts of the adjustments are correct. Identify the errors in the accounta
