1)A furniture store has a sofa on sale for $399.00, with the payment due one year from today. The store is willing to discount the price at an annual rate of 9% if you pay today. What is the amount if you pay today.
2) Dividend growth rate is important to many investors. You are considering investing in a firm after looking at the firm’s dividends over a seven-year period. At the end of the year 2002, the firm paid a dividend of $1.35. At year-end 2009, it paid a dividend of $1.84. What was the average annual growth rate of dividends for this firm?
3) In 1930, the highest paid player in major league baseball was Babe Ruth of the New York Yankees, with an annual salary of $80,000. In 2000, the highest paid player in major league baseball player was Alex Rodriguez, also of the New York Yankees, with a salary of $25,000,000. What was the average annual rate of growth in the top baseball salary over this time period?
4) Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 7% per year, how much money will you have in the account at the end of year three when the last deposit is made?
5) The furniture store offers you no-money-down on a new set of living room furniture. Further, you may pay for the furniture in three equal annual end-of-the-year payments of $1,100 each with the first payment to be made one year from today. If the discount rate is 6%, what is the present value of the furniture payments?
6) Your department at work places $10,000 every year-end into an account earning 5%. The money is used when the corporate office fails to fully finance your profitable projects. The money has not been touched since a first deposit was made exactly six years ago. If the most recent deposit was made today, how much money is currently in the account?
7) If you borrow $50,000 at an annual interest rate of 12% for ten years, what is the annual payment (prior to maturity) on a fully amortized loan?
8) The Cougar Corporation has issued 20-year semi-annual coupon bonds with a face value of $1,000. If the annual coupon rate is 10% and the current yield to maturity is 14%, what is the firm’s current price per bond?
9) Your parents have an investment portfolio of $400,000, and they wish to take out cash flows of $50,000 per year as an ordinary annuity. How long will their portfolio last if the portfolio is invested at an annual rate of 4.90%? Use a calculator to determine your answer.
10) Johnson Construction Inc. has issued 20-year $1,000 face value, 17% annual coupon bonds, with a yield to maturity of 11%. The current price of the bond is
11) Suppose you invest $1,000 today, compounded quarterly, with the annual interest rate of 5.50%. What is your investment worth in one year?
12) Your firm intends to finance the purchase of a new construction crane. The cost is $1,500,000. What is the size of the annual ordinary annuity payment if the loan is amortized over a six-year period at a rate of 8.50%?
13) The next dividend (Div1) is $1.80, the growth rate (g) is 9%, and the required rate of return (r) is 12%. What is the stock price, according to the constant growth dividend model?
14) You want to invest in a stock that pays $5.00 annual cash dividends for the next four years. At the end of the six years, you will sell the stock for $20.00. If you want to earn 12% on this investment, what is a fair price for this stock if you buy it today?
15) Johnson has an annuity due that pays $600 per year for 15 years. What is the present value of the cash flows if they are discounted at an annual rate of 9.50%?
16) Rogue Racing Inc. has $1,000 par value bonds with a coupon rate of 8% per year making semiannual coupon payments. If there are twelve years remaining prior to maturity and these bonds are selling for $896.40, what is the yield to maturity for these bonds?
17) Joe bought a share of stock for $47.50 that paid a dividend of $.92 and sold one year later for $51.38. What was Joe’s dollar profit or loss and holding period return?
18) Consider the following ten-year project. The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years 1 through 10 are $400,000 per year. What is the payback period without discounting cash flows?
19) Assume the following information about the market and JumpMasters’ stock. JumpMasters’ beta = 1.50, the risk-free rate is 3.50%, the market return is 10.0%. Using the SML, what is the expected return for JumpMasters’ stock?
20) Kip owns the following portfolio of securities. What is the beta for the portfolio?
21) Your investment banking firm has estimated what your new issue of bonds is likely to sell for under several different economic conditions. What is the expected (average) selling price of each bond?
22) Willie’s Western Corp. has outstanding nonconvertible preferred stock (cumulative) that pays a quarterly dividend of $1.65. If your required rate of return is 9.5%, what should you be willing to pay for 1000 shares of Willie’s Western?
23) Lincoln Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $85,000 each year. Lincoln expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Lincoln accept the project?
24) In a stream of past dividends, the initial dividend is $1.25 and the most recent dividend is $1.80. The number of years between these two dividends (n) is 9 years. What is the average growth rate during this seven-year period? Use a calculator to determine your answer.
25) Bacon Signs Inc., purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MACRS with the fixed depreciation percentages as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%, etc. The firm has a tax rate of 34%. If the machine is sold at the end of two years for $50,000, what is the cash flow from disposal?
26) Mulligan, Inc. is currently considering an eight-year project that has an initial outlay or cost of $140,000. The cash inflows from its project for years 1 through 8 are the same at $35,000. Mulligan has a discount rate of 13%. Because there is a shortage of funds to finance all good projects, Mulligan wants to compute the profitability index (PI) for each project. That way Mulligan can get an idea as to which project might be a better choice. What is the PI for Mulligan’s current project?
27) Find the Modified Internal Rate of Return (MIRR) for the following series of future cash flows, given a discount rate of 11%: Year 0: -$22,000; Year 1: $5,000; Year 2: $6,000; Year 3: $9,000; Year 4: $7,500; and, Year 5: $8,000.
28) Rogers’ Rotors has debt with a market value of $250,000, preferred stock with a market value of $50,000, and common stock with a market value of $750,000. If debt has before-tax cost of 7%, preferred stock a cost of 9%, common stock a cost of 11%, and the firm has a tax rate of 34%, what is the WACC? 28)
29) Geronimo, Inc. is considering a project that has an initial outlay or cost of $220,000. The respective future cash inflows from its four-year project for years 1 through 4 are: $50,000, $60,000, $80,000, and $90,000, respectively. Geronimo uses the internal rate of return method to evaluate projects. Will Geronimo accept the project if its hurdle rate is 10%?
30) The initial outlay or cost for a four-year project is $1,000,000. The respective cash inflows for years 1, 2, 3 and 4 are: $500,000, $200,000, $300,000, $300,000. What is the discounted payback period if the discount rate is 10%?
31) Your firm has just issued a 20-year $1,000.00 par value, 10% annual coupon bond for a net price of $984.00. Floatation costs are $15 per bond sold. Tax rate is 30%. What is the after-tax cost of debt? Use a financial calculator to determine your answer.
32) You plan to place a $40,000 down payment on a lake cabin in Northern Minnesota in ten years. If you invest in a long-term CD earning an annual rate of 5.50%, how much would you need to invest today to have enough for the down payment in ten years?
33) Orange Electronics Inc. has a profitability ratio of 0.14, an asset turnover ratio of 1.9, a debt to equity ratio of 0.60 and a total asset to equity ratio of 1.60. What is the firm’s ROE?
34) EBIT is $10,000 and interest expense is $3,000. If the tax rate is 30%, what is the net income?
35) Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $8,500,000
Total Sales $10,000,000
Using the information provided, what is the collection cycle for the firm?
36) Explain why is financial leverage so important?
37) The chart below gives information for four classes of U.S. securities over the 10-year time period from 1900 – 1999. Order the securities from highest average annual return to lowest for this time period. Now rank the securities from highest to lowest based on risk. Is the information consistent with what financial theory tells us? Why or why not?
38) Assume that today’s date is August 15, 2010 and that the Rite Aid Bond is an annual-coupon bond. Describe what each of the following terms mean and how each value was determined if appropriate. Par value of the bond is $5,000.
In your answer you should also answer the following questions:
a) Calculate the price of the bond in $$?
b) Calculate annual coupon interest payments.
c) Calculate yield to maturity of the bond.
d) Calculate current yield on the bond.
39) Define authorized shares, issued shares, treasury shares, and outstanding shares. Is a company limited in treasury shares that it may own? Briefly explain.
40) Describe callable bonds. In your description, be sure to include in which situation the company will call the bond back?
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