Q&A Hero

Q: You are given the following cash flow information. The appropriate discount rate is 12 percent for Years 1u22125 and 10 percent for Years 6u221210. Payments are received at the end of the year. Year Amount 15 $20,000 610 $25,000 What should you be willing to pay right now to receive the income stream above? a. $166,866 b. $158,791 c. $225,000 d. $125,870 e. $198,433

Q: You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent? a. $3,277 b. $4,804 c. $5,302 d. $4,289 e. $2,804

Q: Express Airlines is considering the purchase of an aircraft to supplement its current fleet. In estimating the impact of adding this aircraft to the fleet, management has developed the following expected cash flows: End of Year 1 u2212$ 1,000 2 $100,000 3 $100,000 4 $100,000 5 $100,000 6 $100,000 7 u2212$300,000 If the discount rate is 10 percent, what is the present value of these estimated flows? a. $379,080 b. $224,211 c. $189,760 d. $154,869 e. $199,000

Q: Assume that your required rate of return is 12 percent and you are given the following stream of cash flows: Year Cash Flow 0 $10,000 1 15,000 2 15,000 3 15,000 4 15,000 5 20,000 If payments are made at the end of each period, what is the present value of the cash flow stream? a. $66,909 b. $57,323 c. $61,815 d. $52,345 e. $62,029

Q: On January 1, 2006, a graduate student developed a 5-year financial plan which would provide enough money at the end of her graduate work (January 1, 2011) to open a business of her own. Her plan was to deposit $8,000 per year for 5 years, starting immediately, into an account paying 10 percent compounded annually. Her activities proceeded according to plan except that at the end of her third year (1/1/09) she withdrew $5,000 to take a Caribbean cruise, at the end of the fourth year (1/1/10) she withdrew $5,000 to buy a used Prelude, and at the end of the fifth year (1/1/11) she had to withdraw $5,000 to pay to have her dissertation typed. Her account, at the end of the fifth year, was less than the amount she had originally planned on by how much? a. $15,373 b. $16,550 c. $32,290 d. $38,352 e. $13,975

Q: You want to buy a Nissan 300ZX on your 27th birthday. You have priced these cars and found that they currently sell for $30,000. You believe that the price will increase by 5 percent per year until you are ready to buy. You can presently invest to earn 14 percent. If you just turned 20 years old, how much must you invest at the end of each of the next 7 years to be able to purchase the Nissan in 7 years? a. $4,945.57 b. $3,933.93 c. $7,714.72 d. $3,450.82 e. $6,030.43

Q: Your subscription to Jogger's World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100. Your opportunity cost is 7 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.) a. 15 years b. 10 years c. 18 years d. 7 years e. 8 years.

Q: As the winning contestant in a television game show, you are considering the prizes to be awarded. You must indicate to the sponsor which of the following two choices you prefer, assuming you want to maximize your wealth. Assume it is now January 1, and there is no danger whatever that the sponsor won't pay off. (1) $1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying 12 percent simple annual rate, but compounded monthly (to be left on deposit for the year). (2) $12,750 at the end of the year. Which one would you choose? a. Choice 1 b. Choice 2 c. Choice 1, if the payments were made at the end of the year. d. The choice would depend on how soon you need the money. e. Either one, since they have the same present value.

Q: You just graduated, and you plan to work for 10 years and then to leave for the Australian "Outback" bush country. You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years. These savings cash flows will start one year from now. In addition, your family has just given you a $5,000 graduation gift. If you put the gift now, and your future savings when they start, into an account which pays 8 percent compounded annually, what will your financial "stake" be when you leave for Australia 10 years from now? a. $21,432 b. $28,393 c. $16,651 d. $31,148 e. $20,000

Q: You expect to receive $1,000 at the end of each of the next 3 years. You will deposit these payments into an account which pays 10 percent compounded semiannually. What is the future value of these payments, that is, the value at the end of the third year? a. $3,000 b. $3,310 c. $3,318 d. $3,401 e. $3,438

Q: Assume you are to receive a 20-year annuity with annual payments of $50. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 20. You will invest each payment in an account that pays 10 percent. What will be the value in your account at the end of Year 30? a. $6,354.81 b. $7,427.83 c. $7,922.33 d. $8,591.00 e. $6,752.46

Q: Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually. If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20? a. $52,821.19 b. $57,900.83 c. $58,988.19 d. $62,527.47 e. $64,150

Q: Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? a. 0.25% b. 0.50% c. 0.70% d. 1.00% e. 1.25%

Q: South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-of-year installments of $2,504.56. What annual interest rate is the company paying? a. 7% b. 8% c. 9% d. 10% e. 11%

Q: At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years. How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%? a. 12 years b. 15 years c. 18 years d. 20 years e. 23 years

Q: In 1981 the average tuition for one year at a certain state school was $1,800. Thirty years later, in 2011, the average cost was $13,700. What was the growth rate in tuition over the 30-year period? a. 12% b. 9% c. 6% d. 7% e. 8%

Q: If $100 is placed in an account that earns a simple 4 percent, compounded quarterly, what will it be worth in 5 years? a. $122.02 b. $105.10 c. $135.41 d. $120.90 e. $117.48

Q: Suppose the present value of a 2-year ordinary annuity is $100. If the discount rate is 10 percent, what must be the annual cash flow? a. $65.45 b. $82.64 c. $57.62 d. $53.78 e. $79.22

Q: Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows? a. $9,851 b. $13,250 c. $11,714 d. $15,129 e. $17,353

Q: If a 5-year regular annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment? a. $240.42 b. $263.80 c. $300.20 d. $315.38 e. $346.87

Q: What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate? a. $670.43 b. $842.91 c. $1,169.56 d. $1,348.48 e. $1,522.64

Q: What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate? a. $670.44 b. $842.91 c. $1,169.56 d. $1,522.64 e. $1,348.48

Q: You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? a. $1,171 b. $1,126 c. $1,082 d. $1,163 e. $1,008

Q: If you presently have $6,000 invested at a rate of 15 percent, how many years will it take for your investment to triple? (Round up to obtain a whole number of years if necessary.) a. 2 years b. 4 years c. 6 years d. 8 years e. 10 years

Q: At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.) a. 5 b. 8 c. 6 d. 10 e. 9

Q: A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent, compounded annually, and we guarantee to double your money sooner than you imagine." Ignoring taxes, how long would it take to double your money at a simple rate of 14 percent, compounded annually? a. Approximately 3.5 years b. Approximately 5 years c. Exactly 7 years d. Approximately 10 years e. Exactly 14 years

Q: Which of the following statements is most correct? a. If annual compounding is used, the effective annual rate equals the simple rate. b. If annual compounding is used, the effective annual rate equals the periodic rate. c. If a loan has a 12 percent simple rate with semiannual compounding, its effective annual rate is equal to 11/66 percent. d. Both answers a and b are correct. e. Both answers a and c are correct.

Q: Your employer has agreed to make 80 quarterly payments of $400 each into a trust account to fund your early retirement. The first payment will be made 3 months from now. At the end of 20 years (80 payments), you will be paid 10 equal annual payments, with the first payment to be made at the beginning of Year 21 (or the end of Year 20). The funds will be invested at a simple rate of 8.0 percent, quarterly compounding, during both the accumulation and the distribution periods. How large will each of your 10 receipts be? (Hint: You must find the effective annual rate and use it in one of your calculations.) a. $7,561 b. $10,789 c. $11,678 d. $12,342 e. $13,119

Q: You have some money on deposit in a bank account which pays a simple (or quoted) rate of 8.0944 percent, but with interest compounded daily (using a 365-day year). Your friend owns a security which calls for the payment of $10,000 after 27 months. The security is just as safe as your bank deposit, and your friend offers to sell it to you for $8,000. If you buy the security, by how much will the effective annual rate of return on your investment change? a. 1.87% b. 1.53% c. 2.00% d. 0.96% e. 0.44%

Q: Hillary is trying to determine the cost of health care to college students, and parents' ability to cover those costs. She assumes that the cost of one year of health care for a college student is $1,000 today, that the average student is 18 when he or she enters college, that inflation in health care cost is rising at the rate of 10 percent per year, and that parents can save $100 per year to help cover their children's costs. All payments occur at the end of the relevant period, and the $100/year savings will stop the day the child enters college (hence 18 payments will be made). Savings can be invested at a simple rate of 6 percent, annual compounding. Hillary wants a health care plan which covers the fully inflated cost of health care for a student for 4 years, during years 19 through 22 (with payments made at the end of years 19 through 22). How much would the government have to set aside now (when a child is born), to supplement the average parent's share of a child's college health care cost? The lump sum the government sets aside will also be invested at 6 percent, annual compounding. a. $1,076 b. $3,997.81 c. $5,674.23 d. $7,472.08 e. $8,554.84

Q: You will receive a $100 annual perpetuity, the first payment to be received now, at Year 0, a $300 annual perpetuity payable starting at the end of Year 5, and a $200 semiannual (2 payments per year) perpetuity payable starting midway through Year 10. If you require an effective annual interest rate of 14.49 percent, what is the present value of all three perpetuities together at Year 0? (Hint: The semiannual annuity can be thought of as two annual annuities.) a. $2,091.86 b. $2,785.14 c. $4,213.51 d. Infinite; the present value of any perpetuity is infinite. e. Cannot determine the value since some payments are annually and some semiannually.

Q: You are currently saving for your child's college education. The current cost of college is $10,000 a year. You expect that college costs will continue to increase at a rate of 5 percent a year. Your child is scheduled to begin attending a four-year college 10 years from now (i.e., college payments will be made at t = 10, t = 11, t = 12, and t = 13). You currently have $25,000 in an account which earns 6 percent after taxes. You would like to have all of the necessary savings by the time your child enters college, and you would like to contribute a constant amount at the beginning of each of the next 10 years in order to provide the necessary amount. (You want to make 10 equal contributions starting in Year 0 and ending at Year 9.) How much should you contribute to the account each year in order to fully provide for your child's education? a. $1,133.16 b. $1,393.42 c. $1,477.02 d. $1,507.81 e. $1,622.33

Q: You are considering an investment in a 40-year security. The security will pay $25 a year at the end of each of the first three years. The security will then pay $30 a year at the end of each of the next 20 years. The simple interest rate is assumed to be 8 percent, and the current price (present value) of the security is $360.39. Given this information, what is the equal annual payment to be received from Year 24 through Year 40 (i.e., for 17 years)? a. $35 b. $38 c. $40 d. $45 e. $50

Q: Your client just turned 75 years old and plans on retiring in 10 years on her 85th birthday. She is saving money today for her retirement and is establishing a retirement account with your office. She would like to withdraw money from her retirement account on her birthday each year until she dies. She would ideally like to withdraw $50,000 on her 85th birthday, and increase her withdrawals 10 percent a year through her 89th birthday (i.e., she would like to withdraw $73,205 on her 89th birthday). She plans to die on her 90th birthday, at which time she would like to leave $200,000 to her descendants. Your client currently has $100,000. You estimate that the money in the retirement account will earn 8 percent a year over the next 15 years. Your client plans to contribute an equal amount of money each year until her retirement. Her first contribution will come in one year; her tenth and final contribution will come in ten years (on her 85th birthday). How much should she contribute each year in order to meet her objectives? a. $12,401.59 b. $12,998.63 c. $13,243.18 d. $13,759.44 e. $14,021.53

Q: Your father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years. Suppose your father wants to have a real income of $40,000 in today's dollars in each year after he retires. His retirement income will start the day he retires, 2 years from today, and he will receive a total of 3 retirement payments. Inflation is expected to be constant at 5 percent. Your father has $100,000 in savings now, and he can earn 8 percent on savings now and in the future. How much must he save each year, starting today, to meet his retirement goals? a. $1,863 b. $2,034 c. $2,716 d. $5,350 e. $6,102

Q: Your father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years. He wants a retirement income which has, in the first year, the same purchasing power as $40,000 has today. However, his retirement income will be of a fixed amount, so his real income will decline over time. His retirement income will start the day he retires, 2 years from today, and he will receive a total of 3 retirement payments. Inflation is expected to be constant at 5 percent. Your father has $100,000 in savings now, and he can earn 8 percent on savings now and in the future. How much must he save each year, starting today, to meet his retirement goals? a. $1,863 b. $2,034 c. $2,716 d. $5,350 e. $6,102

Q: Assume that you just had a child, and you are now planning for her college education. You would like to make 43 equal payments over the next 21 years (the first payment to be made immediately, all other payments to be made at 6-month intervals, with the final payment to be made at her 21st birthday) so that you will be able to cover her expected expenses while in school. You expect to pay expenses on her 18th, 19th, 20th, and 21st birthdays. Assume that the current (time period 0) annual cost of college is $6,000, that you expect annual inflation to be 8 percent for the next 5 years, and then 5 percent thereafter. If you expect to be able to earn a return of 4 percent every 6 months on your investments (a simple rate of 8 percent with semiannual compounding), what will be the amount of each of the 43 payments? a. $705.86 b. $731.93 c. $692.15 d. $650.46 e. $785.72

Q: You have just purchased a life insurance policy that requires you to make 40 semiannual payments of $350 each, where the first payment is due in 6 months. The insurance company has guaranteed that these payments will be invested to earn you an effective annual rate of 8.16 percent, although interest is to be compounded semiannually. At the end of 20 years (40 payments), the policy will mature. The insurance company will pay out the proceeds of this policy to you in 10 equal annual payments, with the first payment to be made one year after the policy matures. If the effective interest rate remains at 8.16 percent, how much will you receive during each of the 10 years? a. $6,113.20 b. $5,244.62 c. $5,792.21 d. $4,992.39 e. $4,723.81

Q: You plan to invest $2,500 in a money market account which will pay an annual stated (simple) interest rate of 8.75 percent, but which compounds interest on a weekly basis. If you leave this money on deposit for one year (52 weeks), what will be your ending balance when you close the account? a. $2,583.28 b. $2,611.72 c. $2,681.00 d. $2,703.46 e. $2,728.50

Q: Your lease calls for payments of $500 at the end of each month for the next 12 months. Now your landlord offers you a new 1-year lease which calls for zero rent for 3 months, then rental payments of $700 at the end of each month for the next 9 months. You keep your money in a bank time deposit that pays a simple annual rate of 5 percent. By what amount would your net worth change if you accept the new lease? (Hint: Your return per month is 5%/12 = 0.4166667%.) a. u2212$509.81 b. u2212$253.62 c. +$125.30 d. +$253.62 e. +$509.81

Q: Your company must make payments of $100,000 each year for 10 years, with the first payment to be made 10 years from today. To prepare for these payments, your company must make 10 equal annual deposits into an account which pays a simple interest rate of 7 percent, daily compounding (360-day year). Funds will remain in the account during both the accumulation period (the first 10 years) and the distribution period (the last 10 years), and the same interest rate will be earned throughout the entire 20 years. The first deposit will be made immediately. How large must each deposit be? a. $47,821.11 b. $49,661.86 c. $51,234.67 d. $52,497.33 e. $53,262.39

Q: You have a 30-year mortgage with a simple annual interest rate of 8.5 percent. The monthly payment is $1,000. What percentage of your total payments over the first three years goes toward the repayment of principal? a. 1.50% b. 3.42% c. 5.23% d. 6.75% e. 8.94%

Q: The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding. The loan is to be amortized in end-of-quarter payments over its 3-year life. How much interest (in dollars) will your company have to pay during the second quarter? a. $15,675.19 b. $18,508.81 c. $21,205.33 d. $24,678.89 e. $28,111.66

Q: Your company is planning to borrow $1,000,000 on a 5-year, 15 percent, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal? a. 29.83% b. 57.18% c. 35.02% d. 64.45% e. 72.36%

Q: You have just taken out a 30-year mortgage on your new home for $120,000. This mortgage is to be repaid in 360 equal monthly installments. If the stated (simple) annual interest rate is 14.75 percent, what is the amount of each of the monthly installments? a. $1,515.00 b. $1,472.38 c. $1,493.41 d. $1,522.85 e. $1,440.92

Q: Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling some securities which call for four payments, $50 at the end of each of the next 3 years, plus a payment of $1,050 at the end of Year 4. Your friend says she can get you some of these securities at a cost of $900 each. Your money is now invested in a bank that pays an 8 percent simple (quoted) interest rate, but with quarterly compounding. You regard the securities as being just as safe, and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of the securities to decide whether they are a good investment. What is their present value to you? a. $1,000 b. $866 c. $1,050 d. $901 e. $893

Q: Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually. Bank B offers a 2-year CD that is compounded semi-annually. The CDs have identical risk. What is the stated, or simple, rate that Bank B would have to offer to make you indifferent between the two investments? a. 9.67% b. 9.76% c. 9.83% d. 9.87% e. 9.93%

Q: You have just borrowed $20,000 to buy a new car. The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate on this loan? a. 12.68% b. 14.12% c. 12.00% d. 13.25% e. 15.08%

Q: You have just taken out a 30-year, $120,000 mortgage on your new home. This mortgage is to be repaid in 360 equal end-of-month installments. If each of the monthly installments is $1,500, what is the effective annual interest rate on this mortgage? a. 15.87% b. 14.75% c. 13.38% d. 16.25% e. 16.49%

Q: You can deposit your savings at the Darlington National Bank, which offers to pay 12.6 percent interest compounded monthly, or at the Bartlett Bank, which will pay interest of 11.5 percent compounded daily. (Assume 365 days in a year.) Which bank offers the higher effective annual rate? a. Darlington National Bank. b. Bartlett Bank. c. Both banks offer the same effective rate. d. Cannot be determined from the information provided. e. Workable only if the banks use the same compounding period.

Q: A bank pays a quoted annual (simple) interest rate of 8 percent. However, it pays interest (compounds) daily using a 365-day year. What is the effective annual rate of return? a. 7.86% b. 7.54% c. 8.57% d. 8.33% e. 9.21%

Q: Suppose you put $100 into a savings account today, the account pays a simple annual interest rate of 6 percent, but compounded semiannually, and you withdraw $100 after 6 months. What would your ending balance be 20 years after the initial $100 deposit was made? a. $226.20 b. $115.35 c. $62.91 d. $9.50 e. $3.00

Q: Bank One currently charges a 10 percent simple rate on a car loan where the interest is compounded semiannually. Bank Two offers a car loan where the interest is compounded quarterly. What simple rate would Bank Two have to charge in order to earn the same effective annual rate that is earned by Bank One? a. 9.25% b. 9.88% c. 10.00% d. 10.25% e. 10.42%

Q: You want to borrow $1,000 from a friend for one year, and you propose to pay her $1,120 at the end of the year. She agrees to lend you the $1,000, but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 at the end of the 12th month. How much higher is the effective annual rate under your friend's proposal than under your proposal? a. 0.00% b. 0.45% c. 0.68% d. 0.89% e. 1.00%

Q: You have just taken out an installment loan for $100,000. Assume that the loan will be repaid in 12 equal monthly installments of $9,456 and that the first payment will be due one month from today. How much of your third monthly payment will go toward the repayment of principal? a. $7,722 b. $6,359.12 c. $7,212.50 d. $7,925.88 e. $8,333.33

Q: Assume that you are graduating, that you plan to work for 4 years, and then to go to law school for 3 years. Right now, going to law school would require $17,000 per year (for tuition, books, living expenses, etc.), but you expect this cost to rise by 8 percent per year in all future years. You now have $25,000 invested in an investment account which pays a simple annual rate of 9 percent, quarterly compounding, and you expect that rate of return to continue into the future. You want to maintain the same standard of living while in law school that $17,000 per year would currently provide. You plan to save and to make 4 equal payments (deposits) which will be added to your account at the end of each of the next 4 years; these new deposits will earn the same rate as your investment account currently earns. How large must each of the 4 payments be in order to permit you to make 3 withdrawals, at the beginning of each of your 3 years in law school? (Note: (1) The first payment is made a year from today and the last payment 4 years from today, (2) the first withdrawal is made 4 years from today, and (3) the withdrawals will not be of a constant amount.) a. $13,242.67 b. $6,562.13 c. $10,440.00 d. $7,153.56 e. $14,922.85

Q: Your parents start saving for your sister's college education. She will begin college when she turns age 18 and will need $4,000 at that time and at the end of each of the following 3 years. They will make a deposit at the end of this year in an account which pays 6 percent compounded annually, and an identical deposit at the end of each year with the last deposit occurring when she turns age 18. If an annual deposit of $1,484 will allow them to reach their goal, how old is your sister now? a. 13 b. 8 c. 14 d. 12 e. 10

Q: Find the present value of an income stream which has a negative flow of $100 per year for 3 years, a positive flow of $200 in the 4th year, and a positive flow of $300 per year in Years 5 through 8. The appropriate discount rate is 4 percent for each of the first 3 years and 5 percent for each of the later years. Thus, a cash flow accruing in Year 8 should be discounted at 5 percent for some years and 4 percent in other years. All payments occur at year-end. a. $528.21 b. $1,329.00 c. $792.49 d. $1,046.41 e. $875.18

Q: You are currently at time period 0, and you will receive the first payment on an annual payment annuity of $100 in perpetuity at the end of this year. Six full years from now you will receive the first payment on an additional $150 in perpetuity, and at the end of time period 10 you will receive the first payment on an additional $200 in perpetuity. If you require a 10 percent rate of return, what is the combined present value of these three perpetuities? a. $2,349.50 b. $2,526.85 c. $2,685.42 d. $2,779.58 e. $2,975.40

Q: Your mother's employer offers a tax-deferred retirement plan (a 401-b plan, which was authorized by Congress to encourage savings) which would permit her to invest, tax-free until she retires, up to 15 percent of her salary. Once you are out of school (one year from today), she figures she can save $1,000 every 6 months, or $2,000 per year. The insurance company which manages the retirement fund promises to pay a stated (or simple) rate of 12 percent per year, but with quarterly compounding. If your mother invests $1,000 each six months, starting six months after you graduate (or 18 months from today), how much will she have 5 years from now, assuming the last payment is made at the end of Year 5? (Hint: She will make a total of 8 payments.) a. $12,300 b. $12,462 c. $9,897 d. $9,929 e. $10,000

Q: Steaks Galore needs to arrange financing for its expansion program. One bank offers to lend the required $1,000,000 on a loan which requires interest to be paid at the end of each quarter. The quoted rate is 10 percent, and the principal must be repaid at the end of the year. A second lender offers 9 percent, daily compounding (365-day year), with interest and principal due at the end of the year. What is the difference in the effective annual rates (EFF%) charged by the two banks? a. 0.31% b. 0.53% c. 0.75% d. 0.96% e. 1.25%

Q: If it were evaluated with an interest rate of 0 percent, a 10-year regular annuity would have a present value of $3,755. If the future (compounded) value of this annuity, evaluated at Year 10, is $5,440.22, what effective annual interest rate must the analyst be using to find the future value? a. 7% b. 8% c. 9% d. 10% e. 11%

Q: In its first year of operations, 2001, the Gourmet Cheese Shoppe had earnings per share (EPS) of $0.26. Four years later, in 2005, EPS was up to $0.38, and 7 years after that, in 2012, EPS was up to $0.535. It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained. What are the rates of growth for the earlier period and for the later period? a. 6%; 5% b. 6%; 3% c. 10%; 8% d. 10%; 5% e. 12%; 7%

Q: Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago. Currently, its assets total $100,000. If growth continues at the current rate of 12 percent compounded quarterly, what will total assets be in 21/2 years? a. $142,571 b. $126,678 c. $148,016 d. $136,855 e. $134,392

Q: Refer to Trident Food Corporation. How many units of inventory must Trident Foods sell if it wants to operate at its financial breakeven point? a. 2,000 b. 500 c. 4,800 d. 2,280 e. 6,800

Q: You have been given the information below on the Crum Company. Crum expects sales to grow by 50% in 2011, and operating costs should increase at the same rate. Fixed assets were being operated at 40% of capacity in 2010, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase at the same rate as sales during 2011. The company plans to finance any external funds needed as 35% notes payable and 65% common stock. After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected balance sheet method? Information on the Crum Company: 2010 2011 1st pass 2011 2nd pass Sales $1,000.00 Operating costs 800.00 EBIT $ 200.00 Interest 16.00 EBT $ 184.00 Taxes (40%) 73.60 Net Income $ 110.40 Dividends (60%) 66.24 Add'n to R.E. $ 44.16 Current Assets $ 700.00 Net fixed Assets 300.00 Total assets $1,000.00 A/P and Accruals $ 150.00 N/P 8.00% 200.00 Common stock 150.00 Retained earnings 500.00 Total Liab & Equity $1,000.00 AFN Profit Margin 11.04% ROE 16.98% Debt/Assets 35.00% Current ratio 2.00 times Payout Ratio 60.00% AFN Financing: Weights: Dollars: Interest Expense: N/P 0.3500 Common Stock 0.6500 Growth rate: 50.00% 1.0000 a. 16.98% b. 23.73% c. 25.68% d. 19.61% e. 23.24%

Q: Stromburg Corporation makes surveillance equipment for intelligence organizations. Its sales are $75,000,000. Fixed operating costs, including research and development, are $40,000,000, while variable costs amount to 30% of sales. Stromburg plans an expansion which will generate additional fixed costs of $15,000,000, decrease variable costs to 25% of sales, and also permit sales to increase to $100,000,000. What is Stromburg's DOL at the new projected sales level? a. 3.75 b. 4.20 c. 3.50 d. 4.67 e. 3.33

Q: Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT). The firm's current DOL is 2.5. It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units. Last year's EBIT was $60,000. Based on a DOL of 2.5, what is this year's projected EBIT with the increase in sales? a. $60,000 b. $175,000 c. $100,000 d. $90,000 e. $114,000

Q: Marcus Corporation currently sells 150,000 units a year at a price of $4.00 a unit. Its variable costs are approximately 30% of sales, and its fixed operating costs amount to 50% of revenues at its current output level. Although fixed costs are based on revenues at the current output level, the cost level is fixed. What is Marcus' degree of operating leverage in sales dollars? a. 1.0 b. 2.2 c. 3.5 d. 4.0 e. 5.0

Q: Martin Corporation currently sells 180,000 units per year at a price of $7.00 per unit; its variable cost is $4.20 per unit; and fixed operating costs are $400,000. Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4.48 per unit. If Martin expands it expects to sell 270,000 units at $7.00 per unit. By how much will Martin's operating breakeven sales dollar level change? a. $183,333 b. $456,500 c. $805,556 d. $910,667 e. $1,200,000

Q: A firm has the following balance sheet: Cash $ 10 Accounts payable $ 10 Accounts receivable 10 Notes payable 20 Inventories 10 Long-term debt 40 Fixed assets 90 Common stock 40 Retained earnings 10 Total assets $120 Total liabilities and equity $120 Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $10 per year for the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60 percent. Assume that fixed assets cannot be sold. What are the total external financing requirements for the entire 4 years, i.e., the total AFN for the 4-year period? a. $4.00 b. $2.00 c. u2212$0.80 (Surplus) d. u2212$14.00 (Surplus) e. $0

Q: Manufacturer's Inc. estimates that its interest charges for this year will be $700 and that its net income will be $3,000. Assuming its average tax rate is 30%, what is the company's estimated times interest earned ratio? a. 2.40 b. 4.25 c. 5.33 d. 7.12 e. 7.75

Q: Lone Star Plastics has the following data: Assets: $100,000 Profit margin: 6.0% Tax rate: 40% Debt ratio: 40.0% Interest rate: 8.0% Total asset turnover: 3.0 What is Lone Star's EBIT? a. $3,200 b. $12,000 c. $18,000 d. $30,000 e. $33,200

Q: Collins Company had the following partial balance sheet and complete income statement information for 2010: Balance Sheet: Cash $ 20 A/R 1,000 Inventories 2,000 Total current assets $3,020 Net fixed assets 2,980 Total assets $6,000 Income Statement: Sales $10,000 Cost of goods sold 9,200 EBIT 400 EBT $ 400 Taxes (40%) 160 Net Income $ 240 The industry average DSO is 30 (360-day basis). Collins plans to change its credit policy so as to cause its DSO to equal the industry average, and this change is expected to have no effect on either sales or cost of goods sold. If the cash generated from reducing receivables is used to retire debt (which was outstanding all last year and which has a 10% interest rate), what will Collins' debt ratio (Total debt/Total assets) be after the change in DSO is reflected in the balance sheet? a. 33.33% b. 45.28% c. 52.75% d. 60.00% e. 65.71%

Q: Tapley Dental Supply Company has the following data: Net income: $240 Sales: $10,000 Total assets: $6,000 Debt ratio: 75% TIE ratio: 2.0 Current ratio: 1.2 If Tapley could streamline operations, cut operating costs, and raise net income to $300, without affecting sales or the balance sheet (the additional profits will be paid out as dividends), by how much would its ROE increase? a. 3.00% b. 3.50% c. 4.00% d. 4.25% e. 5.50%

Q: Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities.) a. Fixed assets are sold for cash. b. Cash is used to purchase inventories. c. Cash is used to pay off accounts payable. d. Accounts receivable are collected. e. Long-term debt is issued to pay off a short-term bank loan.

Q: Retailers Inc. and Computer Corp. each have assets of $10,000 and a return on common equity equal to 15%. Retailers has twice as much debt and twice as many sales relative to Computer Corp. Retailers' net income equals $750, and its total asset turnover is equal to 3. What is Computer Corp.'s profit margin? a. 2.50% b. 5.00% c. 7.50% d. 10.00% e. 12.50%

Q: Lombardi Trucking Company has the following data: Assets: $10,000 Profit margin: 3.0% Debt ratio: 60.0% Interest rate: 10.0% Tax rate: 40% Total asset turnover: 2.0 What is Lombardi's TIE ratio? a. 0.95 b. 1.75 c. 2.10 d. 2.67 e. 3.45

Q: Assume that a 3-year Treasury note has no maturity premium, and that the real, risk-free rate of interest is 3 percent. If the T-note carries a yield to maturity of 13 percent, and if the expected average inflation rate over the next 2 years is 11 percent, what is the implied expected inflation rate during Year 3? a. 7% b. 8% c. 9% d. 17% e. 18%

Q: Assume that r* = 1.0%; the maturity risk premium is found as MRP = 0.2%(t u2212 1) where t = years to maturity; the default risk premium for AT&T bonds is found as DRP = 0.07%(t u2212 1); the liquidity premium is 0.50% for AT&T bonds but zero for Treasury bonds; and inflation is expected to be 7%, 6%, and 5% during the next three years and then 4% thereafter. What is the difference in interest rates between 10-year AT&T bonds and 10-year Treasury bonds? a. 0.25% b. 0.50% c. 0.63% d. 1.00% e. 1.13%