FINANCE-How much was each entitled to if the interest rate was 4%

1.

In 1880 five
aboriginal trackers were each promised the equivalent of 50 Australian dollars
for helping to capture the notorious outlaw Ned Kelley. In 1999 the
granddaughters of two of the trackers claimed that this reward had not been
paid. The prime minister stated that if this was true, the government would be
happy to pay the $50. However, the granddaughters also claimed that they were
entitled to compound interest.

a. How much was
each entitled to if the interest rate was 4%? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Future value$

b. How much was
each entitled to if the interest rate was 8%? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Future value$

2.

Professor’s
Annuity Corp. offers a lifetime annuity to retiring professors. For a payment
of $77,000 at age 65, the firm will pay the retiring professor $525 a month
until death.

a. If the professor’s remaining life expectancy is 15 years, what is
the monthly rate on this annuity? What is the effective annual rate? (Do not
round intermediate calculations. Round your answers to 2 decimal places.)

Monthly rate on
annuity %
Effective annual
rate %

b. If the monthly interest rate is .75%, what monthly annuity payment
can the firm offer to the retiring professor? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Monthly annuity
payment $

3.

A factory
costs $420,000. You forecast that it will produce cash inflows of $100,000 in
year 1, $160,000 in year 2, and $260,000 in year 3. The discount rate is 10%.

a. Calculate the PV
of cash inflows. (Do not round intermediate calculations. Round your answer to
2 decimal places.)

Present value $

b.
Is the
factory a good investment?

No
Yes

4.

If you earn
8.50% per year on your bank account, how long will it take an account with $100
to double to $200? Use the log formula. (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Number of years

5.

Compute the
present value of a $180 cash flow for the following combinations of discount
rates and times: (Do not round intermediate calculations. Round your answers
to 2 decimal places.)

Present Value
a. r = 12%, t =
8 years $
b. r = 12%, t =
16 years
c. r = 6%, t = 8
years
d. r = 6%, t =
16 years

6.

a. If you take out
an $8,300 car loan that calls for 48 monthly payments starting after 1 month at
an APR of 6%, what is your monthly payment? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Monthly
payment $

b. What is the
effective annual interest rate on the loan? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Effective annual
interest rate %

7.

Refer the table
below:

Maturity
Coupon

Bid Price

Asked Price

Asked Yield, %

2012 May
15

1.375

101:05

101:06

0.78

2013 May
15

3.625

106:31

107:01

1.23

2014 May
15

4.75

111:22

111:23

1.70

2020 May
15

8.75

144:17

144:19

3.44

2025 Aug
15

6.875

133:07

133:11

3.94

2030 May
15

6.25

128:25

128:27

4.12

2040 May
15

4.375

100:28

100:29

4.32

What is the
current yield of the 4.375% 2040 maturity bond? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Current yield %

8.

A 25-year
Treasury bond is issued with face value of $1,000, paying interest of $78 per
year. If market yields increase shortly after the T-bond is issued, what is the
bond’s coupon rate?
(Round your answer
to 1 decimal place.)

Coupon rate %

9.

A bond’s
credit rating provides a guide to its risk. Long-term bonds rated Aa currently
offer yields to maturity of 7.6%. A-rated bonds sell at yields of 7.9%. Assume
a 10-year bond with a coupon rate of 7.1% is downgraded by Moody’s from Aa to A
rating.

a. Calculate the
initial price. (Do not round intermediate calculations. Round your answer to 2
decimal places.)

Initial price $

b. Calculate the
new price. (Do not round intermediate calculations. Round your answer to 2
decimal places.)

New price $

10.

One bond has a
coupon rate of 8.2%, another a coupon rate of 9.6%. Both bonds have 13-year maturities
and sell at a yield to maturity of 8.5%.

a. If their yields to maturity next year are still 8.5%, what is the
rate of return on each bond? (Do not round intermediate calculations. Round
your answers to 1 decimal place.)

Rate of Return
Bond 1 %
Bond 2 %

b.
Does the higher coupon bond give a higher rate of return?

Yes
No

11.

Sure Tea
Co. has issued 6.3% annual coupon bonds that are now selling at a yield to
maturity of 9.2% and current yield of 8.7770%. What is the remaining maturity
of these bonds? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)

Remaining period years

12.

No-Growth
Industries pays out all of its earnings as dividends. It will pay its next $5
per share dividend in a year. The discount rate is 12%.

a. What is the price-earnings ratio of the company? (Do not round
intermediate calculations. Round your answer to 2 decimal places.)

P/E ratio

b. What would the P/E ratio be if the discount rate were 10%? (Round
your answer to 2 decimal places.)

P/E ratio

13.

You expect
a share of stock to pay dividends of $1.80, $1.95, and $2.60 in each of the
next 3 years. You believe the stock will sell for $30 at the end of the third
year.

a. What is the stock price if the discount rate for the stock is 10%?
(Do not round intermediate calculations. Round your answer to 2 decimal
places.)

Stock price $

b. What is the dividend yield? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)

Dividend
yield %

14.

Horse and
Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all
shrinking at a rate of 8% per year.

a. If r = 12% and DIV1 = $5, what is
the value of a share? (Do not round intermediate calculations.)

Value of a
share $

b. What price do you forecast for the stock next year? (Do not round
intermediate calculations. Round your answer to 2 decimal places.)

Stock price $

c. What is
the expected rate of return on the stock? (Do not round intermediate
calculations.)

Expected
rate of return %

15.

Grandiose
Growth has a dividend growth rate of 10%. The discount rate is 9%. The
end-of-year dividend will be $4 per share.

a. What is the present value of the dividend to be paid in year 1?
Year 2? Year 3? (Do not round intermediate calculations. Round your answers to
2 decimal places.)

Present Value
Year 1 $
Year 2
Year 3

16.

Arts and Crafts,
Inc., will pay a dividend of $3 per share in 1 year. It sells at $30 a share
and firms in the same industry provide an expected rate of return of 16%. What
must be the expected growth rate of the company’s dividends? (Do not round
intermediate calculations.)

Expected growth
rate %

17.

Waterworks has a
dividend yield of 8.75%. If its dividend is expected to grow at a constant rate
of 5.75%, what must be the expected rate of return on the company’s stock? (Do
not round intermediate calculations. Round your answer to 2 decimal
places.)

Expected
rate of return %

18.

The following are
the cash flows of two projects:

Year

Project A Project B

0

−$320

−$320

1

150

220

2

150

220

3

150

220

4

150

a. Calculate the
NPV for both projects if the discount rate is 11%? (Do not round intermediate
calculations. Round your answers to 2 decimal places.)

Project NPV
A $
B

b.
Suppose that you can choose only one of these projects. Which would
you choose?

Project B
Project A

19.

The following are
the cash flows of two projects:

Year

Project A Project B

0

−$320

−$320

1

150

220

2

150

220

3

150

220

4

150

a. If the opportunity cost of capital is 11%, calculate NPV for both
projects? (Do not round intermediate calculations. Round your answers to 2
decimal places.)

Project NPV
A $
B

b.
Which of these projects is worth pursuing?

Project A
Project B
Both

20.

The following are
the cash flows of two projects:

Year

Project A Project B

0

−$240

−$240

1

120

140

2

120

140

3

120

140

4

120

What is the payback
period of each project? (Round your answers to 2 decimal places.)

Project Payback Period
A
years

B
years

21.

A house
painting business had revenues of $16,400 and expenses of $9,400. There were no
depreciation expenses. However, the business reported the following changes in
working capital:

Beginning

End

Accounts
receivable

$1,600

$4,900

Accounts
payable 780

340

Calculate net cash
flow for the business for this period.

Net cash
flow $

22.

The owner of a
bicycle repair shop forecasts revenues of $208,000 a year. Variable costs will
be $62,000, and rental costs for the shop are $42,000 a year. Depreciation on
the repair tools will be $22,000. Prepare an income statement for the shop
based on these estimates. The tax rate is 30%. (Input all amounts as
positive values.)

INCOME STATEMENT
$

$

23.

Ilana Industries,
Inc., needs a new lathe. It can buy a new high-speed lathe for $1.2 million.
The lathe will cost $37,000 per year to run, but will save the firm $136,000 in
labor costs, and will be useful for 10 years. Suppose that for tax purposes, the
lathe will be depreciated on a straight-line basis over its 10-year life to a
salvage value of $210,000. The actual market value of the lathe at that time
also will be $210,000. The discount rate is 8%, and the corporate tax rate is
40%. What is the NPV of buying the new lathe? (Negative amount should be
indicated by a minus sign. Enter your answer in dollars not in millions.
Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV $

24.

The owner of a bicycle
repair shop forecasts revenues of $228,000 a year. Variable costs will be
$67,000, and rental costs for the shop are $47,000 a year. Depreciation on the
repair tools will be $27,000. The tax rate is 30%.

a. Calculate
operating cash flow for the year by using all three methods: (a) adjusted
accounting profits; (b) cash inflow/cash outflow analysis; and (c) the
depreciation tax shield approach.

Method Operating Cash Flow
Adjusted accounting
profits $
Cash inflow/cash
outflow analysis
Depreciation tax
shield approach

b.
Are the above answers equal?

Yes
No

25.

Blooper Industries
must replace its magnoosium purification system. Quick & Dirty Systems
sells a relatively cheap purification system for $15 million. The system will
last 5 years. Do-It-Right sells a sturdier but more expensive system for $21
million; it will last for 7 years. Both systems entail $2 million in operating
costs; both will be depreciated straight-line to a final value of zero over
their useful lives; neither will have any salvage value at the end of its life.
The firm’s tax rate is 20%, and the discount rate is 12%.

a. Calculate the
equivalent annual cost of each alternative: (Do not round intermediate
calculations. Enter your answers in millions rounded to 3 decimal places.)

Equivalent Annual Cost
Quick &
Dirty $ million
Do-It-Right million

b.
Which
system should Blooper install?

Quick & Dirty
Do-It-Right

26.

Johnny’s Lunches is
considering purchasing a new, energy-efficient grill. The grill will cost
$35,000 and will be depreciated according to the 3-year MACRS schedule. It will
be sold for scrap metal after 3 years for $8,750. The grill will have no effect
on revenues but will save Johnny’s $17,500 per year in energy expenses. The tax
rate is 30%. Use MACRS depreciation schedule.
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a. What are the
operating cash flows in years 1 to 3? (Do not round intermediate calculations.
Round your answers to 2 decimal places.)

Year

Operating Cash Flows

1

$

2

3

b. What are total cash flows in years 1 to 3? (Negative amounts should
be indicated by a minus sign. Do not round intermediate calculations. Round
your answers to 2 decimal places.)

Time

Total Cash Flows

0

$

1

2

3

c.

If the discount rate
is 12%, should the grill be purchased?

Yes

No

27.

Talia’s
Tutus bought a new sewing machine for $60,000 that will be depreciated using
the MACRS depreciation schedule for a 5-year
recovery period.

a.
Find the depreciation charge each year.

Year Depreciation
1 $
2
3
4
5
6

b. If the sewing machine is sold after 2 years for $40,000, what will
be the after-tax proceeds on the sale if the firm’s tax bracket is 40%?

After-tax proceeds $

28.

In a slow year,
Deutsche Burgers will produce 2.8 million hamburgers at a total cost of $4.2
million. In a good year, it can produce 5.3 million hamburgers at a total cost
of $6.0 million. What are the variable and fixed costs of hamburger production?
(Enter your answers in dollars not in millions. Round “Variable
cost” to 2 decimal places.)

Variable cost

$

per burger

Fixed
cost

$

29.

Modern Artifacts
can produce keepsakes that will be sold for $100 each. Nondepreciation fixed costs
are $1,300 per year and variable costs are $70 per unit.

a. If the project requires an initial investment of $4,000 and is
expected to last for 5 years and the firm pays no taxes. The initial investment
will be depreciated straight-line over 5 years to a final value of zero, and
the discount rate is 12%. What are the accounting and NPV break-even levels of
sales? (Do not round intermediate calculations. Round your answers to the
nearest whole number.)

Accounting
break-even levels of sales units
NPV
break-even levels of sales units

b. What will be the
accounting and NPV break-even levels of sales, if the firm’s tax rate is 30%?
(Do not round intermediate calculations. Round your answers to the nearest
whole number.)

Accounting break-even levels of
sales units
NPV
break-even levels of sales units

30.A silver mine can
yield 13,000 ounces of silver at a variable cost of $32 per ounce. The fixed
costs of operating the mine are $52,000 per year. In half the years, silver can
be sold for $48 per ounce; in the other years, silver can be sold for only $24
per ounce. Ignore taxes.a. What is the
average cash flow you will receive from the mine if it is always kept in
operation and the silver always is sold in the year it is mined?Average cash
flow $b. Now suppose you
can shut down the mine in years of low silver prices. Calculate the average
cash flow from the mine.Average cash
flow $