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Chapter 01 Introduction to Corporate Finance Chapter 01 Introduction to Corporate Finance Answer Key Multiple Choice Questions 1. Which one of the following terms is defined as the management of a firm’s long-term investments? A. working capital management B. financial […]

21. Which one of the following statements concerning a sole proprietorship is correct? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-03 The financial implications of the different forms of business organization. Section: 1.2 Topic: Sole proprietorship A. The […]

42. Which one of the following is an unintended result of the Sarbanes-Oxley Act? AACSB: Ethics Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-04 The conflicts of interest that can arise between managers and owners. Section: 1.3 Topic: Sarbox A. […]

58. Public offerings of debt and equity must be registered with which one of the following? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-03 The financial implications of the different forms of business organization. Section: 1.5 Topic: SEC […]

Chapter 01 – Introduction to Corporate Finance 1-1 Chapter 1 INTRODUCTION TO CORPORATE FINANCE CHAPTER WEB SITES Section Web Address What Is Corporate Finance? The Financial Manager Financial Management Decisions Sole Proprietorship Partnership Corporation A Corporation by Another Name… Possible […]

directly to the chief financial officer. The controller’s office handles cost and financial accounting, tax management, and management information systems, while the treasurer’s office is responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of […]

Chapter 10 Making Capital Investment Decisions Multiple Choice Questions 1. The difference between a firm’s future cash flows if it accepts a project and the firm’s future cash flows if it does not accept the project is referred to as […]

21. Changes in the net working capital requirements: AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Net working capital A. can affect the cash […]

41. When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at […]

61. A proposed expansion project is expected to increase sales of JL Ticker’s Store by $41,000 and increase cash expenses by $21,000. The project will cost $28,000 and be depreciated using straight-line depreciation to a zero book value over the […]

77. Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,480,000 to purchase plus an additional $52,000 a year to operate. The machines have a 6-year life after which they […]

95. Phone Home, Inc. is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will […]

CHAPTER 10 – 14 The electricity cost per year is therefore: 27. We are again solving for the breakeven kilowatt hour cost, but now the incandescent bulb has only 500 hours of useful life. In this case, the incandescent bulb […]

Opportunity Costs Side Effects Net Working Capital Financing Costs Other Issues Getting Started: Pro Forma Financial Statements Project Cash Flows Projected Total Cash Flow and Value A Closer Look at Net Working Capital Depreciation An Example: The Majestic Mulch and […]

Chapter 10 Question 18 Input area: Output area: Aftertax salvage value 45,500.00$ Depreciation tax shield 60,900.00$ Initial cash outlay (945,000.00)$ NPV w/o OCF (876,625.06)$ Necessary OCF 243,184.32$ OCF net of dep. tax shield 182,284.32$ Bid price 15.35$ Quantity 120,000 Installation […]

Chapter 10 Problems 1-36 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

CHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant […]

Chapter 11 Project Analysis and Evaluation Multiple Choice Questions 1. Forecasting risk is defined as the possibility that: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment. […]

21. The base case values used in scenario analysis are the ones considered the most: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment. Section: 11.2 Topic: […]

41. Given the following, which feature identifies the most desirable level of output for a project? AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 11-03 How to determine and interpret cash; accounting; and financial break-even points. Section: 11.3 and […]

61. Precise Machinery is analyzing a proposed project. The company expects to sell 2,250 units, give or take 5 percent. The expected variable cost per unit is $260 and the expected fixed costs are $589,000. Cost estimates are considered accurate […]

81. The Motor Works is considering an expansion project with estimated annual fixed costs of $71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $26.50 per unit. How many units must the firm […]

95. At an output level of 50,000 units, you calculate that the degree of operating leverage is 1.8. What will be the percentage change in operating cash flow if the new output level is 54,500 units? AACSB: Analytic Blooms: Apply […]

CHAPTER 11 – 13 Using the bottom up OCF calculation, we get: 21. The best case and worst cases for the variables are: Base Case Best Case Worst Case Unit sales (new) 55,000 60,500 49,500 Price (new) $825 $908 $743 […]

The Basic Problem Projected versus Actual Cash Flows Forecasting Risk Sources of Value Getting Started Scenario Analysis Sensitivity Analysis Simulation Analysis Fixed and Variable Costs Accounting Break-Even Accounting Break-Even: A Closer Look Uses for the Accounting Break-Even Accounting Break-Even and […]

Chapter 11 Problems 1-30 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 11 Question 16 Output area: a. IRR = 0% payback = N years NPV = I[(I/N)(PVIFA R%,N) – 1] b. IRR = -100% payback = negative NPV = -I c. IRR = R% payback < N years NPV = […]

Chapter 12 Some Lessons from Capital Market History Multiple Choice Questions 1. Last year, T-bills returned 2 percent while your investment in large– company stocks earned an average of 5 percent. Which one of the following terms refers to the […]

21. Which one of the following statements correctly applies to the period 1926- 2010? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 The historical returns on various important types of investments. Section: 12.3 Topic: Historical returns A. Large-company […]

42. The primary purpose of Blume’s formula is to: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 How to calculate the return on an investment. Section: 12.5 Topic: Blume’s formula A. compute an accurate historical rate of return. […]

62. Today, you sold 200 shares of Indian River Produce stock. Your total return on these shares is 6.2 percent. You purchased the shares one year ago at a price of $31.10 a share. You have received a total of […]

81. Over the past fifteen years, the common stock of The Flower Shoppe, Inc. has produced an arithmetic average return of 12.2 percent and a geometric average return of 11.5 percent. What is the projected return on this stock for […]

Chapter 12 – Some Lessons from Capital Market History Chapter 12 SOME LESSONS FROM CAPITAL MARKET HISTORY CHAPTER WEB SITES Section Web Address Introduction www.mhhe.com/rwj 12.1 finance.yahoo.com www.smartmoney.com/marketmap 12.2 www.globalfinancialdata.com bigcharts.marketwatch.com 12.4 www.robertniles.com www.morningstar.com 12.6 www.investorhome.com A First Look A […]

6. Yes, historical information is also public information; weak form efficiency is a subset of semi-strong form efficiency. 7. Ignoring trading costs, on average, such investors merely earn what the market offers; stock investments all have a zero NPV. If […]

Chapter 12 Question 13 Input area: Output area: Current price 1,087.45$ Nominal return 13.35% Real return 8.78% Coupon rate 8.00% Purchase price 1,030.00$ Coupons per year 1 Settlement 01/01/00 Maturity 01/01/14 Current YTM 7.00% Inflation rate 4.20% Chapter 12 19% […]

Chapter 12 Problems 1-24 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 13 Return, Risk, and the Security Market Line Multiple Choice Questions 1. You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the […]

21. The standard deviation of a portfolio: AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. Section: 13.2 Topic: Standard deviation A. is a weighted average of the standard deviations of the individual securities […]

42. Which one of the following is most directly affected by the level of systematic risk in a security? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-04 The security market line and the risk-return trade-off. Section: 13.7 Topic: […]

62. You are comparing stock A to stock B. Given the following information, what is the difference in the expected returns of these two securities? AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 13-01 How to calculate expected returns. […]

82. Your portfolio has a beta of 1.12. The portfolio consists of 40 percent U.S. Treasury bills, 30 percent stock A, and 30 percent stock B. Stock A has a risk-level equivalent to that of the overall market. What is […]

96. What is the expected return of an equally weighted portfolio comprised of the following three stocks? AACSB: Analytic Blooms: Apply Difficulty: 1 Easy EOC: 13-9 Learning Objective: 13-01 How to calculate expected returns. Section: 13.2 Topic: Expected return A. […]

4. a. a change in systematic risk has occurred; market prices in general will most likely decline. b. no change in unsystematic risk; company price will most likely stay constant. c. no change in systematic risk; market prices in general […]

Chapter 13 – Return, Risk, and the Security Market Line Chapter 13 RETURN, RISK, AND THE SECURITY MARKET LINE CHAPTER WEB SITES Section Web Address 13.2 www.thestreet.com 13.5 www.investopedia.com/university 13.6 www.investools.com moneycentral.msn.com finance.yahoo.com money.cnn.com The Systematic Risk Principle Measuring Systematic […]

Chapter 13 Question 15 Input area: Output area: Market E(R) 11.21% Stock E(R) 12.40% Stock beta 1.17 Risk-free return 4.20% Chapter 13 Question 16 Input area: Output area: Risk-free 4.28% Stock E(R) 13.30% Stock beta 1.45 Market E(R) 10.50% Chapter […]

Chapter 13 Problems 1-28 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 14 Cost of Capital Multiple Choice Questions 1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment […]

22. The aftertax cost of debt: AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-02 How to determine a firm’s cost of debt. Section: 14.3 Topic: Cost of debt A. varies inversely to changes in market interest rates. B. […]

42. Sweet Treats common stock is currently priced at $18.53 a share. The company just paid $1.25 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. […]

62. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 7.5 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The […]

81. Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent preferred stock, and 65 percent common stock. The flotation costs are 11 percent for common stock, 10 percent for preferred stock, and 7 percent […]

92. Cookie Dough Manufacturing has a target debt-equity ratio of 0.5. Its cost of equity is 15 percent, and its cost of debt is 11 percent. What is the firm’s WACC given a tax rate of 31 percent? AACSB: Analytic […]

Chapter 14 Problems 1-26 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 14 Question 14 Input Area: Output Area: a. RD8.25% b. RE12.20% Debt-equity ratio 1.25 WACC 9.20% Tax rate 35% a. Cost of equity 14% b. Aftertax cost of debt 6.8% Chapter 14 Question 15 Input Area: Output Area: Market […]

risk of the stock and the method is more widely applicable than is the dividend discount model, since the SML doesn’t make any assumptions about the firm’s dividends. The primary disadvantages of the SML method are (a) three parameters (the […]

Chapter 14 – Cost of Capital 14-1 Chapter 14 COST OF CAPITAL CHAPTER WEB SITES Section Web Address Required Return versus Cost of Capital Financial Policy and Cost of Capital The Dividend Growth Model Approach The SML Approach The Cost […]

Chapter 15 Raising Capital Multiple Choice Questions 1. Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What […]

28. Which one of the following is probably the most successful means of finding venture capital? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-01 The venture capital market and its role in the financing of new; high risk […]

55. Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs. […]

74. Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will […]

Chapter 15 – Raising Capital Chapter 15 RAISING CAPITAL CHAPTER WEB SITES Section Web Address 15.1 www.vfinance.com www.dealflow.com 15.2 www.marketwatch.com 15.3 www.hoovers.com 15.4 www.ml.com www.wrhambrecht.com Venture Capital Some Venture Capital Realities Choosing a Venture Capitalist Conclusion 15.2 Selling Securities to […]

cash offer. However, such offerings are rare, and there may be hidden costs or other factors not yet identified or well understood by researchers. 9. He could have done worse since his access to the oversubscribed and, presumably, underpriced issues […]

Chapter 15 Problems 1-15 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 16 Financial Leverage and Capital Structure Policy Multiple Choice Questions 1. Homemade leverage is: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 The effect of financial leverage. Section: 16.2 Topic: Homemade leverage A. the incurrence of debt […]

30. M & M Proposition I with tax supports the theory that: AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 16-02 The impact of taxes and bankruptcy on capital structure choice. Section: 16.4 Topic: M & M Proposition I […]

57. Miller’s Dry Goods is an all equity firm with 48,000 shares of stock outstanding at a market price of $50 a share. The company’s earnings before interest and taxes are $128,000. Miller’s has decided to add leverage to its […]

75. The Green Paddle has a cost of equity of 12.1 percent and a pre-tax cost of debt of 7.6 percent. The debt-equity ratio is 0.65 and the tax rate is 32 percent. What is Green Paddle’s unlevered cost of […]

88. ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $480,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $240,000 and the […]

Chapter 16 Problems 1-22 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 16 – Financial Leverage and Capital Structure Policy 16-1 Chapter 16 FINANCIAL LEVERAGE AND CAPITAL STRUCTURE POLICY CHAPTER WEB SITES Section Web Address The Basics of Financial Leverage Corporate Borrowing and Homemade Leverage M&M Proposition I: The Pie Model […]

Chapter 16 Question 12 Input Area: Output Area: a. RE17.14% b. RU11.39% c. RE I 19.05% RE II 15.22% RE III 11.39% Debt-equity ratio 1.5 WACC 9.0% Cost of debt 5.5% Tax rate 35% c. Debt-equity ratio 2.00 Debt-equity ratio […]

use greater financial leverage. Also, industries with less predictable future earnings, such as computers or drugs, tend to use less financial leverage. Such industries also have a higher concentration of growth and startup firms. Overall, the general tendency is for […]

Chapter 17 Dividends and Payout Policy Multiple Choice Questions 1. Green Roof Motels has more cash on hand than its operations require. Thus, the firm has decided to pay out some of its earnings in the form of cash to […]

21. All else equal, the market value of a stock will tend to decrease by roughly the aftertax value of the dividend on the: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 Dividend types and how dividends are […]

41. Which one of the following statements is correct? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 17-02 The issues surrounding dividend policy decisions. Section: 17.7 Topic: Dividend policy A. Firms prefer to cut dividend payments rather than borrow […]

61. Blasco’s has a market value equal to its book value. Currently, the firm has excess cash of $1,332, other assets of $11,674, and equity of $7,200. The firm has 1,200 shares of stock outstanding and net income of $838. […]

81. The Mining Co. has 20,000 shares of stock outstanding. The current market value of the firm is $328,000. The company has retained earnings of $27,000, capital in excess of par value of $160,000, and a common stock account value […]

94. The balance sheet for Apple Pie Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding. The company has declared a dividend of $1.80 per share. The stock goes ex-dividend tomorrow. Ignore any tax […]

Chapter 17 Problems 1-16 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 17 – Dividends and Payout Policy 17-1 Chapter 17 DIVIDENDS AND PAYOUT POLICY CHAPTER WEB SITES Section Web Address Cash Dividends Standard Method of Cash Dividend Payment Dividend Payment: A Chronology More about the Ex-Dividend Date An Illustration of […]

additional capital. Growth firms typically pay very small cash dividends, if they pay a dividend at all. This is because they have numerous projects available, and they reinvest the earnings in the firm instead of paying cash dividends. 9. The […]

Chapter 18 Short-Term Finance and Planning Multiple Choice Questions 1. The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy […]

29. Which of the following actions will tend to decrease the inventory period? I. discontinuing all slow-selling merchandise II. selling obsolete inventory below cost just to get rid of it III. buying raw materials only as needed for the manufacturing […]

54. The primary difference between a line of credit and a revolving credit arrangement is the: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Short-term borrowing A. type of […]

74. Tall Guys Clothing has a 45 day collection period. Sales for the next calendar year are estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with the first quarter of the year. Given this information, which one […]

92. Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter. The loan agreement also requires that 2 percent of the unused portion of the credit line be deposited in a non-interest […]

for the cash cycle to be longer than the operating cycle if the accounts payable period is positive. Moreover, it is unlikely that the accounts payable period would ever be negative since that implies the firm pays its bills before […]

Chapter 18 – Short-Term Finance and Planning 18-1 Chapter 18 SHORT-TERM FINANCE AND PLANNING CHAPTER WEB SITES Section Web Address 18.1 Tracing Cash and Net Working Capital Sales and Cash Collections Cash Outflows The Cash Balance Unsecured Loans Secured Loans […]

Chapter 18 Problems 1-18 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 19 Cash and Liquidity Management Multiple Choice Questions 1. Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor. DLK is a sole proprietorship. An unexpected family situation has caused the owner to suddenly want […]

21. Lockboxes: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 How firms manage their cash and some of the collection; concentration; and disbursement techniques used. Section: 19.3 Topic: Lockbox A. should be geographically located close to a firm’s […]

43. The Miller-Orr model: A. recommends selling securities in an amount equal to (U* – C) when the cash balance reaches L. B. requires that marketable securities be sold whenever the cash balance falls below the target level. C. bases […]

63. On an average day, your firm receives $11,800 in checks from customers. These checks clear the bank in an average of 2.8 days. The applicable daily interest rate is 0.015 percent. What is the highest daily fee your firm […]

83. Donaldson, Inc. spends $94,000 a week to pay bills and maintains a lower cash balance limit of $25,000. The standard deviation of the disbursements is $13,000. The applicable weekly interest rate is 0.045 percent and the fixed cost of […]

Chapter 19 Question 12 Input Area: Output: Daily interest rate 0.0134% Customers per day 40.39 Annual fee 10,000$ Variable costs per transaction 0.10$ Reduction in collection 1 Average customer payment 5,700$ T-bill rate 5% # of days per year 365 […]

the price relatively stable. This price stability, along with the dividend tax exemption, makes so-called adjustable rate preferred stock very attractive relative to interest-bearing instruments. 7. Net disbursement float is more desirable because the bank thinks the firm has more […]

Chapter 19 – Cash and Liquidity Management 19-1 Chapter 19 CASH AND LIQUIDITY MANAGEMENT CHAPTER WEB SITES Section Web Address Temporary Cash Surpluses Characteristics of Short-Term Securities Some Different Types of Money Market Securities 19.6 Summary and Conclusions The Speculative […]

Problems 1-12, Appendix 1-10 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 02 Financial Statements, Taxes, and Cash Flow Multiple Choice Questions 1. Which one of the following is the financial statement that shows the accounting value of a firm’s equity as of a particular date? AACSB: Analytic Blooms: Remember Difficulty: […]

23. Shareholders’ equity: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 The difference between accounting value (or “book” value) and market value. Section: 2.1 Topic: Shareholders’ equity 24. The higher the degree of financial leverage employed by a […]

45. A positive cash flow to stockholders indicates which one of the following with certainty? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 How to determine a firm’s cash flow from its financial statements. Section: 2.4 Topic: Cash […]

65. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long– term debt. The firm spent $24,000 on fixed assets and decreased net working […]

77. What is the net capital spending for 2011? A. $117 B. $239 C. $257 D. $338 E. $421 Net capital spending = $4,123 – $4,006 + $122 = $239 AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-04 […]

89. The Blue Bonnet’s 2010 balance sheet showed net fixed assets of $2.2 million, and the 2011 balance sheet showed net fixed assets of $2.6 million. The company’s income statement showed a depreciation expense of $900,000. What was the amount […]

leading to negative cash flow from assets. In general, what matters is whether the money is spent wisely, not whether cash flow from assets is positive or negative. 7. It’s probably not a good sign for an established company, but […]

Chapter 02 – Financial Statements, Taxes, and Cash Flow 2-1 Chapter 2 FINANCIAL STATEMENTS, TAXES, AND CASH FLOW CHAPTER WEB SITES Section Web Address Assets: The Left Side Liabilities and Owners’ Equity: The Right Side Net Working Capital Liquidity Debt […]

Chapter 2 Problems 1-26 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 2 Question 15 Input area: Output area: Income Statement Sales 52,000$ Costs 27,300 Depreciation expense 8,877$ EBIT 15,823$ Interest expense 4,900 EBT 10,923$ Taxes 3,823 Net income 7,100$ Dividends 1,800$ Addition to retained earnings 5,300$ Sales 52,000$ Costs 27,300$ […]

Chapter 20 Credit and Inventory Management Multiple Choice Questions 1. Blackwell Brothers sells men’s suits. The store offers a 1 percent discount if payment is received within 10 days. Otherwise, payment is due within 30 days. This credit offering is […]

21. Which one of the following time periods is included in the accounts receivable period but not in the cash collection period? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 How firms manage their receivables and the basic […]

41. Which of the following are frequently used as sources of information when trying to ascertain the creditworthiness of a customer? I. payment history with similar firms II. credit reports III. financial statements IV. information provided by a bank AACSB: […]

63. Cape May Products currently sells 650 units a month at a price of $59 a unit. The firm believes it can increase its sales by an additional 125 units if it switches to a net 30 credit policy. The […]

81. You are currently selling 72 units a month at a price of $210 a unit. Your variable cost of each unit is $130. If you switch from your current cash sales only policy to a net 30 policy you […]

Chapter 20 – Credit and Inventory Management Chapter 20 CREDIT AND INVENTORY MANAGEMENT CHAPTER WEB SITES Section Web Address 20.1 www.treasury.pncbank.com www.treasurystrat.com www.insidearm.com 20.2 www.newyorkfed.org/education/addpub/credit.html www.nacm.org 20.4 www.creditworthy.com 20.5 www.dnb.com 20.7 www.simba.org Components of Credit Policy The Cash Flows from […]

Chapter 20 Problems 1-20, Appendix 1-5 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” […]

grant longer credit periods to entice buyers. b. A: Landlords have significantly greater collateral, and that collateral is not mobile. c. A: Since A’s customers turn over inventory less frequently, they have a longer inventory period and, thus, will most […]

Chapter 20 Cash flow from old policy: 136,890$ Cash flow from new policy: 148,420$ Incremental cash flow 11,530$ NPV 154,170.00$ Question 14 Input Area: Unit sales per month 3,510 3,620 Output Area: Required return 2.5% Current Policy New Policy Price […]

Chapter 21 International Corporate Finance Multiple Choice Questions 1. Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States? AACSB: Analytic Blooms: Remember […]

21. The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate? AACSB: Analytic Blooms: Remember Difficulty: 1 […]

41. Uncovered interest parity is defined as: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 21-02 Purchasing power parity; interest rate parity; unbiased forward rates; uncovered interest rate parity; and the international Fisher effect and their implications for exchange […]

61. The camera you want to buy costs $230 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $0.8262? Assume absolute purchasing power parity exists. AACSB: Analytic Blooms: Apply Difficulty: […]

81. You want to invest in a riskless project in Sweden. The project has an initial cost of SKr3.8million and is expected to produce cash inflows of SKr1.75 million a year for three years. The project will be worthless after […]

Chapter 21 – International Corporate Finance 21-1 Chapter 21 INTERNATIONAL CORPORATE FINANCE CHAPTER WEB SITES Section Web Address Absolute Purchasing Power Parity Relative Purchasing Power Parity Interest Rate Parity Forward Rates and Future Spot Rates Putting It All Together Method […]

3. a. The Australian dollar is expected to weaken relative to the dollar, because it will take more A$ in the future to buy one dollar than it does today. b. The inflation rate in Australia is higher. c. Nominal […]

Chapter 21 Problems 1-18 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 22 Behavioral Finance: Implications for Financial Management Multiple Choice Questions 1. Amy is the chief financial officer of a retail toy store. Recently, she decided that the firm should expand its operations and open two additional stores. Within a […]

21. Steve purchased a stock last year for $34 a share. The stock increased in value to $36 a share before declining to its current value of $30. Steve has decided to sell the stock, but only if he can […]

34. You have saved a total of $200,000 over the past several years. Jane, a trusted business associate, recently approached you with an offer. She has offered you a partnership in a new firm that she expects to be exceedingly […]

Chapter 22 – Behavioral Finance: Implications for Financial Management 22-1 Chapter 22 BEHAVIORAL FINANCE: IMPLICATIONS FOR FINANCIAL MANAGEMENT CHAPTER WEB SITES Section Web Address 22.5 www.zakon.org/robert/internet/timeline Loss Aversion House Money Overoptimism Confirmation Bias The Affect Heuristic The Representativeness Heuristic Representativeness […]

4. A noise trader is someone whose trades are not based on information or financially meaningful analysis. Noise traders could, in principle, act together to worsen a mispricing in the short-run. Noise trader risk is important because the worsening of […]

Chapter 23 Enterprise Risk Management Multiple Choice Questions 1. Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be […]

21. A forward contract: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-02 The similarities and differences between futures and forward contracts and how these contracts are used to hedge risk. Section: 23.3 Topic: Forward contract A. requires that […]

41. If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 23-04 The payoffs of option contracts and how they […]

55. You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415′0 cents per bushel for delivery […]

to create a perfect hedge because the quantity of oil it needs to hedge doesn’t match the standard contract size on crude oil futures, or perhaps the exact settlement date the company requires isn’t available on these futures (exposing the […]

Chapter 23 – Enterprise Risk Management 23-1 Chapter 23 Enterprise Risk Management CHAPTER WEB SITES Section Web Address Forward Contracts: The Basics The Payoff Profile Hedging with Forwards Trading in Futures Futures Exchanges Hedging with Futures The Risk Profile Reducing […]

Chapter 23 Problems 1-10 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 24 Options and Corporate Finance Multiple Choice Questions 1. Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period? AACSB: Analytic […]

21. Latetia owns a convertible bond. Which one of the following terms would describe the value of this bond if it were not convertible? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and […]

41. Employee stock options: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-03 The basics of employee stock options and their benefits and disadvantages. Section: 24.4 Topic: Employee stock option A. usually have a positive intrinsic value when issued. […]

61. You sold one call option contract with a strike price of $55 when the option was quoted at $0.80. The option expires today when the value of the underlying stock is $53.70. Ignoring trading costs and taxes, what is […]

81. You are considering a project that has been assigned a discount rate of 14 percent. If you start the project today, you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for […]

95. Rackin Pinion Corporation’s assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of […]

Chapter 24 Question 12 Input Area: Output Area: Coupon rate 5.50% Bond value component 825.20$ Warrant component 174.80$ Price of one warrant 8.74$ Detachable warrants 20 Face value 1,000$ Settlement date 01/01/00 Maturity date 01/01/25 Coupon 55$ Yield 7% Chapter […]

Chapter 24 Problems 1-22 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

9. The value of a call option will increase, and the value of a put option will decrease. inflows and outflows are counted, not contingent cash flows. From a political perspective, debt guarantees would make the deficit larger, so that […]

Chapter 24 – Options and Corporate Finance 24-1 Chapter 24 OPTIONS AND CORPORATE FINANCE CHAPTER WEB SITES Section Web Address A Simple Model: Part II The Fifth Factor A Closer Look Puts and Calls Stock Options Quotations Option Payoffs Value […]

Chapter 25 Option Valuation Multiple Choice Questions 1. Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the stock price may decline so he just purchased a put option on the stock with […]

21. To compute the value of a put using the Black-Scholes option pricing model, you: AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 25-02 The famous Black-Scholes option pricing model and its uses. Section: 25.2 Topic: Put option pricing […]

41. The value of the risky debt of a firm is equal to the value of: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 25-04 How the Black-Scholes model can be used to value the debt and equity of […]

61. What is the value of a 6-month call with a strike price of $25 given the Black-Scholes option pricing model and the following information? AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 25-02 The famous Black-Scholes option pricing […]

$1,000.) AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy EOC: 25-11 Learning Objective: 25-04 How the Black-Scholes model can be used to value the debt and equity of a firm. Section: 25.4 Topic: Black-Scholes and asset value A. $32,000 B. $38,000 […]

CHAPTER 25 OPTION VALUATION Answers to Concepts Review and Critical Thinking Questions 1. Increasing the time to expiration increases the value of an option. The reason is that the option gives the holder the right to buy or sell. The […]

Chapter 25 Question 16 Input Area: Output Area: d10.5728 d20.2328 N(d1)0.7166 N(d2)0.5921 Equity value 4,327.50$ Debt value 17,272.50$ Face value of debt 20,000$ Maturity (months) 12 Market value 21,600$ Standard deviation 34% Risk-free rate 6% Chapter 25 Question 17 Input […]

Chapter 25 – Option Valuation 25-1 CHAPTER 25 OPTION VALUATION CHAPTER WEB SITES Section Web Address The Call Option Pricing Formula Put Option Valuation A Cautionary Note Valuing the Equity in a Leveraged Firm Options and the Valuation of Risky […]

Chapter 25 Problems 1-28 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 26 Mergers and Acquisitions Multiple Choice Questions 1. Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a […]

21. Down River Markets has decided to acquire a controlling interest in Blue Jays by purchasing shares of stock in the public markets. Which of the following statements correctly apply to this acquisition? I. The purchase of publicly-traded shares may […]

41. Which one of the following best defines synergy given the following? VA = Value of firm A VB = Value of firm B VAB = Value of merged firm AB AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: […]

61. The Floral Shoppe and Maggie’s Flowers are all-equity firms. The Floral Shoppe has 2,500 shares outstanding at a market price of $16.50 a share. Maggie’s Flowers has 5,000 shares outstanding at a price of $17 a share. Maggie’s Flowers […]

80. A. $26,700 B. $33,600 C. $38,300 D. $39,200 E. $46,100 Postmerger equity = $28,900 + $9,400 = $38,300 Assume the following balance sheets are stated at book value. What will be the value of the equity account on the […]

2. a. Greenmail refers to the practice of paying unwanted suitors who hold an equity stake in the firm a premium over the market value of their shares to eliminate the potential takeover threat. b. A white knight refers to […]

Chapter 26 – Mergers and Acquisitions 26-1 CHAPTER 26 MERGERS AND ACQUISITIONS CHAPTER WEB SITES Section Web Address The Purchase Method Pooling of Interests More about Goodwill Merger or Consolidation Acquisition of Stock Acquisition of Assets Acquisition Classifications A Note […]

Chapter 26 Problems 1-15 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

Chapter 27 Leasing Multiple Choice Questions 1. Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Ron? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning […]

22. A capital lease is recorded as an asset on the balance sheet in an amount equal to: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 27-01 The types of leases and how the IRS qualifies leases. Section: 27.2 […]

40. Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine. The machine will be depreciated using MACRS over a 4- year period, after which the machine will be worthless. MACRS allows for 33.33 percent, 44.44 percent, […]

58. Frank’s Auto Repair can purchase a new machine for $136,000. The machine has a 4-year life and can be sold at the end of year 4 for $12,000. Frank’s uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, […]

Chapter 27 Problems 1-12 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-in” be installed […]

a. The lease transfers ownership of the asset by the end of the lease. In this case, the firm essentially owns the asset and will have access to its residual value. b. The lessee can purchase the asset at a […]

Chapter 27 – Leasing 27-1 CHAPTER 27 LEASING CHAPTER WEB SITES Section Web Address Leasing versus Buying Operating Leases Financial Leases 27.3 Taxes, the IRS, and Leases 27.4 The Cash Flows from Leasing The Incremental Cash Flows A Note about […]

Chapter 03 Working with Financial Statements Multiple Choice Questions 1. Activities of a firm which require the spending of cash are known as: AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-01 How to standardize financial statements for comparison […]

22. A supplier, who requires payment within ten days, should be most concerned with which one of the following ratios when granting credit? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-02 How to compute and; more importantly; interpret […]

42. A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its cash to decrease its debt while maintaining its current equity and net income. Which one of the following will decrease […]

62. A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in total assets? AACSB: Analytic Blooms: Apply […]

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-02 How to compute and; more importantly; interpret some common ratios. Section: 3.3 Topic: Profitability ratios E. 20.14 percent Return on equity = $42,500/($140,000 + $131,800) = 15.64 percent 77. What […]

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 How to standardize financial statements for comparison purposes. Section: 3.1 Topic: Statement of cash flows 87. BL Lumber has earnings per share of $1.21. The firm’s earnings have been increasing […]

101. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.5. Its return on equity is 15 percent. What is the net income? AACSB: Analytic Blooms: Apply Difficulty: 2 Medium EOC: 3-18 Learning Objective: […]

Chapter 3 Questions 13 -15 Input area: 2011 2012 2011 2012 Output area: 2011 #13 2012 #13 #14 #15 Assets Current assets Cash 9,279$ 2.67% 11,173$ 2.93% 1.2041 1.0964 Accounts receivable 23,683 6.81% 25,760 6.75% 1.0877 0.9904 Inventory 42,636 12.26% […]

assets; the firm potentially has poor liquidity. If pressed by its short-term creditors and suppliers for immediate payment, the firm might have a difficult time meeting its obligations. A current ratio of 1.50 means the firm has 50% more current […]

Chapter 3 Problems 1-30 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 03 – Working with Financial Statements 3-1 Chapter 3 WORKING WITH FINANCIAL STATEMENTS CHAPTER WEB SITES Section Web Address Sources and Uses of Cash The Statement of Cash Flows 3.2 Standardized Financial Statements Common-Size Statements Common-Base Year Financial Statements: […]

Chapter 04 Long-Term Financial Planning and Growth Multiple Choice Questions 1. Phil is working on a financial plan for the next three years. This time period is referred to as which one of the following? AACSB: Analytic Blooms: Understand Difficulty: […]

21. Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-01 How to apply the percentage […]

42. The financial planning process: I. involves internal negotiations among divisions. II. quantifies senior manager’s goals. III. considers only internal factors. IV. reconciles company activities across divisions. AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Some of the […]

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-03 The determinants of a firm’s growth. Section: 4.4 Topic: Internal growth rate B. 8.78 percent C. 9.26 percent D. 9.75 percent E. 10.90 percent Retention ratio = ($2,600 – $950)/$2,600 […]

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-02 How to compute the external financing needed to fund a firm’s growth. Section: 4.4 Topic: External financing need A. -$318.09 B. -$268.49 C. $103.13 D. $350.40 E. $460.56 External financing […]

AACSB: Analytic Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 How to apply the percentage of sales method. Section: 4.3 Topic: Fixed assets A. $0 B. $811 C. $833 D. $908 E. $1,024 Full-capacity sales = $17,300/.96 = $18,020.83 Required […]

91. Seaweed Mfg., Inc. is currently operating at only 84 percent of fixed asset capacity. Current sales are $550,000. What is the maximum rate at which sales can grow before any new fixed assets are needed? AACSB: Analytic Blooms: Apply […]

CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. The reason is that, ultimately, sales are the driving force behind a business. A firm’s assets, 3. The internal growth rate is greater than […]

Chapter 4 Question 16,17 Input area: Output area: 16) Full capacity 695,652$ Maximum sales growth 8.70% 17) Fixed assets / Full capacity sales 0.7044 Total fixed assets 514,193.75$ New fixed assets 24,193.75$ 16) Percent of capacity 92% Current sales 640,000$ […]

Chapter 4 Problems 1-32 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

CHAPTER 4 – 16 So the EFN is: 25. First, we need to calculate full capacity sales, which is: Full capacity sales = $743,000 / .80 Full capacity sales = $928,750 The full capacity ratio at full capacity sales is: […]

Chapter 04 – Long-Term Financial Planning and Growth 4-1 CHAPTER 4 LONG-TERM FINANCIAL PLANNING AND GROWTH CHAPTER WEB SITES Growth as a Financial Management Goal Dimensions of Financial Planning What Can Planning Accomplish? The Balance Sheet A Particular Scenario An […]

Chapter 05 Introduction to Valuation: The Time Value of Money Multiple Choice Questions 1. You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment […]

21. Gerold invested $5,600 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years? AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 05-01 How to determine the future […]

41. A. $778.98 B. $811.13 C. $862.30 D. $948.03 E. $1,020.18 Present value = $40,000 × [1/(1 + .025)6] = $34,491.87 Present value = $26,000 × [1/(1 + .025)5] = $35,354.17 Difference = $35,354.17 – $34,491.87 = $862.30 Theo needs […]

55. Imprudential, Inc. has an unfunded pension liability of $850 million that must be paid in 25 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. The relevant discount […]

maturity if it is to its advantage, i.e., interest rates decline. Given the drop in interest rates needed to make this viable for TMCC, it is unlikely the company will repurchase the security. This is an example of a “call” […]

Chapter 5 Question 11 Output area: Input area: Present value Years Interest rate Future value 1,013.63$ 80 9% 1,000,000$ Chapter 5 Question 12 Input area: Output area: Present value Years Interest rate Future value 50$ 108 4.10% 3,833.97$ Chapter 5 […]

Chapter 5 Problems 1-20 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 05 – Introduction to Valuation: The Time Value of Money 5-1 Chapter 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY CHAPTER WEB SITES Section Web Address www.investopedia.com Investing for a Single Period Investing for More Than One Period […]

Chapter 06 Discounted Cash Flow Valuation Multiple Choice Questions 1. An ordinary annuity is best defined by which one of the following? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 How loan payments are calculated and how to […]

22. How is the principal amount of an interest-only loan repaid? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-03 How loans are amortized or paid off. Section: 6.4 Topic: Interest-only loan A. The principal is forgiven over the […]

39. Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference […]

58. The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project? A. 6.97 percent […]

77. Lucas will receive $7,100, $8,700, and $12,500 each year starting at the end of year one. What is the future value of these cash flows at the end of year five if the interest rate is 9 percent? AACSB: […]

97. What is the effective annual rate of 5.25 percent compounded continuously? AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-04 How interest rates are quoted (and misquoted). Section: 6.3 Topic: Continuous compounding A. 5.27 percent B. 5.39 percent […]

115. You want to be a millionaire when you retire in 40 years. You can earn A 12.5 percent annual return. How much more will you have to save each month if you wait 10 years to start saving versus […]

CHAPTER 6 DISCOUNTED CASH FLOW VALUATION Answers to Concepts Review and Critical Thinking Questions 1. The four pieces are the present value (PV), the periodic cash flow (C), the discount rate (r), and the 9. The problem is that the […]

Chapter 06 – Discounted Cash Flow Valuation 6-1 Chapter 6 DISCOUNTED CASH FLOW VALUATION CHAPTER WEB SITES Section Web Address Pure Discount Loans Interest-Only Loans Amortized Loans Future Value with Multiple Cash Flows Present Value with Multiple Cash Flows A […]

Chapter 6 Question 59 Input area: Year Output area: EAR 5.65% PV of salary offer 40,234,108.52$ PV of salary with increase 42,234,108.52$ Effective quarterly interest rate 1.384% Quarterly salary 1,587,735.13$ 06,500,000$ 15,100,000$ 25,600,000$ 36,100,000$ 47,500,000$ 58,200,000$ 69,000,000$ Requested signing bonus […]

Chapter 6 Question 41 Input area: Output area: Monthly rate 0.710% APR 8.52% Price of sailboat 95,000$ Monthly payment 1,950$ Number of months 60 Chapter 6 Question 42 Input area: Output area: Present value of payments 220,361.04$ Remaining principal 69,638.96$ […]

Chapter 6 Question 21 Input area: Output area: # of months until paid off 46.58 Monthly payment 500$ Discount rate 1.7% Current balance 16,000$ Chapter 6 Question 22 Input area: Output area: Interest rate per week 33.33% APR 1733.33% EAR […]

CHAPTER 6 – 41 Calculator Solutions 2. Enter 8 5% $5,200 N I/Y PV PMT FV Solve for $33,608.71 Enter 5 5% $7,300 N I/Y PV PMT FV Solve for $31,605.18 Enter 8 15% $5,200 N I/Y PV PMT FV […]

CHAPTER 6 – 21 48. The time line is: 0 1 … 180 PV $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 $1,750 This question is asking for the present value of an annuity, but the interest rate changes during […]

Chapter 6 Problems 1-75 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 07 Interest Rates and Bond Valuation Multiple Choice Questions 1. Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Important bond […]

23. Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the: AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields and why they fluctuate. Section: 7.5 Topic: […]

43. Which of the following increase the price sensitivity of a bond to changes in interest rates? I. increase in time to maturity II. decrease in time to maturity III. increase in coupon rate IV. decrease in coupon rate AACSB: […]

64. Last year, you purchased a “TIPS” at par. Since that time, both market interest rates and the inflation rate have increased by 0.25 percent. Your bond has most likely done which one of the following since last year? AACSB: […]

84. Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 […]

102. A Treasury bond is quoted as 99:18 asked and 99:09 bid. What is the bid- ask spread in dollars on a $5,000 face value bond? AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-02 Bond values and yields […]

118. An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 6.2 percent. What does Sam believe the inflation rate will be for the next […]

Chapter 07 – Interest Rates and Bond Valuation Chapter 7 INTEREST RATES AND BOND VALUATION CHAPTER WEB SITES Section Web Address 7.1 bonds.yahoo.com personal.fidelity.com money.cnn.com/markets/bondcenter www.bankrate.com investorguide.com 7.2 www.investinginbonds.com www.finra.org/marketdata www.sifma.org www.sec.gov 7.3 www.standardandpoors.com www.moodys.com www.fitchinv.com www.publicdebt.treas.gov www.brillig.com/debt_clock www.ny.frb.org 7.4 […]

Chapter 7 Problems 1-35 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 7 Question 18 Input area: Settlement date 1/1/2000 Output area: Current yield 8.61% Yield to maturity 8.46% Effective annual rate 8.64% Maturity date 1/1/2018 Annual coupon rate 9.2% Coupons per year 2 Face value (% of par) 100 Bond […]

CHAPTER 7 INTEREST RATES AND BOND VALUATION Answers to Concepts Review and Critical Thinking Questions 5. There are two benefits. First, the company can take advantage of interest rate declines by calling in an issue and replacing it with a […]

CHAPTER 7 – 15 The call value is the difference between this implied bond value and the actual bond price. So, the 33. In general, this is not likely to happen, although it can (and did). The reason this bond […]

Chapter 08 Stock Valuation Multiple Choice Questions 1. What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? AACSB: Analytic Blooms: Understand […]

21. The counter area on the floor of the NYSE where a specialist operates is called a: AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 08-03 The different ways corporate directors are elected to office. Section: 8.3 Topic: Specialist’s […]

41. Hardy Lumber has a capital structure which includes bonds, preferred stock, and common stock. Which of the following rights have most likely been granted to the preferred shareholders? I. right to share in company profits prior to other shareholders […]

62. The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share […]

82. Renew It, Inc., is preparing to pay its first dividend. It is going to pay $0.45, $0.60, and $1 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be […]

101. Suppose you know a company’s stock currently sells for $85 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains […]

Chapter 8 Problems 1-35 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

gains yield is larger. This is easy to see for companies that pay no dividends. For companies that do pay dividends, the dividend yields are rarely over 5 percent and are often much less. 7. Yes. If the dividend grows […]

Chapter 08 – Stock Valuation 8-1 Chapter 8 STOCK VALUATION CHAPTER WEB SITES Section Web Address Stock valuation is more difficult than bond valuation because the cash flows are uncertain, the life is infinite, and the required rate of return […]

Chapter 8 Question 18 Input area: Dividend growth rate – period 1 24% Output area: Price at end of supernormal growth 76.80$ Share price 63.30$ Dividend growth rate – period 2 6% Required return 11% Dividend 1.90$ Chapter 8 Question […]

Chapter 09 Net Present Value and Other Investment Criteria Multiple Choice Questions 1. A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? AACSB: Analytic Blooms: Remember […]

21. Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of […]

41. Roger’s Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: […]

61. You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent? AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy […]

77. Alicia is considering adding toys to her gift shop. She estimates that the cost of inventory will be $7,500. The remodeling expenses and shelving costs are estimated at $1,800. Toy sales are expected to produce net cash inflows of […]

Section: 9.2 Topic: Payback rule 93. You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. […]

104. A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project. AACSB: Analytic Blooms: Apply […]

CHAPTER 9 – 14 19. The MIRR for the project with all three approaches is: Combination approach: In the combination approach, we find the value of all cash outflows at time 0, and the value of all cash inflows at […]

Analyzing the Rule Redeeming Qualities of the Rule Summary of the Rule opportunities is the creation of investment opportunities. Unlike the field of investments, where the analyst more or less takes the investment opportunity set as a given, the field […]

Chapter 9 Problems 1-28 Input boxes in tan Output boxes in yellow Given data in blue Calculations in red Answers in green NOTE: Some functions used in these spreadsheets may require that the “Analysis ToolPak” or “Solver Add-In” be installed […]

Chapter 9 Question 15 Input area: Annual cash flows: Output area: Profitability index at 10% 1.181 Profitability index at 15% 1.092 Profitability index at 22% 0.987 Year 0 (18,000)$ Year 1 10,300$ Year 2 9,200$ Year 3 5,700$ Discount rate […]

CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Answers to Concepts Review and Critical Thinking Questions 1. A payback period less than the project’s life means that the NPV is positive for a zero discount rate, but nothing more […]