Finance Problems

Problem1. Using present value techniques to evaluate alternative investment opportunities. Fast Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Fast recently acquired approximately $6 million of cash capital from its owners, and its president. Don Keenon, is trying to identify the most profitable way to invest these funds. Clarence Roy, the company’s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $720,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $280,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $100,000. Operating the vans will require additional working capital of $40,000, which will be recovered at the end of the fourth year. In contrast, Patricia Lipa, the company’s chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings with reductions in cash outflows as the following. Year 1 Year 2 Year 3 Year 4$160,000 $320,000 $400,000 $440,000The large trucks are expected to cost $800,000 and to have a four-year useful life and a $80,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $16,000. Fast Delivery’s management has established a 16 percent desired rate of return. Requireda. Determine the net present value of the two investment alternatives. b. Calculate the present value index for each alternative. c. Indicate which investment alternative you would recommend. Explain your choice. Problem 2Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities. Louis Gallo owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involved purchasing a machine that would enable Mr. Gallo to offer frozen yogurt to customers. The machine would cost $8,100 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $5. 940 and $900, respectively. Alternatively, Mr. Gallo could purchase for $10,080 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,280 and $2,430 respectively. Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent. Requireda. Determine the payback period and unadjusted rate of return (use average investment) for each alternative. b. Indicate which investment alternative you would recommend. Explain your choice. Problem 3Using net present value and internal rate of return to evaluate investment opportunities. Veronica Tanner, the present of Tanner Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $100,000 and for Project B are $40,000. The annual expected cash inflows are $31,487 for Project A and $13,169 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Tanner Enterprise’s cost of capital is 8 percent. Requireda. Compare the net present value of each project. Which project should be adopted based on the net present value approach?b. Compute the approximate internal rate of return on each project. Which one should be adopted based on the internal rate of return approach?c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?

Originally posted 2018-06-22 11:53:17. Republished by Blog Post Promoter

Finance Problems

1. Determine the size of the M1 money supply using the followinginformation. Currency plus traveler s checks $25 millionNegotiable CDs $10 millionDemand deposits $13 millionOther checkable deposits $12 million2. Following are components of the M1 money supply at the end oflast year. What will be the size of the M1 money supply at the end ofnext year if currency grows by 10 percent, demand deposits grow by5 percent, other checkable deposits grow by 8 percent, and theamount of traveler s checks stays the same?Currency $700 billionDemand deposits $300 billionOther checkable deposits $300 billionTraveler s checks $10 billion3. Assume that a country estimates its M1 money supply at $20million. A broader measure of the money supply, M2, is $50 million. The country s gross domestic product is $100 million. Production orreal output for the country is 500,000 units or products. a. Determine the velocity of money based on the M1 moneysupply. b. Determine the velocity of money based on the M2 moneysupply. c. Determine the average price for the real output. 4. The One Product economy, which produces and sells onlypersonal computers (PCs), expects that it can sell 500 more, or 12,500PCs, next year. Nominal GDP was $20 million this year, and themoney supply was $7 million. The central bank for the One Producteconomy plans to increase the money supply by 10 percent next year. a. What was the average selling price for the personal computersthis year?b. What is the expected average selling price next year forpersonal computers if the velocity of money remains at thisyear s turnover rate? What percentage change in price level isexpected to occur?c. If the objective is to keep the price level the same next year(i. e. , no inflation), what percentage increase in the moneysupply should the central bank plan for?d. How would your answer in (c) change if the velocity of moneyis expected to be three times next year? What is it now?5. 1. The following three one-year discount loans are available toyou:Loan A: $120,000 at a 7 percent discount rateLoan B: $110,000 at a 6 percent discount rateLoan C: $130,000 at a 6. 5 percent discount ratea. Determine the dollar amount of interest you would pay oneach loan and indicate the amount of net proceeds each loanwould provide. Which loan would provide you with the mostupfront money when the loan takes place?b. Calculate the percent interest rate or effective cost of eachloan. Which one has the lowest cost?Following are selected balance sheet accounts for Third State Bank:vault cash $2 million; U. S. government securities $5 million;demand deposits $13 million; nontransactional accounts $20million; cash items in process of collection $4 million; loans to individuals$7 million; loans secured by real estate $9 million; federalfunds purchased $4 million; and bank premises $11 million. a. From these accounts, select only the asset accounts andcalculate the bank s total assets. b. Calculate the total liabilities for Third State Bank. c. Based on the totals for assets and liabilities, determine theamount in the owners capital account. 10. Let s assume that you have been asked to calculate risk-basedcapital ratios for a bank with the following accounts:Cash $5 millionGovernment securities $7 millionMortgage loans $30 millionOther loans $50 millionFixed assets $10 millionIntangible assets $4 millionLoan-loss reserves $5 millionOwners equity $5 millionTrust-preferred securities $3 millionCash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms ofriskiness. a. Calculate the equity capital ratio. b. Calculate the Tier 1 Ratio using risk-adjusted assets. c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio usingrisk-adjusted assets11. Challenge Problem This problem focuses on bank capitalmanagement and various capital ratio measures. Following arerecent balance sheet accounts for Prime First National Bank. Cash assets $ 17 million Demand deposits $50 millionLoans secured by Time & savingsreal estate 40 deposits 66Commercial loans 45 Federal fundspurchased 15Government Trust-preferredsecurities owned 16 securities 2Goodwill 5Bank fixed assets 15 Owners capital 5Total assets $138 million Total liabilities $138 millionand owners capitalAll amounts are in millions of dollars. Note: The bank has loan-loss reserves of $10 million. The real estateand commercial loans shown on the balance sheet are net of theloan-loss reserves. a. Calculate the equity capital ratio. How could the bank increaseits equity capital ratio?b. Risk-adjusted assets are estimated using the following weightingsprocess: cash and government securities . 00; real estateloans . 50; commercial and other loans 1. 00. Calculate the risk-adjusted assets amount for the bank. c. Calculate the Tier 1 Ratio based on the information providedand the risk-adjusted assets estimate from Part b. d. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio based onthe information provided and the risk-adjusted assets estimatefrom Part b. e. What actions could the bank management team take toimprove the bank s Tier 1 and Total Capital ratios?

Originally posted 2018-06-22 11:53:17. Republished by Blog Post Promoter

Finance Problems

Chapter: 9 Problem: 18 INPUTS USED IN THE MODEL P0 $50.00 Net Ppf $30.00 Dpf $3.50 D0 $2.35 g 7% B-T rd 10% Skye’s beta 0.95 Market risk premium, RPM 6.5% Risk free rate, rRF 6.0% Target capital structurefrom debt 40% Target capital structure from preferred stock 5% Target capital structure from common stock 55% Tax rate 35% Flotation cost for common 10% a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferredstock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the DCF method and the CAPM method to find the cost of equity. Cost of debt: B-T rd × (1 – T) = A-T rd Cost of preferred stock (including flotation costs): Dpf /Net Ppf = rpf Cost of common equity, DCF (ignoring flotation costs): D1 / P0 + g = rs Cost of common equity, CAPM: rRF + b × RPM = rs = IMPORTANT NOTE: HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME COST OF EQUITY. THAT OCCURRED BECAUSE WEUSED A BETA IN THE PROBLEM THAT FORCED THE SAME RESULT. ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS. b. Calculate the cost of new stock using the DCF model. D0 × (1 + g) / P0 × (1 – F) + g = re c. What is the cost of new common stockbased on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method and add that differential to the CAPM value for rs.) rs + Differential = re + = Again, we would not normally find that the CAPM and DCF methods yield identicalresults. d. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company’s WACC? wd 40.0% wpf 5.0% ws 55.0% 100.0% wd × A-T rd + wpf × rpf + ws × rs = WACC = e. Suppose Gao is evaluating three projectswith the following characteristics: (1) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the betaestimated for the project. All equity will come from reinvested earnings. (2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%. (3) Equity invested in Project B would have a beta of 1.0. The project has an expectedreturn of 10.0%. (4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%. Analyze the company’s situation and explain why each project should be accepted or rejected. Beta rs rps rd(1 – T) WACC Expected returnon project Accept? Project A 0.5 Project B 1.0 Project C 2.0

Finance Problems

Problem 9-3 Cost of Preferred Stock Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $54.50 per share with an annual dividend of $5.50 a share.Ignoring flotation costs, what is the company’s cost of preferred stock, rps? Round your answer to two decimal places. %Problem 9-4 Cost of Preferred Stock with Flotation Costs Burnwood Tech plans to issue some $60 par preferred stock with a 7% dividend.A similar stock is selling on the market for $73. Burnwood must pay flotation costs of 5% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places. %Problem 9-5 Cost of Equity: DCF Summerdahl Resorts’ common stockis currently trading at $33.00 per share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 = $3.00), and the dividend is expected to grow at a constant rate of 4% a year. What is the cost of common equity? Round your answerto two decimal places. %Problem 9-7 WACC Shi Importers’ balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 30%, rd = 7%, rps = 6.3%, and rs = 10%. If Shi has a target capitalstructure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places. % Problem 9-9 Bond Yield and After-Tax Cost of Debt A company’s 8% coupon rate, semiannual payment, $1,000 par value bond that maturesin 20 years sells at a price of $640.49. The company’s federal-plus-state tax rate is 30%. What is the firm’s after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimalplaces. %Problem 9-12 Calculation of g and EPS Spencer Supplies’s stock is currently selling for $60 per share. The firm is expected to earn $6.00 per share this year and to pay a year-end dividend of $3.00. If investors require a 10% return, what rate ofgrowth must be expected for Spencer? Round your answer to two decimal places. % If Spencer reinvests earnings in projects with average returns equal to the stock’s expected rate of return, then what will be next year’s EPS? (Hint: g = ROE × Retention ratio.)Round your answer to the nearest cent. $ Problem 9-13 The Cost of Equity and Flotation Costs Messman Manufacturing will issue common stock to the public for $35. The expected dividend and growth in dividends are $3.25 per share and 3%, respectively. If theflotation cost is 13% of the issue’s gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places. % Problem 9-16 Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current assets$30,000,000 Current liabilities $10,000,000 Fixed assets 50,000,000 Long-term debt 30,000,000 Common stock (1 million shares) 1,000,000 Retained earnings 39,000,000 Total assets $80,000,000 Total claims $80,000,000 The current liabilities consist entirelyof notes payable to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company’s permanent capital structure. The long-term debt consistsof 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 6%, and a 25-year maturity. The going rate of interest on new long-term debt, rd, is 12%, and this is the present yield to maturity on the bonds. The common stock sells ata price of $70 per share. Calculate the firm’s market value capital structure. Round your answers to two decimal places. Short-term debt $ % Long-term debt $ % Common equity $ % Total capital $ %

Finance Problems

Financial Pre-Test ProblemsI am looking for the way to solve these by hand and in Excel, and also the proper answer: 1. Suppose that the following cash flows are received: 0 = -$500, 1 = $200, 2 = $200, 3 = $200The Internal Rate of Return on the cash flows (rounded to the nearest percent) is8%, 9%, 10%, 11%, or 12%2. A 10-year bond paying 8% annual coupons pays $1000 at maturity. If the required rate of return on the bond is 7%, then today the bond will sell (rounded to the nearest cent) for$1000. 00$1210. 45$987. 48$1070. 243. The annual revenue-growth rates for a new tech star tup during its first 4 years of operations were as follows: 1 = 50, 2 = 50, 3 = -50, 4 = -50Rounded to the nearest tenth of one percent, the start up’s 4-year Compound Annual Growth Rate was-13. 4% or -10. 5%4. Last year, a barber shop generated $100,000 in profit. Assume that the shop’s profits grow at 5% per year and that cash flows are discounted at 10% per year. If profits are received at the end of each year, what is the present value of all the shop’s future profits?$2,100,000$3,000,000

Finance Problems

Division Asset Beta Next Period’s Expected Free Cash Flow ($mm)Expected Growth Rate Oil Exploration 1.44504.0%Oil Refining 1.15252.5%Gas and Convenience Stores 0.86003.0%The risk-free rate of interest is 3% and the market risk premium is 5%.Which is the cost of capital for the oil refining division closest to?A) 6.5%B) 7.0%C) 8.5%D) 10.0%with the calculation p.Number 2 question You expect CCM Corporation to generate the following free cash flows over the next 5 yearsYear12345FCF ($ millions)2528323740 If CCM has $150 million of debt and 12 million shares of stock outstanding, then which is the share price for CCM closest to?A) $49.50B) $11.25C) $20.50D) $22.75 Number 3 question Which is the variance of the returns on the Index from 2000 to 2009 closest to?Year EndIndexRealized Return(R – R)(R – R)2200023.6.78%0.0218448200124.7.88%0.0252174200230.5%21.68%0.047002220039.0%0.18%3.24E-062004-2.0%-10.82%0.01170722005-17.3%-26.12%0.06822542006-24.3%-33.12%0.1096934200732.2%23.38%0.054662420084.4%-4.42%0.001953620097.4%-1.42%0.0002016A) 0.0450B) 0.3400C) 0.1935D) 0.0375(TCO A) Which of the following statements is false? (Points : 5)The WACC can be used throughout the firm as the company-wide cost of capital for new investments that are of comparable risk to the rest of the firm and that will not alter the firms debt-equity ratio.A disadvantage of the WACC method is that you need to know how the firm’s leverage policy is implemented to make the capital budgeting decision.The intuition for the WACC method is that the firm’s weighted average cost of capital represents the average return the firm must pay to its investors (both debt and equity holders) on an after-tax basis.To be profitable, a project should generate an expected return of at least the firm’s weighted average cost of capital.number 2…. (TCO F) Which of the following statements is correct? (Points : 5)One advantage of the NPV over the IRR is that NPV takes account of cash flows over a projects full life, whereas IRR does not.One advantage of the NPV over the IRR is that NPV assumes that cash flows will be reinvested at the WACC, whereas IRR assumes that cash flows are reinvested at the IRR. The NPV assumption is generally more appropriate.One advantage of the NPV over the MIRR method is that NPV takes account of cash flows over a projects full life, whereas MIRR does not.One advantage of the NPV over the MIRR method is that NPV discounts cash flows, whereas the MIRR is based on undiscounted cash flows.Because cash flows under the IRR and MIRR are both discounted at the same rate (the WACC), these two methods always rank mutually exclusive projects in the same order.

Finance Problems

Problem 2:Quantco, a domestic corporation, is an engineering consulting firm that has its main offices in San Diego, California. Because Quantco does a considerable amount of business in China, it has a branch office in Beijing. During the current year, Quantco generates a total pre-tax profit of $100 million (all from active business operations), including $80 million of profits from its U.S. operations and $20 million of profits from its Chinese operations. Assume the U.S. tax rate is 35% and the Chinese rate is 40%.Compute Quantco’s creditable foreign income taxes, foreign tax credit limitation, and excess credits (if any).Now assume that Quantco has a second foreign branch office in Singapore which generates $10 million of profits (all from active business operations), on which Quantco pays Singapore taxes. Assume the Singapore tax rate is 25%. Recompute Quantco’s creditable foreign income taxes, foreign tax credit limitation, and excess credits. What is the name of the phenomenon by which the Singapore profits resulted in the elimination of the excess credits on the Chinese profits?Problem 3:Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Trikeco operates in Europe through Trike1, a wholly owned Italian corporation that manufactures a special line of mountain bicycles for the European market.In addition, Trike1 owns 100% of Trike2, a U.K. corporation that market’s Trike1’s products in the United Kingdom. At the end of the current year, the undistributed earnings and foreign income taxes of Trike1 and Trike2 are as follows:Trike 1 Trike2Post – 1986 undistributed earnings: $90 million $54 millionPost-1986 foreign income taxes: $36 million $27 millionDuring the current year, Trike2 distributed a $10 million dividend to Trike1, and Trike1 distributed a $10 million divident to Trikeco. To simplify the computations, assume that neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the dividend received by Trike1 was exempt from Italian taxation.Compute Trikeco’s deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Trikeco received from Trike1. Assume the U.S. tax rate is 35%.Problem 4:Shedco, a domestic corporation, operates in Asia through Shed1, a wholly owned Hong Kong subsidary. At the end of the current year, Shed1’s pools of post-1986 undistributed earnings and post-1986 foreign income taxes are as follows:Post-1986 undistributed earnings Post-1986 income taxesGeneral limitation income $24 million $18 millionPassive income $12 million $3 millionTotals $36 million $21 millionDuring the current year, Shed1 distributed a $6 million dividend to Shedco. Compute Shedcos deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Shedco received from Shed1. Assume the U.S. tax rate is 35%.PROBLEM 5Tenco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Tenco owns 100% of the stock of Teny, a foreign marketing subsidiary that was organized in Year 1. During Year 1, Teny had $15 million of foreign base company sales income, paid $3 million in foreign income taxes, and distributed no dividends. During Year 2, Teny had no earnings and profi ts, paid no foreign income taxes, and distributed a $12 million dividend.Assuming the U.S. corporate tax rate is 35%, what are the U.S. tax consequences of Tenys Year 1 and Year 2 activities?

Finance Problems

Exercise 20-6Schumann Shoe Manufacturer is considering whether or not to refund a $70 million, 10% coupon, 30-year bond issue that was sold 8 years ago. It is amortizing $4.5 million of flotation costs on the 10% bonds over the issue’s 30-year life. Schumann’s investment bankers have indicated that the company could sell a new 22-year issue at an interest rate of 8 percent in today’s market. Neither they nor Schumann’s management anticipate that interest rates will fall below 6 percent any time soon, but there is a chance that interest rates will increase. A call premium of 10 percent would be required to retire the old bonds, and flotation costs on the new issue would amount to $5 million. Schumann’s marginal federal-plus-state tax rate is 40 percent. The new bonds would be issued 1 month before the old bonds are called, with the proceeds being invested in short-term government securities returning 5 percent annually during the interim period.a. Perform a complete bond refunding analysis. What is the bond refunding’s NPV? b. At what interest rate on the new debt is the NPV of the refunding no longer positive?Exercise 18-6 As part of its overall plant modernization and cost reduction program, Western Fabrics’ management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project’s required return of 12%.The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized loan at a 10% interest rate, with payments to be made at the end of each year. In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $20,000 per year paid at the end of each year. The loom falls in the MACRS 5-year class, and Western’s marginal federal-plus-state tax rate is 40%. Aubey Automation Inc., maker of the loom, has offered to lease the loom to Westen for $70,000 upon delivery and installation (at t=0) plus 4 additional annual lease payments of $70,000 to be made at the ends of Years 1 through 4. (Note that there are 5 lease payments in total.) The lease agreement includes maintenance and servicing. Actually, the loom has an expected life of eight years, at which time its expected salvage value is zero; however, after 4 years, its market value is expected to equal its book value of $42,500. Tanner-Woods plans to build and entirely new plant in 4 years, so it has no interest in either leasing or owning the proposed loom for more than that period. a. Should the loom be leased or purchased? b. The salvage value is clearly the most uncertain cash flow in the analysis. Assume that the appropriate salvage value pre-tax discount rate is 15 percent. What would be the effect of a salvage value risk adjustment on the decision? c. Assuming that the after-tax cost of debt should be used to discount all anticipated cash flows, at what lease payment would the firm be indifferent to either leasing or buying? Exercise 15-12Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher’s unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm’s optimal capital structure and what is the weighted average cost of capital at the optimal structure?

Finance Problems

Question 1ABC Corp. issued 15-year bonds 2 years ago at a coupon rate of 10. 6%. The bonds make semi-annual payments. If these bonds currently sell for 97% of par value, what is the YTM?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 2ABC’s bonds have a 9. 5 percent coupon and pay interest semi-annually. Currently, the bonds are quoted at 106. 315 percent of par value. The bonds mature in 8 years. What is the yield to maturity?Answer1 pointsQuestion 3The yield to maturity on a Marshall Co. premium bond is 7. 6 percent. This is the:Answernominal rate. effective rate. real rate. current yield. coupon rate. 1 pointsQuestion 4A discount bond has a yield to maturity that:Answerexceeds the coupon rate. equals zero. is equal to the current yield. is less than the coupon rate. equals the bond’s coupon rate. 1 pointsQuestion 5BCD s $1,000 par value bonds currently sell for $798. 40. The coupon rate is 10%, paid semi-annually. If the bonds have 5 years to maturity, what is the yield to maturity?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 6The 14. 8 percent, $1,000 face value bonds of Tim McKnight, Inc. , are currently selling at $1,077. 39. What is the current yield?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 7The rate required in the market on a bond is called the:Answercall yieldrisk premiumliquidity premiumyield to maturitycurrent yield1 pointsQuestion 8You paid $1,183 for a corporate bond that has a 5. 38% coupon rate. What is the current yield?Hint: if nothing is mentioned, then assume par value = $1,000Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 9ABC has issued a bond with the following characteristics:Par: $1,000; Time to maturity: 8 years; Coupon rate: 4%;Assume semi-annual coupon payments. Calculate the price of this bond if the YTM is 7. 9%Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12. 345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 10ABC Inc. , has $1,000 face value bonds outstanding. These bonds mature in 3 years, and have a 6. 5 percent coupon. The current price is quoted at 98. 59 percent of par value. Assume semi-annual payments. What is the yield to maturity?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 11ABC’s Inc. ‘s bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 12The 8 percent coupon bonds of the Peterson Co. are selling for 98 percent of par value. The bonds mature in 5 years and pay interest semi-annually. These bonds have a yield to maturity of _____ percent. Answer1 pointsQuestion 13Stealers Wheel Software has 9. 1% coupon bonds on the market with nine years to maturity. The bonds make semi-annual payments and currently sell for 103. 17% of par. What is the current yield?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 14A firm’s bonds have maturity of 10 years with a $1000 face value, an 8% semi-annual coupon, are callable in 5 years, at $1,050, and currently sells at a price of $1,100. What is the yield to call (YTC)?Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0. 12345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 15The 12. 23 percent coupon bonds of the Peterson Co. are selling for $908. 7. The bonds mature in 5 years and pay interest semi-annually. These bonds have current yield of _____ percent. Enter your answer in percentages rounded off to two decimal points. Answer1 pointsQuestion 16The principal amount of a bond that is repaid at the end of term is called the par value or the:Answerdiscount amountback-end amountcoupon ratecouponface value1 pointsQuestion 17ABC has issued a bond with the following characteristics:Par: $1,000; Time to maturity: 9 years; Coupon rate: 11%;Assume semi-annual coupon payments. Calculate the price of this bond if the YTM is 11. 56%Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12. 345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 18A bond which sells for less than the face value is called a:Answerperpetuity. par value bond. discount bond. debenture. premium bond. 1 pointsQuestion 19A premium bond is a bond that:Answerhas a par value which exceeds the face value. has a face value in excess of $1,000. has a market price which exceeds the face value. is callable within 12 months or less. is selling for less than par value. 1 pointsQuestion 20ABC wants to issue 11-year, zero coupon bonds that yield 11. 96 percent. What price should they charge for these bonds if they have a par value of $1,000? That is, solve for PV. Assume annual compounding. Hint: zero coupon bonds means PMT = 0Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12. 345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 21Assume that you wish to purchase a 10-year bond that has a maturity value of $1,000 and a coupon interest rate of 5%, paid semiannually. If you require a 4. 05% rate of return on this investment (YTM), what is the maximum price that you should be willing to pay for this bond? That is, solve for PV. Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12. 345 then enter as 12. 35 in the answer box. Answer1 pointsQuestion 22ABC has issued a bond with the following characteristics:Par: $1,000; Time to maturity: 18 years; Coupon rate: 6%;Assume annual coupon payments. Calculate the price of this bond if the YTM is 7. 82%Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12. 345 then enter as 12. 35 in the answer box.

Finance Problems

Question 11. You are given the following information about ABC Company:Interest expenses = $17,758Times Interest Earned Ratio = 1. 6 timesTax Rate = 22. 8%What is the net income?Question 21. Suppose an investment offers to double your money in 16 years. What annual rate of return are you being offered if interest is compounded semi-annually?Question 31. ABC’s current assets comprise of cash, accounts receivables, and inventory. ABC has $10,342 in cash, $8,947 in accounts receivables, and $5,725 in inventory. If the current ratio is 1. 7 times, compute the quick ratio. Question 41. ABC Company earned $438,069 in taxable income for the year. How much tax does the company owe on this income?Question 51. ABC Company has $556,473 of operating income after all costs but before $42,383 of interest income, $52,182 of dividend income, and taxes. What is the tax expense?Question 61. ABC Company has total assets of $789,024. There are 52,104 shares outstanding with a market value of $27 per share. If the net profit margin is 9. 4% and the total asset turnover is 2. 5, what is the price/earnings (P/E) ratio?Question 71. What is the future value of $75,425 invested for 9 years at 14% compounded semi-annually?Question 81. ABC Company has a debt ratio of 0. 2. What is the debt-equity (D/E) ratio?Question 91. Suppose you invest $25,195. If the interest rate is 4% compounded quarterly for the first 10 years and 13% compounded monthly for the next 5 years, what is the future value after 15 years?Question 101. ABC Company has net working capital of $1,956, current assets of $4,354, long-term debt of $2,963, and equity of $4,898. What is the amount of net fixed assets?Question 111. A project has the following cash flows. What is the internal rate of return?Year 0 1 2 3Cash flow -$121,000 68,150 $42,200 $39,10014. 82%12. 71%14. 39%13. 85%13. 47%1 pointsQuestion 121. How many years will it take to triple your money at 6% compounded monthly?

Finance Problems

Question 2 1. If the effective rate is 19%. What is the nominal rate if compounding is daily. Do not enter the symbol % in your answer. Simply enter the answer in percentages rounded off to two decimal points. Question 3 1. The ABC Company is considering a new project which will require an initial cash investment of $14,864. The projected cash flows for years 1 through 4 are $9,722, $9,118, $8,632, and $5,842, respectively. If the appropriate discount rate is 11%, compute the NPV of the project. Enter your answer rounded off to two decimal points. Do not enter $ in the answer box. Question 4 1. How many months it will take to grow your money from $4,712 to $7,580 if you can earn an interest of 16% compounded monthly? Note: Do not write “months” in your answer. Simply write the number in the answer box. 1 points Question 5 1. What is the effective rate of 18% compounded monthly? Do not enter the symbol % in your answer. Simply enter the answer in percentages rounded off to two decimal points. 1 points Question 6 1. How much do you need to invest today in order to have $14,899 at the end of 12 years if you are sure to earn an interest at the rate of 11%? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 7 1. What is the future value of $2,029 invested for 6 years at 12% if interest is compounded semi-annually (twice a year)? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 8 1. If you can double your money in 19 years, what is the implied annual rate of interest, given that compounded in quarterly? Note: give your answer in percentages. Note: Do not put % sign in your answer. Simply write the number in percentages in the answer box. Question 10 1. How many years it will take you to quadruple (means 4 times) your money if you can earn 7% each year? Note: Do not write “years” in your answer. Simply write the number in the answer box. 1 points Question 11 1. What is the future value of $359 invested for 10 years at 13% if interest is compounded quarterly? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 12 1. What is the future value of annual payments of $6,087 for 17 years at 5 percent?1 points Question 13 1. In order to buy a house, you take a loan of 100,000 at 7. 5% for a period of 13 years. Compute the balance remaining at the end of 5 years. Do not enter the symbol $ in your answer. Enter your answer as a positive number. Simply enter the answer rounded off to two decimal points. 1 points Question 14 1. The Perpetual Life Insurance Co is trying to sell you an investment policy that will pay you and your heirs $12,471 per year forever. Suppose the Perpetual Life Insurance Co. told you the policy costs $180,064. At what interest rate would this be a fair deal? Just enter the number in percentages up to 2 decimal points. Do not enter % in the answer box. 1 points Question 15 1. If you can triple your money in 18 years, what is the implied rate of interest? Note: Do not put % sign in your answer. Simply write the number in percentages in the answer box. . 1 points 1 points Question 17 1. What is the future value of $4,357 invested for 29 years at 18% if interest is compounded semi-annually? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 18 1. How many years it will take to grow your money from $3,308 to $9,537 if you can earn an interest of 15% compounded quarterly? Note: Do not write “years” in your answer. Simply write the number in the answer box. 1 points Question 19 1. What is the future value of $661 for 15 years at 6 percent if interest is compounded semi-annually? Note: Do not enter “$” in your answer. Simply write down the number that you get as your answer. 1 points Question 20 1. 026:Say, you deposit $1,493 in a bank for 17 years. What is the amount you will have in the bank at the end of 17 years if interest of 7 % for first 10 years and interest of 9 % for the remaining years? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 21 1. How much do you need to invest today in order to have $4,498 at the end of 28 years if you are sure to earn an interest at the rate of 15%, if interest is compounded monthly? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 22 1. Kelly starting setting aside funds 6 years ago to buy some new equipment for her firm. She has saved $607 each quarter and earned an average rate of return of 5 percent. How much money does she currently have saved for this purpose?1 points Question 23 1. Assume interest rate of 3%. A company receives cash flows of $967 at the end of year 5, $316 at the end of year 7, and $624 at the end of year 10. Compute the future value of this cash flow stream. Do not enter the symbol $ in your answer. Simply enter the answer rounded off to two decimal points. 1 points Question 24 1. How many years it will take to grow your money from $3,641 to $7,248 if you can earn an interest of 13% compounded monthly? Note: Do not write “years” in your answer. Simply write the number in the answer box. 1 points Question 25 1. How much do you need to invest today in order to have $9,131 at the end of 25 years if you are sure to earn an interest at the rate of 9%, if interest is compounded quarterly? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 26 1. What is the future value of quarterly payments of $562 for 14 years at 6 percent?1 points Question 27 1. If you receive $110 at the end of each year for the first three years and $794 at the end of each year for the next three years. What is the present value? Assume interest rate is 4%. Hint: This is an uneven cash flow problem. Use the CF function and solve for NPV to get the answer. Just enter the number up to 2 decimal points. Do not enter $ in the answer box. 1 points Question 28 1. 027:Say, you deposit $4,879 in a bank for 17 years. What is the amount you will have in the bank at the end of 17 years if interest of 6 % compounded monthly for first 9 years and interest of 6 % compounded quarterly for the remaining years? Note: Do not put $ sign in your answer. Simply write the number in the answer box. 1 points Question 29 1. 023A:If you can double your money in 23 years, what is the implied annual rate of interest, given that compounded semi-annually? Note: give your answer in percentages. Note: Do not put % sign in your answer. Simply write the number in percentages in the answer box. 1 points Question 30 1. Barrett Pharmaceuticals is considering a drug project that costs $174,959 today and is expected to generate end-of-year annual cash flows of $13,959, forever. At what discount rate would Barrett be indifferent between accepting and rejecting the project?Just enter the number in percentages up to 2 decimal points. Do not enter % in the answer box. 1 points 1 points Question 33 1. Assume interest rate of 6%. Suppose that you receive $97,408 at the end of each year for 4 years. Suppose that this cash flow starts at the end of the fourth year. Compute the present value. Do not enter the symbol $ in your answer. Simply enter the answer rounded off to two decimal points. 1 points Question 34 1. What should you be willing to pay in order to receive $259 annually forever, if you require 5% per year on the investment? Just enter the number up to 2 decimal points. Do not enter $ in the answer box. 1 points Question 35 1. How many years it will take you to double your money if you can earn 9% each year, given that compounding is quarterly? Note: Do not write “years” in your answer. Simply write the number in the answer box. 1 points Question 36 1. Assume interest rate of 4%. A company receives cash flows of $81,403 at the end of years 4, 5, 6, 7, and 8, and cash flows of $289,772 at the end of year 10. Compute the future value of this cash flow stream. Do not enter the symbol $ in your answer. Simply enter the answer rounded off to two decimal points.

Finance Problems

The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you. 1. The company purchased equipment on January 2, 2009, for $165,000. At that time, the equipment had an estimated useful life of 7 years with a $25,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a $15,000 salvage value. 2. During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $625,000. It had a useful life of 10 years and a salvage value of $50,000. The following computations present depreciation on both bases for 2010 and 2011. 2011 2010 Straight-line $ 57,500 $ 57,500Declining-balance $ 92,000 $ 115,0003. The company purchased a machine on July 1, 2010, at a cost of $450,000. The machine has a salvage value of $25,000 and a useful life of 10 years. The company’s bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value. Ignore Tax effect. 4. The company has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows. December 31, 2011 $ 5,400December 31, 2012 $ 4,6005. In reviewing the December 31, 2011, inventory, the company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect December 31, 2012, inventory amount. December 31, 2010 Understated $ 32,000December 31, 2011 Understated $ 51,000December 31, 2012 Overstated $ 9,5006. At December 31, 2012, the company decided to change to the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of $250000 when purchased on January 1, 2011. It has a salvage value of 0 and a 8-year useful life. Depreciation expense recorded prior to 2012 under the double-declining-balance method was $62500. The company has already recorded 2012 depreciation expense of $46875 using the double-declining-balance method. 7. Before the current year, the company accounted for its income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues to use the completed-contract method for tax purposes. Income for the current year has been recorded using the new method. Prior year tax effects must be considered. The following information is available. Pretax Income Percentage-of-Completion Completed-ContractPrior to 2012 $320,000 $180,0002012 $140,000 $120,000Required: Prepare the journal entries necessary at December 31, 2012, to record the corrections and changes made to date related to the information provided. The books are still open for 2012. The income tax rate is 35%. The company has not yet recorded its 2012 income tax expense and payable amounts so current-year tax effects may be ignored.

Finance Problems

P7-1. A very small country s gross domestic product is $12 million. a. If government expenditures amount to $7. 5 million andgross private domestic investment is $5. 5 million, whatwould be the amount of net exports of goods and services?P7-2. How would your answer change in Problem 1 if the gross domesticproduct had been $14 million?P8-1. Assume investors expect a 2. 0 percent real rate of return over thenext year. If inflation is expected to be 0. 5 percent, what is theexpected nominal interest rate for a one-year U. S. Treasury security?P8-4. A thirty-year U. S. Treasury bond has a 4. 0 percent interest rate. Incontrast, a ten-year Treasury bond has an interest rate of 3. 7 percent. If inflation is expected to average 1. 5 percentage points over both thenext ten years and thirty years, determine the maturity risk premiumfor the thirty-year bond over the ten-year bond. P8-6. You are considering an investment in a one-year government debtsecurity with a yield of 5 percent or a highly liquid corporate debtsecurity with a yield of 6. 5 percent. The expected inflation rate forthe next year is expected to be 2. 5 percent. a. What would be your real rate earned on either of the twoinvestments?b. What would be the default risk premium on the corporatedebt security?P8-12. A Treasury note with a maturity of four years carries a nominalrate of interest of 10 percent. In contrast, an eight-year Treasurybond has a yield of 8 percent. a. If inflation is expected to average 7 percent over the first fouryears, what is the expected real rate of interest?b. If the inflation rate is expected to be 5 percent for the firstyear, calculate the average annual rate of inflation for years2 through 4. c. If the maturity risk premium is expected to be zero betweenthe two Treasury securities, what will be the average annualinflation rate expected over years 5 through 8?

Finance Problems

5-2Wilson Wonder s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 per value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?6-7Suppose rRF = 5%, rM = 10%, and rA = 12%a. Calculate Stock A s beta. b. If Stock A s beta were 2. 0, then what would be A s new required rate of return?6-11You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta1. 1. You are considering selling $100,000 worth of one stock with beta of 0. 9 and using the proceeds to purchase another stock with a beta of 1. 4. What will the portfolio s new beta be after these transactions?

Finance Problems

Resolved Question:1. the target capital structure for QM industries is 45% common stock, 12% preferred stock, and 43% debt. If the cost of common equity for the firm is 18. 1%, the cost of preferred stock is 9. 8%, the before-tax cost of debt is 7. 9% and the firms tax rate is 35%, what is QM’S weighted average cost of capital?QM’S WACC IS _________%2. Crypton electronics has a capital structure consisting of 43% common stock and 57% debt. A debt issue of $1000 par value, 6. 5% bonds that mature in 15 years and pay annual interest will sell for $972. Common stock of the firm is currently selling for $29. 05 per share and the firm expects to pay a $2. 34 dividend next year. dividends have grown at the rate of 4. 6% per year and are expected to continue to do so for the foreseeable future. What is cryptons cost of capital where the firms tax rate is 30%Cryptons cost of capital is ___%3. the target capital structure for jowers manufacturing is 55% common stock 16% preferred stock, and 29% debt. if the cost of common equity for the firm is 19. 2% the cost of preferred stock is 12. 3% and the beforetax cost of debt is 9. 5% what is jowers cost of capital? the firms tax rate is 34%Jowers wacc is ______%4. . As a member of the finance department of ranch manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm s present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm s capital structure as follows:Bonds $3,500,000Preferred stock $2,200,000Common stock $6,500,000To finance the purchase, ranch manufacturing will sell 10-year bonds paying 7. 2% per year at the market price of $1,028. Preferred stock paying a $2. 02 dividend can be sold for $25. 45. Common stock for ranch manufacturing is currently selling for $55. 35 per share and the firm paid $2. 91 dividend last year. Dividends are expected to continue growing at a rate of 45. 4% per year into the indefinite future. if the firms tax rate is 30% what discount rate should you use to evaluate the equipment purchase?Ranch manufacturing s WACC is ___%5. Abe forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located In dallas, Houston, and san Antonio. To finance the new venture two plans have been proposed:-plan a is an all common equity structure in which $2. 4 million dollars would be raised by selling 80,000 shares of common stock- plan b would involve insuring $1. 1 million dollars in long term bonds with an effective interest rate of 11. 7% plus $1. 3 million would be raised by selling 40,000 shares of common stock. The debt funds raised under plan b have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firms capital structure. Abe and his partners plan to use a 40% tax rate in their analysis and they have hired you on a consulting basis to do the following:a. find the EBIT indifference level associated with the two financing plans. b. prepare a pro forma income statement for the EBIT level solved for in part a. that shows the EPS will be the same regardless whether plan a or b is chosen. 6. . three recent graduates of the computer science program at the university of Tennessee are forming a company that will write and distribute new application software for the Iphone. Initially, the corportation will operate in the southern region of Tennessee, Georgia, north Carolina, and south Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:- the first (plan a) is an all common equity capital structure. $2. 2 million dollars would be raised by selling common stock at $20 per common share- plan b would involve the use of financial leverage. $1. 4 million dollars would be raised by selling bonds with an effective interest rate of 10. 7% (per annum), and the remaining $0. 8 million would be raised by selling common stock at the $20 per share. The use of financial leverage is considered to be a permanent part of the firm s capitalization, so no fixed maturity date is needed for the analysis. A 34% tax rate is deemed appropriate for the analysis. a. find the EBIT indifference level associated with two financing plans. b. a detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $302,000 annually. Taking this into consideration, which plan will generate the higher eps?

Finance Problems

Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling securities that call for 4 payments of $50 (1 payment at the end of each of the next 4 years) plus an extra payment of $1,000 at the end of Year 4. Your friend says she can get you some of these securities at a cost of $875 each. Your money is now invested in a bank that pays an 8% nominal (quoted) interest rate but with quarterly compounding. You regard the securities as being just as safe, and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of the securities to decide whether they are a good investment. What is their present value to you? Round your answer to the nearest cent. $ Your company is planning to borrow $1,750,000 on a 7-year, 10%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal? Round your answer to two decimal places. %ProblemTo complete your last year in business school and then go through law school, you will need $15,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $15,000 one year from today). Your rich uncle offers to put you through school, and he will deposit in a bank paying 4. 24% interest a sum of money that is sufficient to provide the 4 payments of $15,000 each. His deposit will be made today. a. How large must the deposit be? Round your answer to the nearest cent. $b. How much will be in the account immediately after you make the first withdrawal? Round your answer to the nearest cent. $How much will be in the account immediately after you make the last withdrawal? Round your answer to the nearest cent. $ProblemFind the present value of the following ordinary annuities. Round your answers to the nearest cent. (Notes: If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can “override” the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in many situations, to see how changes in input variables affect the output variable. Also, note that you can leave values in the TVM register, switch to “BEG,” press FV, and find the FV of the annuity due. )a. $800 per year for 10 years at 12%. $b. $400 per year for 5 years at 6%. $c. $800 per year for 5 years at 0%. $Now rework parts a, b, and c assuming that payments are made at the beginning of each year; that is, they are annuities due. d. $800 per year for 10 years at 12%. $e. $400 per year for 5 years at 6%. $f. $800 per year for 5 years at 0%. $ProblemFind the interest rate (or rates of return) for each of the following situations. Round your answers to two decimal places. a. You borrow $700 and promise to pay back $728 at the end of 1 year. %b. You lend $700 and receive a promise to be paid $728 at the end of 1 year. %c. You borrow $70,000 and promise to pay back $121,305 at the end of 13 years. %d. You borrow $10,000 and promise to make payments of $2,445. 7 at the end of each year for 5 years. %ProblemWhat’s the future value of a 4%, 6-year ordinary annuity that pays $750 each year? Round your answer to the nearest cent. $If this were an annuity due, what would its future value be? Round your answer to the nearest cent. $Problema. It is now January 1. You plan to make a total of 5 deposits of $500 each, one every 6 months, with the first payment being made today. The bank pays a nominal interest rate of 8% but uses semiannual compounding. You plan to leave the money in the bank for 5 years. How much will be in your account after 5 years? Round your answer to the nearest cent. $b. You must make a payment of $1,992. 30 in 10 years. To get the money for this payment, you will make 5 equal deposits, beginning today and for the following 4 quarters, in a bank that pays a nominal interest rate of 6% with quarterly compounding. How large must each of the 5 payments be? Round your answer to the nearest cent. $ProblemAn investment will pay $200 at the end of each of the next 3 years, $400 at the end of Year 4, $500 at the end of Year 5, and $700 at the end of Year 6. If other investments of equal risk earn 4% annually, what is its present value? Round your answer to the nearest cent. $What is its future value? Round your answer to the nearest cent. $ProblemTo the next whole year, how long will it take $200 to double if it is deposited and earns the following rates? Round your answers up to the next highest year. [Notes: (1) If you are using a financial calculator, you can enter the known values and then press the appropriate key to find the unknown variable. Then, without clearing the TVM register, you can “override” the variable that changes by simply entering a new value for it and then pressing the key for the unknown variable to obtain the second answer. This procedure can be used in parts b and d, and in many other situations, to see how changes in input variables affect the output variable. ) (2) This problem cannot be solved exactly with some financial calculators. For example, if you enter PV = -200, PMT = 0, FV = 400, and I = 7 in an HP-12C, and then press the N key, you will get 11 years. The correct answer is 10. 2448 years, which rounds to 10, but the calculator rounds up. However, the HP-10B gives the correct answer. ]a. 7. 5%. year(s)b. 12. 7%. year(s)c. 15. 6%. year(s)d. 100%. year(s)

Finance problems

FIN/370 week 2

Cash Flow Problem Sets

Complete the following problem sets from Chapter 5 in Microsoft® Excel®:

5-1
5-3
5-5
5-7
5-12
5-15
5-39 (Calculate monthly payment only)

· 5-1 FutureValue Compute the future value in year 9 of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 using a 10 percent interest rate.

· 5-3 Future Value of an Annuity What is the future value of a $900 annuity payment over five years if interest rates are 8 percent?

· 5-5 Present Value Compute the present value of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent.

· 5-7 Present Value of an Annuity What’s the present value of a $900 annuity payment over five

· 5-12 Present Value of an Annuity Due If the present value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what’s the present value of the same annuity due?

· 5-15 Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR. What’s the loan’s effective annual rate (EAR)?

· Loan Payments You wish to buy a $25,000 car. The dealer offers you a 4-year loan with a 9 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a deci

finance problems

Question

Problem1. Using present value techniques to evaluate alternative investment opportunities.
Fast Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Fast recently acquired approximately $6 million of cash capital from its owners, and its president. Don Keenon, is trying to identify the most profitable way to invest these funds.
Clarence Roy, the company’s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $720,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $280,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $100,000. Operating the vans will require additional working capital of $40,000, which will be recovered at the end of the fourth year.
In contrast, Patricia Lipa, the company’s chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings with reductions in cash outflows as the following.
Year 1 Year 2 Year 3 Year 4
$160,000 $320,000 $400,000 $440,000
The large trucks are expected to cost $800,000 and to have a four-year useful life and a $80,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $16,000. Fast Delivery’s management has established a 16 percent desired rate of return.
Required
a. Determine the net present value of the two investment alternatives.
b. Calculate the present value index for each alternative.
c. Indicate which investment alternative you would recommend. Explain your choice.

Problem 2Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities.
Louis Gallo owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involved purchasing a machine that would enable Mr. Gallo to offer frozen yogurt to customers. The machine would cost $8,100 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $5.940 and $900, respectively.
Alternatively, Mr. Gallo could purchase for $10,080 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,280 and $2,430 respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Required
a. Determine the payback period and unadjusted rate of return (use average investment) for each alternative.
b. Indicate which investment alternative you would recommend. Explain your choice.

Problem 3Using net present value and internal rate of return to evaluate investment opportunities.
Veronica Tanner, the present of Tanner Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $100,000 and for Project B are $40,000. The annual expected cash inflows are $31,487 for Project A and $13,169 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Tanner Enterprise’s cost of capital is 8 percent.
Required
a. Compare the net present value of each project. Which project should be adopted based on the net present value approach?
b. Compute the approximate internal rate of return on each project. Which one should be adopted based on the internal rate of return approach?
c. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?