Question: Your grandfather has offered you a choice

> Analogue Technology has preferred stock outstanding that pays a $9 annual dividend. It has a price of $76. What is the required rate of return (yield) on the preferred stock?

> X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $12.00 per share. With the passage of time, yields have soared from the original 10 percent to 17 percent (yield is the same as required rate of return). a. What was the

> The Woodruff Corporation purchased a piece of equipment three years ago for $230,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $90,000. A new piece of equipment can be purchased for $320,000. It

> North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return). a. What was

> The preferred stock of Denver Savings and Loan pays an annual dividend of $5.70. It has a required rate of return of 6 percent. Compute the price of the preferred stock.

> You are called in as a financial analyst to appraise the bonds of Olsen’s Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 10 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual in

> Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 11 percent and the interest is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. Ther

> Evans Emergency Response bonds have 6 years to maturity. Interest is paid semiannually. The bonds have a $1,000 par value and a coupon rate of 8 percent. If the price of the bond is $1,073.55, what is the annual yield to maturity?

> Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is a. 7 percent. b. 10 percent. c. 13 percent.

> Stilley Resources bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5 percent. If the price of the bond is $841.51, what is the yield to maturity?

> Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $690. They have 10 years remaining to maturity. The annual interest

> Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and

> Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point in time as d

> Masco Oil and Gas Company is a very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: The vice president of finance is plannin

> Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point in time as descri

> Katie Pairy Fruits Inc. has a $1,000, 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,000 = $150 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. a. Compute the

> Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point as descri

> Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,180. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest

> a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year time period. b. Assume the interest rate in the m

> Using Table 10-1, assume interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent. a. What is the price of the bond? b. Assume five years have passed and interest rates in the market have gone down to 12 pe

> The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is a. 6 percent. b. 9 percent. c. 13 percent.

> You are going to receive $205,000 in 18 years. What is the difference in present value between using a discount rate of 12 percent versus 9 percent?

> Your father offers you a choice of $105,000 in 12 years or $47,000 today. a. If money is discounted at 8 percent, which should you choose? b. If money is still discounted at 8 percent, but your choice is between $105,000 in 9 years or $47,000 today, wh

> Your uncle offers you a choice of $105,000 in 10 years or $47,000 today. If money is discounted at 9 percent, which should you choose?

> Medical Research Corporation is expanding its research and production capacity to introduce a new line of products. Current plans call for the expenditure of $100 million on four projects of equal size ($25 million each), but different returns. Project A

> Your aunt offers you a choice of $20,100 in 20 years or $870 today. If money is discounted at 17 percent, which should you choose?

> If you invest $9,000 today, how much will you have a. In 2 years at 9 percent? b. In 7 years at 12 percent? c. In 25 years at 14 percent? d. In 25 years at 14 percent (compounded semiannually)?

> Your parents have accumulated a $120,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giv

> Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost $17,000 per year for four years (cost assumed to come at the end of each year). Anticipating Lind

> You are chairperson of the investment fund for the Continental Soccer League. You are asked to set up a fund of semiannual payments to be compounded semiannually to accumulate a sum of $250,000 after nine years at a 10 percent annual rate (18 payments).

> Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years. a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis f

> If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest (round to the nearest dollar)? How muc

> Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent interest. That is, in this particular case, the amount owed will go up by 10 percent per year for five years. The lender then will require that Cal pay off the loan

> If you borrow $9,441 and are required to pay back the loan in five equal annual installments of $2,750, what is the interest rate associated with the loan?

> Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $8,000 per year and is designed to last 10 years. If the interest rate for this problem calculation is 13 percent, what is the most he should have paid f

> Mel Thomas, the chief financial officer of Preston Resources, has been asked to do an evaluation of Dunning Chemical Company by the president and Chair of the Board, Sarah Reynolds. Preston Resources was planning a joint venture with Dunning (which was p

> You will receive $6,800 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $6,800 ×
or divide by 1.10 (one year’s discount rate at 10 percent). b. What is the value of your invest

> Bridget Jones has a contract in which she will receive the following payments for the next five years: $1,000, $2,000, $3,000, $4,000, and $5,000. She will then receive an annuity of $8,500 a year from the end of the 6th through the end of the 15th year.

> Del Monty will receive the following payments at the end of the next three years: $2,000, $3,500, and $4,500. Then, from the end of the 4th through the end of the 10th year, he will receive an annuity of $5,000 per year. At a discount rate of 9 percent,

> You wish to retire in 14 years, at which time you want to have accumulated enough money to receive an annual annuity of $17,000 for 19 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you

> Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is expected to increase in value by 12 percent per year for the next five years. He will take the proceeds and provide himself with a 10-year annuity. Assuming a 12 percent

> Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund manager assumes he can earn a 9 percent return on her asset

> C. D. Rom has just given an insurance company $35,000. In return, he will receive an annuity of $3,700 for 20 years. At what rate of return must the insurance company invest this $35,000 in order to make the annual payments? Interpolate.

> Mr. Dow bought 100 shares of stock at $14 per share. Three years later, he sold the stock for $20 per share. What is his annual rate of return?

> Franklin Templeton has just invested $9,260 for his son (age one). This money will be used for his son’s education 18 years from now. He calculates that he will need $71,231 by the time the boy goes to school. What rate of return will Mr. Templeton need

> Beverly Hills started a paper route on January 1. Every three months, she deposits $550 in her bank account, which earns 8 percent annually but is compounded quarterly Four years later, she used the entire balance in her bank account to invest in an inve

> Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he had received from drug companies for his latest discovery, a unique electronic stimulator that reduces the pain from arthritis. The process had yet to pass rigorous F

> You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. a. What s

> a. What is the present value of $140,000 to be received after 30 years with a 14 percent discount rate? b. Would the present value of the funds in part a be enough to buy a $2,900 concert ticket?

> As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find th

> Determine the amount of money in a savings account at the end of 10 years, given an initial deposit of $5,500 and a 12 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly.

> Juan Garza invested $20,000 10 years ago at 12 percent, compounded quarterly. How much has he accumulated?

> Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $35,000 per year for the next 10 years. a. If Mr. Moore’s opportunity cost (potential return) is 10 percent, what is the present value of his cons

> Jack Hammer invests in a stock that will pay dividends of $2.00 at the end of the first year; $2.20 at the end of the second year; and $2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the sto

> If you owe $35,000 payable at the end of eight years, what amount should your creditor accept in payment immediately if she could earn 13 percent on her money?

> At a growth (interest) rate of 10 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.

> The difficult part of solving a problem of this nature is to know what to do with the information contained within a story problem. Therefore, this problem will be easier to complete if you rely on Chapter 4 for the format of all required schedules. The

> Assume that Rf = 5 percent and Km = 10.5 percent. Compute Kj for the following betas using Formula 11A-2. a. 0.6 b. 1.3 c. 1.9

> Christy Reed made a $2,000 deposit in her savings account on her 21st birthday, and she has made another $2,000 deposit on every birthday since then. Her account earns 7 percent compounded annually. How much will she have in her account after she makes t

> What is the present value of a. $7,900 in 10 years at 11 percent? b.$16,600 in 5 years at 9 percent? c. $26,000 in 14 years at 6 percent?

> Al Rosen invests $25,000 in a mint condition 1952 Mickey Mantle Topps baseball card. He expects the card to increase in value 12 percent per year for the next 10 years. How much will his card be worth after 10 years?

> Rita Gonzales won the $41 million lottery. She is to receive $1.5 million a year for the next 19 years plus an additional lump sum payment of $12.5 million after 19 years. The discount rate is 14 percent. What is the current value of her winnings?

> The Clearinghouse Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at the rate of $20,000 a year for the next 50 years. With a discount rate of 10 percent, what is the present value of your winnings?

> Carrie Tune will receive $19,500 for the next 20 years as a payment for a new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for $160,000?

> Sherwin Williams will receive $18,500 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights now for $165,000?

> Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future “pot of gold”?

> Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?

> You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?

> Sun Microsystems is a leading supplier of computer-related products, including servers, workstations, storage devices, and network switches. In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G. McN

> If you invest $8,500 per period for the following number of periods, how much would you have? a. 12 years at 10 percent. b. 50 years at 9 percent.

> How much would you have to invest today to receive a. $15,000 in 8 years at 10 percent? b. $20,000 in 12 years at 13 percent? c. $6,000 each year for 10 years at 9 percent? d. $50,000 each year for 50 years at 7 percent?

> You invest $3,000 for three years at 12 percent. a. What is the value of your investment after one year? Multiply $3,000 × 1.12. b. What is the value of your investment after two years? Multiply your answer to part a by 1.12. c. What is the value of your

> Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 14 percent against the euro. What is the effective interest rate on the loan for one year? (Consi

> Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 11 percent and LIBOR 1.5 percent less. Also assume there will be a $45 tr

> Mary Ott is going to borrow $10,400 for 120 days and pay $150 interest. What is the effective rate of interest if the loan is discounted?

> Sol Pine borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?

> A pawnshop will lend $2,500 for 45 days at a cost of $35 interest. What is the effective rate of interest?

> Simmons Corp. can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds?

> The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the contracts must be closed out in December of this year.

> Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products. Mr. Lamar is quick to point out the increase in sal

> Charming Paper Company sells to the 12 accounts listed here. Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for acco

> Summit Record Company is negotiating with two banks for a $151,000 loan. Fidelity Bank requires a 28 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 14 percent compensating

> Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend the money for 55 days at an interest cost of $13,300. a. What is the effective rate on the bank loan? b. How much would it cost (in percentage terms) if Ha

> Neveready Flashlights Inc. needs $340,000 to take a cash discount of 3/17, net 72. A banker will lend the money for 55 days at an interest cost of $10,400. a. What is the effective rate on the bank loan? b. How much would it cost (in percentage terms) if

> The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills. Mr. Duke, Vice President of Reynolds Corporation, has suggested that the compan

> The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills. Mr. Duke, Reynolds Corporation vice president, has suggested that the company b

> Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/15, net 85. Mr. Warner never takes the discount offered, but he pays his suppliers in 75 days rather than the 85 days allowed so he is sure the payments are never

> Lewis and Clark Camping Supplies Inc. is borrowing $51,000 from Western State Bank. The total interest is $15,700. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this installment

> Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?

> Zerox Copying Company plans to borrow $172,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 17½ percent (18 percent total) and requires a compensating balance of 21 percent. The principal i

> United Technology Corporation (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value) with a coupon rate of 11 percent. Interest rates are currently 8 percent for bonds of equal risk. The bonds have 15 years left to matu

> If you borrow $5,300 at $400 interest for one year, what is your effective interest rate for the following payment plans? a. Annual payment. b. Semiannual payments. c. Quarterly payments. d. Monthly payments.

> Your company plans to borrow $13 million for 12 months, and your banker gives you a stated rate of 24 percent interest. You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stands alone.) a.

> The treasurer for the Macon Blue Sox baseball team is seeking a $23,600 loan for one year from the 4th National Bank of Macon. The stated interest rate is 10 percent, and there is a 15 percent compensating balance requirement. The treasurer always keeps

> Randall Corporation plans to borrow $233,000 for one year at 20 percent from the Waco State Bank. There is a 21 percent compensating balance requirement. Randall Corporation keeps minimum transaction balances of $17,500 in the normal course of business.

> Digital Access Inc. needs $400,000 in funds for a project. a. With a compensating balance requirement of 20 percent, how much will the firm need to borrow? b. Given your answer to part a and a stated interest rate of 9 percent on the total amount borrowe

> Maxim Air Filters Inc. plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the effective rate of interest?

> McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of $9,530. Its average daily sales are $10,680, and it collects accounts in 32 days. a. What is its net credit position? That is, compute its accounts receivable an

> Talmud Book Company borrows $24,900 for 60 days at 12 percent interest. What is the dollar cost of the loan?

> Barney’s Antique Shop has annual credit sales of $1,620,000 and an accounts receivable balance of $157,500. Calculate the average collection period (use 360 days in a year).