Practice Chapter 1-6 Problems

Suppose your company needs to raise $28 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're evaluating two issue alternatives: an 8 percent annual coupon and a zero coupon bond. Your company's tax rate is 25 percent. In 20 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeros? (Assume annual compounding on the zero coupon bond.)

Coupon bond = $28m + (0.08 × $28m) = $30.24m; PV of a $1,000 face value zero coupon bond = $1,000/(1.08)20 = $214.548207; Number of zero coupon bonds required = $28m/$214.548207 = 130,506.80 bonds; Payment on zero coupon bonds = $1,000 × 130,506.80 = $130.51m

Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned?

Difference = 51.31 - 35.47 = 15.84 months

You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 5 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?

Future value 35 years = $5,000 × (1 + 0.05)35 = $27,580.08 Future value 30 years = $5,000 × (1 + 0.05)30 = $21,609.71

Today, Stacy is investing $26,000 at 6.0 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?

Future value 6.0% = $26,000 × (1 + 0.060)4 = $32,824.40Future value 7% = $26,000 × (1 + 0.07)4 = $34,080.70Difference = $34,080.70 - $32,824.40 = $1,256.30

Fried Foods has sales of $238,900, total assets of $217,000, total equity of $121,300, net income of $18,700, and dividends paid of $7,000. What is the internal growth rate?

Internal growth rate = {($18,700/$217,000) × [($18,700 - $7,000)/$18,700]}/{1 - {($18,700/$217,000) × [($18,700 - $7,000)/$18,700]}}/ = 5.70 percent

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?

Limited Partnership

Donner United has total owners' equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

Long-term debt = $36,400 - $18,800 - $12,200 = $5,400

The Play House's December 31, 2013, balance sheet showed net fixed assets of $1,238,000 and the December 31, 2014, balance sheet showed net fixed assets of $1,416,000. The company's 2014 income statement showed a depreciation of $214,600. What was the firm's net capital spending for 2014?

Net capital spending = $1,416,000 - $1,238,000 + $214,600 = $392,600

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions?

No new equity and a constant debt-equity ratio

Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent?

Profit margin = {[(0.21 x $737,000) - $7,900] x (1 - 0.35)]}/ $737,000 = 12.95 percent

Freedom Health Centers has total equity of $861,300, sales of $1.48 million, and a profit margin of 5.2 percent. What is the return on equity?

Return on equity = (0.052 x $1,480,000)/$861,300 = 8.94 percent

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

annual percentage rate

Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:

future value

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:

has positive net working captial

A protective covenant:

limits the actions of the borrower

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested

A limited liability company:

prefers its profits be taxed as personal income to its owners

Net capital is defined as:

the depreciated book value from a firm's fixed assets

Which of the following features distinguishes an ordinary annuity from an annuity due?

timing of the annuity payments

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

will be greater than 12.9 percent

Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's:

working capital

Arts and Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? (Assume semiannual compounding.)

$331.40

Beginning in 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires corporations with a market value over ________ to allow a nonbinding shareholder vote on executive pay.

$75,000,000

Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?

$800 = $690 × (1 + 0.054)t; t = 2.81 years

If your nominal rate of return is 14.38 percent and your real rate of return is 4.97 percent, what is the inflation rate?

(1 + 0.1438) = (1 + 0.0497)(1 + h); h = 8.96 percent

Which one of the following statements is correct concerning a firm's fixed assets?

The market value is the expected selling price in today's economy

Miser Materials paid $27,500 in dividends and $28,311 in interest over the past year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $21,000 in long-term debt. What is the amount of the cash flow from assets?

cash flow from assets = ($28,311 + $21,000) + ($27,500 - $25,000) = $51,811

The inflation premium:

compensates investors for expected price increases

Which one of the following statements related to securities dealers is correct?

dealers buy and sell from their own inventory