Finance Misc. problems
1. Toadies, Inc., has identified an investment project with the following cash flows.

Year Cash Flow
1 $ 1,525
2 1,645
3 1,730
4 1,780

If the discount rate is 8 percent, what is the future value of the cash flows in year 4? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Future value $

If the discount rate is 11 percent, what is the future value of the cash flows in year 4? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Future value $

If the discount rate is 24 percent, what is the future value of the cash flows in year 4? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Future value $

2.
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 5.30 percent, how much will you pay for the policy? (Round your answer to 2 decimal places. (e.g., 32.16))

Present value $

3.First National Bank charges 13.6 percent compounded monthly on its business loans. First United Bank charges 13.9 percent compounded semiannually.

Calculate the EAR for First National Bank and First United Bank. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

EAR
First National %
First United %

As a potential borrower, which bank would you go to for a new loan?

4. Wainright Co. has identified an investment project with the following cash flows.

Year Cash Flow
1 $ 920
2 1,330
3 1,590
4 1,775

If the discount rate is 10 percent, what is the present value of these cash flows? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

What is the present value at 20 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

What is the present value at 30 percent? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

5.
An investment offers $6,500 per year for 20 years, with the first payment occurring one year from now.

If the required return is 7 percent, what is the value of the investment? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

What would the value be if the payments occurred for 45 years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

What would the value be if the payments occurred for 70 years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

What would the value be if the payments occurred forever? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Present value $

6. Find the EAR in each of the following cases (Use 365 days a year. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):

Stated Rate (APR) Number of Times Compounded Effective Rate (EAR)
10.0 % Quarterly %
19.0 Monthly
15.0 Daily
12.0 Infinite

7. You are planning to make monthly deposits of $390 into a retirement account that pays 8 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 25 years? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

8.Investment X offers to pay you $5,000 per year for eight years, whereas Investment Y offers to pay you $7,100 per year for five years.

Calculate the present value for Investment X and Y if the discount rate is 5 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Present value
Investment X $
Investment Y $

Calculate the present value for Investment X and Y if the discount rate is 15 percent. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Present value
Investment X $
Investment Y $

9.You want to buy a new sports coupe for $82,500, and the finance office at the dealership has quoted you a 6.4 percent APR loan for 72 months to buy the car.
What will your monthly payments be? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Monthly payment $

What is the effective annual rate on this loan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Effective annual rate %

10.You’re prepared to make monthly payments of $310, beginning at the end of this month, into an account that pays 7.2 percent interest compounded monthly.

How many payments will you have made when your account balance reaches $22,000? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Number of payments

11. You want to be a millionaire when you retire in 40 years.

How much do you have to save each month if you can earn an 11.6 percent annual return? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Savings per month $

How much do you have to save each month if you wait 10 years before you begin your deposits? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Savings per month $

How much do you have to save each month if you wait 20 years before you begin your deposits? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Savings per month $

What are disruptive technologies and how do they enable organizations to change their business processes radically? Give a specific example.
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1.Assume that Mary Boyle had a homeowner’s insurance policy with $150,000 of coverage on the dwelling. Would a 90 percent co-insurance clause be better than an 80 percent clause in such a policy? Give reasons to support your answer.

3.Fred and Sasha Seidel, both graduate students, moved into an apartment near the university. Sasha wants to buy renter’s insurance, but Fred thinks they don’t need it because their furniture isn’t worth much. Sasha points out that, among other things, they have some expensive computer and stereo equipment. To help the Seidels resolve their dilemma, suggest a plan for deciding how much insurance to buy, and give them some ideas for finding a policy.

5.David Salter has a personal automobile policy (PAP) with coverage of $25,000/$50,000 for bodily injury liability, $25,000 for property damage liability, $5,000 for medical payments, and a $500 deductible for collision insurance. How much will his insurance cover in each of the following situations? Will he have any out-of-pocket costs?

a.David loses control and skids on ice, running into a parked car and causing $3,785 damage to the unoccupied vehicle and $2,350 damage to his own car.
b.David runs a stop sign and causes a serious auto accident, badly injuring two people. The injured parties win lawsuits against him for $30,000 each.
c.David’s 18-year-old son borrows his car. He backs into a telephone pole and causes $450 damage to the car.

3.Suppose that Leonard Krauss places an order to buy 100 shares of Google. Explain how the order will be processed if it’s a market order. Would it make any difference if it had been a limit order? Explain.

5.Using the Web site for Yahoo! Finance (http://finance.yahoo.com), find the 52-week high and low for Google’s common stock (symbol GOOG). What is the stock’s latest dividend yield? What was Google’s most recent closing price, and at what P/E ratio was the stock trading?

Chapter 5: Warm-up questions 2.1

E5-1 Assume a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!) , what will the account balance be after 1 year?

E5-2 If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly , what will the account balance be after 4 years?

E5-3 Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a strict economic point view which option should she take?

E5-4 Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the savings shown in the following table over its 5-year life:

Year—————-Savings estimate
1———————$35,000
2———————$50,000
3———————$45,000
4———————$25,000
5———————$15,000

Should the firm make this investment if it requires a minimum annual return of 9% on all investments?

E5-5 Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and looking for a bank in which to deposit the funds. Partners’ Saving Bank offers an account with an annual interest rate of 3% compounded semiannually, while Selwyn’s offers an account with a 2.75% annually interest rate compounded continuously. Calculate the value of the two accounts at the end of one year, and recommend to Joseph which account he should choose.

E5-6 Jack and Jill have just had their first child. If college is expected to cost $150,000 per year in 18 years, how much should the couple begin depositing annually at the end of each year to accumulate enough funds to pay the first year’s tuition at the beginning of the 19th year? Assume that they can earn a 6% annual rate of return on their investment.

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Finance Misc. Problems
October 19, 2015 admin    

(Capital Asset Pricing Model) Levine Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 6.75 percent, and the expected return for the market is 12 percent. What should be the required rates of return for each investment (using the CAPM)?

Security Beta
A 1.50
B .90
C .70
D 1.15

3. (Preferred Stock Valuation) What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12 percent.

4. (Preferred Stockholder Expected Return) Solitron preferred stock is selling for $42.16 and pays $1.95 in dividends. What is your expected rate of return if you purchase the security at the market price?

5. (Measuring Growth) Given that a firm’s return on equity is 18 percent and management plans to retain 40 percent of earnings for investment purposes, what will be the firm’s growth rate?

6. (Preferred Stock Valuation) Gree’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.
a. What is the expected rate of return of the stock?
b. If an investor’s required rate of return is 10 percent, what is the value of the stock for the investor?
c. Should the investor acquire the stock?

7. (IRR Calculation) Determine the internal rate of return on the following projects:
a. An initial outlay of $10,000 resulting in a single cash flow of $17,182 after 8 years
b. An initial outlay of $10,000 resulting in a single cash flow of $48,077 after 10 years
c. An initial outlay of $10,000 resulting in a single cash flow of $114,943 after 20 years
d. An initial outlay of $10,000 resulting in a single cash flow of $13,680 after 3 years

8. (IRR Calculation) Determine the internal rate of return on the following projects:
a. An initial outlay of $10,000 resulting in a cash flow of $1,993 at the end of each year for the next 10 years
b. An initial outlay of $10,000 resulting in a cash flow of $2,054 at the end of each year for the next 20 years
c. An initial outlay of $10,000 resulting in a cash flow of $1,193 at the end of each year for the next 12 years
d. An initial outlay of $10,000 resulting in a cash flow of $2,843 at the end of each year for the next 5 years