Finance Final
Firm A borrows at 6% and then deducts its interest expense from its revenues before paying taxes at the rate of 20%. Firm B borrows at 8% and then deducts its interest expense from its revenues before paying taxes at the rate of 34%. The difference between the actual cost of borrowing of these firms is
0.48%
D'Anthony borrowed $50,000 today that he must repay in 15 annual end-of-year installments of $5,000. What annual interest rate is D'Anthony paying on his loan?
5.55%
A deferred annuity will pay you $500 at the end of each year for 10 years, however the first payment will not be made until three years from today (payments will be made at the end of years 3 through 12). What amount will you have to deposit today to fund this deferred annuity? Use an 8% discount rate and round your answer to the nearest $100.
$2,900
ACME, Inc. expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 12% is...
$20.83
How much would you be willing to pay (rounded to the nearest dollar) for a 20-year ordinary annuity if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?
$53,777
The present value of $1,000 to be received in 5 years is ____ if the discount rate is 12.78%.
$548
You have contracted to buy a house for $250,000, paying $30,000 down and taking out a fully amortizing loan for the balance, at a 5.7% annual rate for 30 years. What will your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)?
$1,277
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the net present value for this project?
$104,089
Dynamic Industries paid a dividend of $1.65 on its common stock yesterday. The dividends of Wallace Industries are expected to grow at 9% per year indefinitely. If required rate of return is 11%, estimate the value of Wallace Industries stock 2 years from now.
$106.84
You are 21 years old today. Your grandparents set up a trust fund that will pay you $25,000 per year for 20 years, starting on your 65th birthday to supplement your retirement. If the trust can earn 7.5% per year, how much will your grandparents need to put in the trust fund today (rounded to the nearest ten dollars)?
$11,370
What is the value on 1/1/13 of the following cash flows. Use a 7% discount rate, and round your answer to the nearest $10. [Date Cash Received, Amount of Cash] (1/1/14, $14,000) (1/1/15, $20,000) (1/1/16, $30,000) (1/1/17, $43,000) (1/1/18, $57000)
$128,490
Today is your 21st birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded monthly. How much will be in the account on your 50th birthday?
$163,823
You sell valuable artifacts from your household estate for $200,000 and want to use the money to supplement your retirement. You receive the money on your 60th birthday, the day you retire. You want to withdraw equal amounts at the end of each of the next 25 years. What constant amount can you withdraw each year and have nothing remaining at the end of 20 years if you are earning 7% interest per year?
$17,162
Today is your 20th birthday and your bank account balance is $25,000. Your account is earning 6.5% interest compounded semiannually. How much will be in the account on your 50th birthday?
$170,351
You believe in the power of compounding and decide to save $1 per day by avoiding the purchase of a soda. You deposit the $1 at the end of each day in a bank account that pays 8% interest compounded daily. You are going to take a trip in 20 years with the money you have accumulated. How much money will you have in 20 years, assuming 365 days per year?
$18,032
You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts? [Year, End of Year Deposit] (1, $350) (2, $500) (3, $725) (4, $400)
$2,207
How much money must you pay into an account at the end of each of 20 years in order to have $100,000 at the end of the 20th year? Assume that the account pays 6% per year, and round to the nearest $1.
$2,718
Congratulations! You are the proud winner of the multi-state Sour Ball Lottery. You are to receive $2,000,000 at the end of each year for the next 20 years. While the Lottery Commission refers to this as a $40,000,000 jackpot, if you choose the "cash option" they will give you much less than that; you can receive a lump sum payment today equal to the present value of the ordinary annuity instead of the 20 annual payments. If the discount rate that the Lottery Commission uses to determine the lump sum payoff is 7%, what is your payoff if you select the cash option?
$21,188,028
If you invest $750 every six months at 8 percent compounded semiannually, how much would you accumulate at the end of 10 years?
$22,334
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $120,000 and is expected to generate $75,000 in year one and $90,000 in year two. Project B costs $120,000 and is expected to generate $54,000 in year one, $47,000 in year two, $36,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10% What is the net present value for project A?
$22,562
The Western State Companyʹs common stock is expected to pay a $2.00 dividend in the coming year. If investors require a 17% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?
$22.22
Shackleford Corporation generally retains 35% of net income for reinvestment. The companyʹs ROE is 16%. They just paid a dividend of $1.37, and the required rate of return on this stock is 12%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the companyʹs internal growth rate.
$22.61
You are thinking of buying a craft emporium. It is expected to generate cash flows of $30,000 per year in years 1 through 5, and $40,000 per year in years 6 through 10. If the appropriate discount rate is 8%, what amount are you willing to pay for the emporium?
$228,476
You plan to go to Asia to visit friends in three years. The trip is expected to cost a total of $10,000 at that time. Your parents have deposited $5,000 for you in a Certificate of Deposit paying 6% interest annually, maturing three years from now. Uncle Lee has agreed to pay for all remaining expenses. If you are going to put Uncle Lee's gift in an investment earning 10% over the next three years, how much must he deposit today, so you can visit your friends three years from today?
$3,039
You are considering the purchase of a share of Ranchʹs common stock. You expect to sell it at the end of 1 year for $32.00. You will also receive a dividend of $2.50 at the end of the year. If your required return on this stock is 12%, what is the most you would be willing to pay for it now?
$30.80
Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa. The villa costs $500,000 today, and housing prices in Mexico are expected to increase by 6% per year. Manny and Irene want to make fifteen equal annual payments into an account, starting today, so there will be enough money to purchase the villa in fifteen years. If the account earns 10% per year, what is the amount of each deposit?
$34,286
You deposit $5,000 per year at the end of each of the next 25 years into an account that pays 8% compounded annually. How much could you withdraw at the end of each of the 20 years following your last deposit if all withdrawals are the same dollar amount? (The twenty-fifth and last deposit is made at the beginning of the 20-year period. The first withdrawal is made at the end of the first year in the 20-year period.)
$37,230
If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way, and if your required rate of return is 16% per year, how much is the stock worth today?
$48.05
Stimpson Inc. preferred stock pays a $.50 annual dividend. What is the value of the stock if your required rate of return is 10%?
$5.00
Assume you are to receive a 10-year annuity with annual payments of $1,000. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 10. You will invest each payment in an account that pays 9% compounded annually. Although the annuity payments stop at the end of year 10, you will not withdraw any money from the account until 25 years from today, and the account will continue to earn 9% for the entire 25-year period. What will be the value in your account at the end of Year 25 (rounded to the nearest dollar)?
$55,340
You have been accepted to study international economy at the European Central Bank (ECB) in Frankfurt. You will need $10,500 every 6 months (beginning today) for the next three years to cover tuition and living expenses. Mom and Dad have agreed to pay for your education, and want to make one deposit today in a bank account earning 6% interest, compounded semiannually. Assuming that each semester takes six months, how much must they deposit now so that you can withdraw $10,500 at the beginning of each semester over the next 3 years?
$58,587
Perrine Industrial Inc. just paid a dividend of $5 per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 16%?
$59.44
Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment?
$597.24
You estimate you'll need $200,000 per year for 25 years starting on your 65th birthday to live on during your retirement. Today is your 49th birthday and you want to make equal deposits into an account paying 9% interest per year, the first deposit one year from now and the last deposit on your 64th birthday. How much must each deposit be (rounded to the nearest $10)?
$66,909
You are ready to retire. A glance at your 401(k) statement indicates that you have $750,000. If the funds remain in an account earning 9.0%, how much could you withdraw at the beginning of each year for the next 25 years?
$70,050
Jimmy just bought a new Ford SUV for his business. The price of the vehicle was $40,000. Jimmy made a $5,000 down payment and took out an amortized loan for the rest. The car dealership made the loan at 8% interest compounded monthly for five years. He is to pay back the principal and interest in equal monthly installments beginning one month from now. Determine the amount of Jimmy's monthly payment.
$709.67
A retirement plan guarantees to pay you or your estate a fixed amount for 25 years. At the time of retirement you will have $100,000 to your credit in the plan. The plan anticipates earning 7% interest annually over the period you receive benefits. How much will your annual benefits be assuming the first payment occurs one year from your retirement date?
$8,581
Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The companyʹs dividends are expected to grow at a constant rate of 8.5% indefinitely. If the required rate of return on this stock is 15.5%, compute the current value per share of Bensen Co. stock.
$81.38
How much money must be put into a bank account yielding 6.42% (compounded annually) in order to have $1,671 at the end of 11 years (round to nearest $1)?
$843
An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?
$864
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the profitability index for this project?
1.14
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $120,000 and is expected to generate $75,000 in year one and $90,000 in year two. Project B costs $120,000 and is expected to generate $54,000 in year one, $47,000 in year two, $36,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. What is the profitability index for project A?
1.19
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $120,000 and is expected to generate $75,000 in year one and $90,000 in year two. Project B costs $120,000 and is expected to generate $54,000 in year one, $47,000 in year two, $36,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. What is the payback period for project A?
1.5 years
Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $120,000 and is expected to generate $75,000 in year one and $90,000 in year two. Project B costs $120,000 and is expected to generate $54,000 in year one, $47,000 in year two, $36,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. What is the discounted payback period for project A?
1.7 years
One bank offers you 10% interest compounded semiannually (That is; APR=4 & m=2). What would the equivalent rate be if interest were compounded quarterly? (That is; what should be the APR of an account that compounds quarterly, and have the same EAR as the EAR of the previous account)
10.18%
Given the following information on S & G Inc.ʹs capital structure, compute the companyʹs weighted average cost of capital. The companyʹs marginal tax rate is 40%. [Type of Capital, Percent of Capital Structure, Before-Tax Component Cost] (Bonds, 40%, 7.5%) (Preferred Stock, 5%, 11%) (Internal Common Stock, 55%, 15%)
10.6%
The DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before‐tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 35 percent tax bracket, what is the firmʹs cost of capital?
10.74%
Kokapeli, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If the firmʹs yield to maturity on bonds is 7.5% and investors require a 15% return on the firmʹs common stock, what is the firmʹs weighted average cost of capital?
10.80%
You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?
11%
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the modified internal rate of return for this project?
11.57%
Backford Company just paid a dividend yesterday of $2.25 per share. The companyʹs stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for Backford Company dividends assuming constant growth?
11.81%
Baxter Inc. has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The companyʹs after‐tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the companyʹs marginal tax rate is 35%. What is the companyʹs weighted average cost of capital if retained earnings are used to fund the common equity portion?
12%
GHJ Inc. is investing in a major capital budgeting project that will require the expenditure of $16 million. The money will be raised by issuing $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. The company estimates is after‐tax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost of retained earnings to be 14%, and the cost of new common stock to be 17%. What is the weighted average cost of capital for this project?
13.75%
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the internal rate of return for this project?
15.13%
Lithium Lakes Industries common stock has a market price of $44. It just paid a dividend of $2.00. The growth rate is constant at 10%. What do investors require as a rate of return on this stock?
16%
You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00. The annual percentage interest rate (APR) is closest to
18%
Adventure Outfitter Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share. What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?
18.89%
GPS Inc. wishes to estimate its cost of retained earnings. The firmʹs beta is 1.3. The rate on 6‐month T‐ bills is 2%, and the return on the S&P 500 index is 15%. What is the appropriate cost for retained earnings in determining the firmʹs cost of capital?
18.9%
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the payback period for this project?
2.50 years
The risk‐free rate of return is 2.5% and the market risk premium is 8%. Rogue Transport has a beta of 2.2. Using the capital asset pricing model, what is Rogue Transportʹs cost of retained earnings?
20.1%
Phillips Enterprises Inc. is expected to pay a dividend of $2.60 next year. Dividends are expected to grow at a constant rate of 8% per year, and the stock price is currently $20.00. New stock can be sold at this price subject to flotation costs of 15%. Compute the cost of internal equity (retained earnings) and the cost of external equity (new common stock), respectively.
21.00%, 23.29%
Whistle Corp. has a preferred stock that pays a dividend of $2.40. If you are willing to purchase the stock at $11, what is your required rate of return? (Round your answer to the nearest 0.1%)
21.8%
At 6 percent compounded monthly, how long will it take to triple your money?
221 months
Beaver Corp. preferred stock has a market price of $14.50. If it has a yearly dividend of $3.50, what is your expected rate of return if you purchase the stock at its market price?
24.14%
Tannerly Worldwideʹs common stock is currently selling for $48 a share. If the expected dividend at the end of the year is $2.40 and last yearʹs dividend was $2.00, what is the rate of return implicit in the current stock price?
25%
Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $5). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturingʹs stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturingʹs marginal tax rate is 35%. Based on the above information, the cost of retained earnings is
26.62%.
Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $5). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturingʹs stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturingʹs marginal tax rate is 35%. Based on the above information, the cost of new common stock is
28.38%
DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the discounted payback period for this project?
3.2 years
Your parents are complaining about the price of items today compared to what they cost years ago. If an automobile that cost $12,000 in 1980 costs $40,000 in 2010, calculate the annual growth rate in the automobile's price.
4.26%
At what rate must $287.50 be compounded annually for it to grow to $650.01 in 14 years?
6%
Consider a firm that borrows at 8% and then deducts its interest expense from its revenues before paying taxes at the rate of 23%. What is the actual cost of borrowing for this firm?
6.16%
Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years?
7.18%
JPR Companyʹs preferred stock is currently selling for $28.00, and pays a perpetual annual dividend of $2.00 per share. Underwriters of a new issue of preferred stock would charge $3 per share in flotation costs. Compute the cost of new preferred stock for JPR.
8%
Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15‐year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Five Rivers flotation expense on the new bonds will be $50 per bond. Crandalʹs marginal tax rate is 35%. What is the yield to maturity on the newly‐issued bonds?
8.17%
Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15‐year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandalʹs flotation expense on the new bonds will be $50 per bond. Crandalʹs marginal tax rate is 35%. What is the after‐tax cost of debt for the newly‐issued bonds?
8.76%
Crandal Dockworks is undergoing a major expansion. The expansion will be financed by issuing new 15‐year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Crandalʹs flotation expense on the new bonds will be $50 per bond. Crandalʹs marginal tax rate is 35%. What is the pre‐tax cost of debt for the newly‐issued bonds?
8.76%
Asymmetric Frames Corp. had a return on equity of 15%. The corporationʹs earnings per share was $6.00, its dividend payout ratio was 40% and its profit‐retention rate was 60%. If these relationships continue, what will be United Financial Corp.ʹs internal growth rate?
9.0%
You charged $1,000 on your credit card for Christmas presents. Your credit card company charges you 26% annual interest, compounded monthly. If you make the minimum payments of $25 per month, how long will it take (to the nearest month) to pay off your balance?
94 months
Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.)
a bank CD that pays 7.25 percent compounded semiannually
A small biotechnology research corporation has been experiencing losses for the first three years of its existence, and thus has a negative balance in retained earnings. The corporationʹs stock price, however, is $1 per share. Which of the following statements is MOST correct?
Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive.
How is preferred stock similar to bonds?
Preferred stockholders receive a dividend payment (much like interest payments to bondholders) that is usually fixed.
You have the choice of two equally risky annuities, each paying $5,000 per year for 8 years. One is an annuity due and the other is an ordinary annuity. If you are going to be receiving the annuity payments, which annuity would you choose to maximize your wealth?
The annuity due
Which of the following statements is MOST correct?
The cost of a particular source of capital is equal to the investorʹs required rate of return after adjusting for the effects of both flotation costs and corporate taxes.
A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives. Which of the following statements is MOST correct?
The higher the interest rate, the more likely the man will prefer the $500,000 lump sum.
Which of the following changes will make the value of a stock go up, other things being held constant?
The required return decreases.
How is preferred stock affected by a decrease in the required rate of return?
The value of a share of preferred stock increases.
Maynard Inc. preferred stock pays an annual dividend of $7 per share. Which of the following statements is true for an investor with a required return of 9%?
The value of the preferred stock is $77.78 per share.
All else equal, an increase in beta results in...
an increase in the cost of common equity, whether or not the funds come from retained earnings or newly issued common stock.
Many preferred stocks have a feature that entitles a company to repurchase its preferred stock from their holders at stated prices over a given time period. What is the name of this feature?
call provision
Due to changes in regulatory requirements, the transactions costs associated with selling corporate securities increased by $1 per share. This change will...
cause the cost of capital to increase.
In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find which of the following?
component cost of internal equity
Two considerations that cause a corporationʹs cost of capital to be different than its investorsʹ required returns are...
corporate taxes and flotation costs.
Most preferred stocks have a feature that requires all past unpaid preferred dividend payments be paid before any common stock dividends can be paid. What is the name of this feature?
cumulative dividends
The present value of a single future sum...
depends upon the number of discount periods
The cost of external equity capital is greater than the cost of retained earnings because of...
flotation costs on new equity.
Consider the following four types of payments that could be made by a normal operating firm: interest, common dividends, income taxes, and preferred dividends. Compared to the other payments mentioned, where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?
fourth
Higher flotation costs will result in all of the following EXCEPT
higher cost of retained earnings.
Preferred stock differs from common stock in that...
preferred stock dividends are fixed.
Which of the following differentiates the cost of retained earnings from the cost of newly‐issued common stock?
the flotation costs incurred when issuing new securities
What provision entitles the common shareholder to maintain a proportionate share of ownership in a firm?
the preemptive right