63) The cash flow from a project is computed as the:

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63) The cash flow from a project is computed as the: A) sum of the sunk costs, opportunity costs, and erosion costs of the project. B) net income generated by the project, plus the annual depreciation expense. C) net operating cash flow generated by the project, less any sunk costs and erosion

costs. D) sum of the incremental operating cash flow, capital spending, and net working

capital cash flows incurred by the project. E) sum of the incremental operating cash flow and aftertax salvage value of the

project.

63)

64) Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

A) coupon B) effective C) stripped D) real E) nominal

64)

65) Sunk costs include any cost that: A) will be incurred if a project is accepted. B) will change if a project is undertaken. C) will occur if a project is accepted and once incurred, cannot be recouped. D) has previously been incurred and cannot be changed. E) will be paid to a third party and cannot be refunded for any reason whatsoever.

65)

14

66) You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

A) fixed B) opportunity C) incremental D) sunk E) relevant

66)

67) Erosion can be explained as the: A) additional income generated from the sales of a newly added product. B) loss of revenue due to customer theft. C) loss of revenue due to employee theft. D) loss of current sales due to a new project being implemented. E) loss of cash due to the expenses required to fix a parking lot after a heavy rain

storm.

67)

68) Which one of the following should be excluded from the analysis of a project? A) sunk costs B) incremental fixed costs C) incremental variable costs D) erosion costs E) opportunity costs

68)

69) All of the following are anticipated effects of a proposed project. Which of these should be considered when computing the cash flow for the final year of a project?

A) operating cash flow and salvage values B) salvage values and net working capital recovery C) net working capital recovery and operating cash flow D) operating cash flow, net working capital recovery, salvage values E) operating cash flow only

69)

70) Changes in the net working capital: A) only affect the initial cash flows of a project. B) affect the initial and the final cash flows of a project but not the cash flows of the

middle years. C) can affect the cash flows of a project every year of the project’s life. D) are included in project analysis only if they represent cash outflows. E) are generally excluded from project analysis due to their irrelevance to the total

project.

70)

15

71) The net working capital of a firm will decrease if there is: A) a decrease in accounts receivable. B) a decrease in fixed assets. C) a decrease in accounts payable. D) an increase in inventory. E) an increase in the firm’s checking account balance.

71)

72) Net working capital: A) is the only expenditure where at least a partial recovery can be made at the end of

a project. B) can be ignored in project analysis because any expenditure is normally recouped

by the end of the project. C) is frequently affected by the additional sales generated by a new project. D) requirements generally, but not always, create a cash inflow at the beginning of a

project. E) expenditures commonly occur at the end of a project.

72)

73) The book value of an asset is primarily used to compute the: A) amount of cash received from the sale of an asset. B) amount of tax due on the sale of an asset. C) change in depreciation needed to reflect the market value of the asset. D) amount of tax saved annually due to the depreciation expense. E) annual depreciation tax shield.

73)

74) The salvage value of an asset creates an aftertax cash flow in an amount equal to the: A) sales price of the asset. B) sales price plus the tax due based on the sales price minus the book value. C) sales price minus the book value. D) sales price plus the tax due based on the book value minus the sales price. E) sales price minus the tax due based on the sales price minus the book value.

74)

75) A project’s operating cash flow will increase when the: A) interest expense is lowered. B) sales projections are lowered. C) net working capital requirement increases. D) depreciation expense increases. E) earnings before interest and taxes decreases.

75)

16

76) Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as:

A) Net income + Depreciation. B) (Sales – Costs) × (1 – Tax rate). C) EBIT – Depreciation + Taxes. D) EBIT – Taxes. E) EBIT × (1 – Tax rate) + Depreciation × Tax rate.

76)

77) Tax shield refers to a reduction in taxes created by: A) a reduction in sales. B) a project’s incremental expenses. C) opportunity costs. D) an increase in interest expense. E) noncash expenses.

77)

78) Marshall’s purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project?

A) $1,208,635 B) $1,498,000 C) $1,100,000 D) $1,661,500 E) $1,710,000

78)

79) The Boat Works currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash flow for the expansion project?

A) $348,500 B) $485,000 C) $537,200 D) $329,700 E) $425,000

79)

17

80) Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually at an average price of $79 a pair. It is considering adding a lower-priced line of shoes which sell for $49 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,250 less pairs of the higher-priced shoes by doing so. What is the estimated value of the erosion cost that should be charged to the lower-priced shoe project?

A) $52,000 B) $98,750 C) $138,750 D) $123,240 E) $146,250

80)

81) Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it appraised at $212,900. The house is being rented to a family for $1,200 a month, the maintenance expenses average $200 a month, and the property taxes are $4,800 a year. If she sells the house she will incur $20,000 in expenses. She is considering converting the house into professional office space. What opportunity cost, if any, should she assign to this property if she has been renting it for the past two years?

A) $192,900 B) $185,000 C) $178,500 D) $120,000 E) $232,900

81)

82) Ernie’s Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project?

A) $15,000 B) $17,900 C) $18,300 D) $19,200 E) $21,300

82)

83) Kurt’s Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow for this project?

A) $33,000 B) $27,000 C) $13,000 D) $7,000 E) $40,000

83)

42) The net present value method of capital budgeting analysis does all of the following except:

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42) The net present value method of capital budgeting analysis does all of the following except:

A) incorporate risk into the analysis. B) consider all relevant cash flow information. C) provide a specific anticipated rate of return. D) discount all future cash flows. E) use all of a project’s cash flows.

42)

43) The payback method of analysis: A) applies an industry-standard recoupment period. B) discounts cash flows. C) always uses all project cash flows. D) has a timing bias. E) ignores the initial cost.

43)

44) The payback method: A) applies mainly to projects where the actual results will be known relatively soon. B) generally results in decisions that conflict with the decision suggested by NPV

analysis. C) is a more sophisticated method of analysis than the profitability index. D) is the most frequently used method of capital budgeting analysis. E) considers the time value of money.

44)

45) A mutually exclusive project is a project whose: A) NPV is always negative. B) acceptance or rejection has no effect on other projects. C) cash flow pattern exhibits more than one sign change. D) acceptance or rejection affects other projects. E) IRR is always negative.

45)

46) Which one of the following statements is true? A) You must know the discount rate to compute the NPV but you can compute the

IRR without having a discount rate. B) Discounted payback is a better method than payback and is more frequently used

in practice. C) Financing projects can only ever have one IRR. D) Payback uses the same discount rate as that applied in the NPV calculation. E) You must have a discount rate to compute, NPV, IRR, PI, and discounted

payback.

46)

10

47) What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

A) −$1,195.12 B) −$287.22 C) $204.36 D) $797.22 E) −$1,350.49

47)

48) What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5 percent.

A) $371.02 B) $86.87 C) $249.65 D) $68.20 E) $270.16

48)

49) Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why?

A) Project A; because its NPV is positive while Project B’s NPV is negative B) Project A; because it has the higher required rate of return C) neither project; because neither has an NPV equal to or greater than its initial cost D) Project B; because it has the largest total cash inflow E) Project B; because it has a negative NPV which indicates acceptance

49)

50) Bernstein’s proposed project has an initial cost of $128,600 and cash flows of $64,500, $98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to Time 0 at a discount rate of 10 percent, what is the modified internal rate of return?

A) 9.82% B) 9.69% C) 10.00% D) 10.04% E) 9.97%

50)

51) Blue Bird Café is considering a project with an initial cost of $46,800, and cash flows of $8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How many internal rates of return do you expect this project to have?

A) 3 B) 4 C) 2 D) 0 E) 1

51)

11

52) It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

A) 1.83 years B) 1.14 years C) 2.83 years D) .83 years E) 2.14 years

52)

53) A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period?

A) 3.98 years B) never C) 2.84 years D) 2.97 years E) 3.92 years

53)

54) Homer is considering a project with cash inflows of $950 a year for Years 1 to 4, respectively. The project has a required discount rate of 11 percent and an initial cost of $2,100. What is the discounted payback period?

A) never B) 3.05 years C) 2.68 years D) 3.39 years E) 2.21 years

54)

55) Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2, $36,000 in Year 3, and −$5,000 in Year 4. Ginny requires a rate of return of 8 percent and has a required discounted payback period of three years. Based on the discounted payback method should she make this investment? All things considered, do you agree with this decision? Why or why not?

A) no; because the discounted payback period is too short B) yes; discounted payback indicates acceptance but that is not a wise decision as the

NPV is negative and the final cash outflow is ignored by payback C) yes; because the NPV is positive and the project pays back on a discounted basis

within the assigned time period D) no; although the project earns more than 8 percent, there is no situation where the

project can pay back on a discounted basis within three years E) yes; but only because the discounted payback requirement is met

55)

12

56) Consider an investment with an initial cost of $20,000 that expected to last for 5 years. The expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are $5,500 each, and the Year 5 cash flow is $1,000. Assume each annual cash flow is spread evenly over its respective year. What is the payback period?

A) 4.55 years B) 3.82 years C) 4.00 years D) 3.18 years E) None of these

56)

57) The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

A) erosion B) incremental C) stand-alone D) net present value E) opportunity

57)

58) A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

A) sunk cost. B) salvage value expense. C) opportunity cost. D) erosion cost. E) net working capital expense.

58)

59) The most valuable investment given up if an alternative investment is chosen is a(n): A) salvage value expense. B) net working capital expense. C) opportunity cost. D) erosion cost. E) sunk cost.

59)

60) A decrease in a firm’s current cash flows resulting from the implementation of a new project is referred to as:

A) salvage value expenses. B) net working capital expenses. C) opportunity costs. D) erosion costs. E) sunk costs.

60)

13

61) The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation.

A) straight-line B) curvilinear C) MACRS D) sum-of-years digits E) FIFO

61)

62) The cash flow tax savings generated as a result of a firm’s tax-deductible depreciation expense is called the:

A) operating cash flow. B) aftertax salvage value. C) depreciable basis. D) depreciation tax shield. E) aftertax depreciation savings.

62)

21) What is the current ratio for 2015? A) 2.06 B) .95 C) .98 D) 1.98 E) 1.95

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21)

What is the current ratio for 2015? A) 2.06 B) .95 C) .98 D) 1.98 E) 1.95

21)

22) An annuity stream of cash flow payments is a set of: A) increasing cash flows occurring at set intervals of time that go on forever. B) equal cash flows occurring each time period forever. C) either equal or varying cash flows occurring at set intervals of time for a fixed

period. D) arbitrary cash flows occurring each time period for no more than 10 years. E) equal cash flows occurring each time period over a fixed length of time.

22)

5

23) The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A) compound interest B) periodic interest C) daily interest D) effective annual E) annual percentage

23)

24) You are considering two projects with the following cash flows:

Assuming both projects have the same initial cost, you know that: A) both projects have equal net present values at any discount rate. B) Project B has a higher net present value than Project A. C) Project A is more valuable than Project B given a positive discount rate. D) there are no conditions under which the projects can have equal values. E) both projects offer the same rate of return.

24)

25) You would be making a wise decision if you chose to: A) base decisions regarding investments on effective rates and base decisions

regarding loans on annual percentage rates. B) ignore the effective rates and concentrate on the annual percentage rates for all

transactions. C) accept the loan with the lower effective annual rate rather than the loan with the

lower annual percentage rate. D) invest in an account paying 6 percent, compounded quarterly, rather than an

account paying 6 percent, compounded monthly. E) assume all loans and investments are based on simple interest.

25)

26) The net present value of a project is equal to the: A) present value of the future cash flows minus the initial cost. B) sum of the project’s anticipated cash flows. C) present value of the future cash flows. D) future value of the future cash flows minus the present value of the initial cost. E) future value of the future cash flows minus the initial cost.

26)

6

27) Olivia is willing to pay $185 a month for four years for a car payment. If the interest rate is 4.9 percent, compounded monthly, and she has a cash down payment of $2,500, what price car can she afford to purchase?

A) $8,342.05 B) $8,533.84 C) $8,686.82 D) $10,961.36 E) $10,549.07

27)

28) You borrow $12,600 to buy a car. The terms of the loan call for monthly payments for five years at an interest rate of 4.65 percent, compounded monthly. What is the amount of each payment?

A) $253.22 B) $235.76 C) $243.73 D) $233.04 E) $230.62

28)

29) Luis has a management contract which grants him a lump sum payment of $20 million be paid upon the completion of his first five years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 4.5 percent on these funds. How much must the company set aside each year for this purpose?

A) $3,655,832.79 B) $3,798,346.17 C) $3,801,033.67 D) $3,775,042.93 E) $4,038,018.22

29)

30) Stu can purchase a one-bedroom house near his college today for $110,000, including the cost of some minor repairs. He expects to be able to resell it in four years for $150,000 if he just puts a little effort into cleaning up the property. At a discount rate of 6.5 percent, what is the expected net present value of this purchase opportunity?

A) $2,487.43 B) $4,311.02 C) $7,208.18 D) $3,001.61 E) $6,598.46

30)

31) The difference between the present value of an investment’s future cash flows and its initial cost is the:

A) net present value. B) discounted payback period. C) internal rate of return. D) profitability index. E) payback period.

31)

7

32) The length of time required for a project’s discounted cash flows to equal the initial cost of the project is called the:

A) discounted profitability index. B) discounted payback period. C) net present value. D) payback period. E) discounted net present value.

32)

33) The discount rate that makes the net present value of an investment exactly equal to zero is called the:

A) profitability index. B) equalizer. C) external rate of return. D) internal rate of return. E) average accounting return.

33)

34) A situation in which accepting one investment prevents the acceptance of another investment is called the:

A) net present value profile. B) issues of scale problem. C) multiple rates of return decision. D) mutually exclusive investment decision. E) operational ambiguity decision.

34)

35) The present value of an investment’s future cash flows divided by the initial cost of the investment is called the:

A) internal rate of return. B) net present value. C) profitability index. D) profile period. E) average accounting return.

35)

36) All else constant, the net present value of a typical investment project increases when: A) the initial cost of a project increases. B) the discount rate increases. C) all cash inflows occur during the last year instead of periodically throughout a

project’s life. D) each cash inflow is delayed by one year. E) the rate of return decreases.

36)

8

37) The primary reason that company projects with positive net present values are considered acceptable is that:

A) they return the initial cash outlay within three years or less. B) they create value for the owners of the firm. C) the required cash inflows exceed the actual cash inflows. D) the investment’s cost exceeds the present value of the cash inflows. E) the project’s rate of return exceeds the rate of inflation.

37)

38) One characteristic of the payback method of project analysis is the: A) standardized cutoff point for cash flow consideration. B) discounting of all cash flows. C) use of variable discount rates. D) consideration of the risk level of each project. E) bias towards liquidity.

38)

39) Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis.

A) payback B) net present value C) discounted payback D) profitability index E) internal rate of return

39)

40) If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis.

A) modified internal rate of return B) profitability index C) internal rate of return D) payback E) net present value

40)

41) Accepting a positive net present value (NPV) project: A) means the present value of the expected cash flows is equal to the project’s cost. B) guarantees all cash flow assumptions will be realized. C) indicates the project will pay back within the required period of time. D) ignores the inherent risks within the project. E) is expected to increase the stockholders’ value by the amount of the NPV.

41)

1) A firm’s capital structure refers to the firm’s:

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1) A firm’s capital structure refers to the firm’s: A) combination of cash and cash equivalents. B) combination of accounts appearing on the left side of its balance sheet. C) mixture of various types of production equipment. D) proportions of financing from current and long-term debt and equity. E) investment selections for its excess cash reserves.

1)

2) Short-term finance deals with: A) acquiring and selling fixed assets. B) the timing of cash flows. C) financing long-term projects. D) issuing additional shares of common stock. E) capital budgeting.

2)

3) As seen on an income statement: A) depreciation is shown as an expense but does not affect the tax expense. B) interest is deducted from income and increases the total taxes incurred. C) the tax rate is applied to the earnings before interest and taxes when the firm has

both depreciation and interest expenses. D) interest expense is added to earnings before interest and taxes to compute pretax

income. E) depreciation reduces both the pretax income and the net income.

3)

4) According to the Generally Accepted Accounting Principles, costs are: A) matched with revenues. B) expensed as management desires. C) recorded as incurred. D) matched with production levels. E) recorded when paid.

4)

5) Under generally accepted accounting principles (GAAP), a firm’s assets are reported at: A) liquidation value less accumulated depreciation. B) market value less accumulated depreciation. C) historical cost less accumulated depreciation. D) market value. E) liquidation value.

5)

1

6) According to generally accepted accounting principles (GAAP), revenue is recognized as income when:

A) a contract is signed to perform a service or deliver a good. B) managers decide to recognize it. C) payment is requested. D) income taxes are paid on the revenue earned. E) the transaction is complete and the goods or services are delivered.

6)

7) Projected future financial statements are called: A) plug statements. B) comparative statements. C) aggregated statements. D) pro forma statements. E) reconciled statements.

7)

8) Which statement expresses all accounts as a percentage of total assets? A) common-size balance sheet B) statement of cash flows C) common-size income statement D) pro forma income statement E) pro forma balance sheet

8)

9) Ratios that measure a firm’s financial leverage are known as ________ ratios. A) profitability B) asset management C) long-term solvency D) market value E) short-term solvency

9)

10) The debt-equity ratio is measured as: A) total debt divided by total equity. B) long-term debt divided by total equity. C) total assets minus total debt, divided by total equity. D) total equity divided by long-term debt. E) total equity divided by total debt.

10)

11) The measure of net income returned from every dollar invested in total assets is the: A) return on equity. B) return on assets. C) asset turnover. D) profit margin. E) earnings before interest and taxes.

11)

2

12) The market-to-book ratio is measured as the: A) market price per share divided by the net income per share. B) market price per share divided by the dividends per share. C) market value per share divided by the book value per share. D) net income per share divided by the market price per share. E) market price per share divided by the par value per share.

12)

13) An increase in which one of the following accounts increases a firm’s current ratio without affecting its quick ratio?

A) fixed assets B) inventory C) accounts payable D) cash E) accounts receivable

13)

14) A banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______.

A) .40; .75 B) .50; .75 C) .45; 1.75 D) .50; 1.00 E) .40; 1.75

14)

15) If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm:

A) has no net working capital. B) is using its assets as efficiently as possible. C) also has a current ratio of 15. D) has no debt of any kind. E) has an equity multiplier of 2.

15)

16) Turner’s Inc. has a price-earnings ratio of 16. Alfred’s Co. has a price-earnings ratio of 19. Thus, you can state with certainty that one share of stock in Alfred’s:

A) sells at a lower price per share than one share of Turner’s. B) represents a larger percentage of firm ownership than does one share of Turner’s

stock. C) has a higher market price than one share of stock in Turner’s. D) earns a greater profit per share than does one share of Turner’s stock. E) has a higher market price per dollar of earnings than does one share of Turner’s.

16)

3

17) The most effective method of directly evaluating the financial performance of a firm is to compare the financial ratios of the firm to:

A) the average ratios of the firm’s international peer group. B) those of the largest conglomerate that has operations in the same industry as the

firm. C) the average ratios of all firms within the same country over a period of time. D) the firm’s ratios from prior time periods and to the ratios of firms with similar

operations. E) those of other firms located in the same geographic area that are similarly sized.

17)

18) Enterprise value is based on the: A) book value of debt plus the market value of equity. B) market value of equity plus the book value of total debt minus cash. C) market value of interest bearing debt plus the market value of equity minus cash. D) book values of debt and assets, other than cash. E) book values of debt and equity less cash.

18)

19) The equity multiplier measures: A) management efficiency. B) financial leverage. C) returns to stockholders. D) asset use efficiency. E) operating efficiency.

19)

20) The return on equity can be calculated as: A) Profit margin × ROA × Total asset turnover. B) Profit margin × ROA. C) ROA × Debt-equity ratio. D) ROA × Equity multiplier. E) ROA × (Net income / Total assets).

20)

7-4: Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?

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7-4:

Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return?

7-10:

The beta coefficient for Stock C is bC = 0.4 and that for Stock D is bD = −0.5. (Stock D’s beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although collection agency and gold mining stocks are sometimes cited as examples.)
a. If the risk-free rate is 9% and the expected rate of return on an average stock is 13%, what are the required rates of return on Stocks C and D?

b. For Stock C, suppose the current price, P0, is $25; the next expected dividend,D1, is $1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock were not in equilibrium.

Chapter 8 Problem 8-4, 8-5, 8-6

8-4:

The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?

8-5:

Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) strike price is $35, (3) time to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.25.

8-6:

The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $21 and that expires in 1 year. (Hint: Use daily compounding.)

Chapter 9 Problem 9-3, 9-8, 9-13

9-3:

Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with an annual dividend of $4.50 a share. Ignoring flotation costs, what is the company’s cost of preferred stock, rps?

9-8;

David Ortiz Motors has a target capital structure of 40% debt and 60% equity. The yield to maturity on the company’s outstanding bonds is 9%, and the company’s tax rate is 40%. Ortiz’s CFO has calculated the company’s WACC as 9.96%. What is the company’s cost of equity capital?

9-13:

Messman Manufacturing will issue common stock to the public for $30. The expected dividend and the growth in dividends are $3.00 per share and 5%, respectively. If the flotation cost is 10% of the issue’s gross proceeds, what is the cost of external equity, re?

If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

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If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

4-5:

You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal?

4-20:

a. Set up an amortization schedule for a $25,000 loan to be repaid in equal instalments at the end of each of the next 5 years. The interest rate is 10%.
b. How large must each annual payment be if the loan is for $50,000? Assume that the interest rate remains at 10% and that the loan is still paid off over 5 years.
c. How large must each payment be if the loan is for $50,000, the interest rate is 10%, and the loan is paid off in equal installments at the end of each of the next 10 years? This loan is for the same amount as the loan in part b, but the payments are spread out over twice as many periods. Why are these payments not half as large as the payments on the loan in part b?

4-22:

Washington-Pacific invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return?

Chapter 5 Problem 5-15, 5-21
5-15;

Absalom Motors’s 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the yield curve is flat. Assuming that interest rates in the economy are expected to remain at their current level, what is the best estimate of the nominal interest rate on new bonds?

5-21:

Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.
a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 6%. At what price would the bonds sell?
b. Suppose that, 2 years after the initial offering, the going interest rate had risen to 12%. At what price would the bonds sell?
c. Suppose, as in part a, that interest rates fell to 6%, 2 years after the issue date. Suppose further that the interest rate remained at 6% for the next 8 years. What would happen to the price of the bonds over time?

Chapter 6 Problem 6-4, 6-10

6-4:

A stock’s returns have the following distribution:
Demand for Probability of Rate of return

Company’s this Demand if this demand

Products Occuring Occurs

Weak 0.1 (50%)

Below Average 0.2 (5)

Average 0.4 16

Above average 0.2 25

Strong 0.1 60

1.0

Calculate the stock’s expected return, standard deviation, and coefficient of variation.

6-10:

You have a $2 million portfolio consisting of a $100,000 investment in each of 20different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions?