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BUSI 530 Week 1 HomeWork 1 (SOLUTIONS)
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BUSI 530 Week 1 HomeWork 1 (SOLUTIONS) -
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Question 1

Construct a balance sheet for Sophie’s Sofas given the following data.
(Be sure to list the assets and liabilities in order of their liquidity.)
Question 2
Using Table 3.7, calculate the marginal and average tax rates for a single
taxpayer with the following incomes: (Do not round intermediate
calculations. Round "Average tax rate" to 2 decimal places.)
Question 3
The year- end 2010 balance sheet of Brandex Inc. listed common stock
and other paid-in capital at $2,200,000 and retained earnings at
$4,500,000. The next year, retained earnings were listed at $4,800,000.
The firm’s net income in 2011 was $1,010,000. There were no stock
repurchases during the year. What were the dividends paid by the firm in
2011?
Question 4
You have set up your tax preparation firm as an incorporated business.
You took $75,500 from the firm as your salary. The firm’s taxable
income for the year (net of your salary) was $19,000. Assume you pay
personal taxes as an unmarried taxpayer. Use the tax rates presented in
Table 3-5 and Table 3-7.

Question 5
The founder of Alchemy Products, Inc., discovered a way to turn lead
into gold and patented this new technology. He then formed a
corporation and invested $2,000,000 in setting up a production plant. He
believes that he could sell his patent for $50 million
Question 6
Sheryl’s Shipping had sales last year of $14,500. The cost of goods sold
was $7,400, general and administrative expenses were $1,900, interest
expenses were $1,400, and depreciation was $1,900. The firm’s tax rate
is 35%
Question 7
Ponzi Products produced 96 chain letter kits this quarter, resulting in a
total cash outlay of $10 per unit. It will sell 48 of the kits next quarter at
a price of $11, and the other 48 kits in two quarters at a price of $12. It
takes a full quarter for it to collect its bills from its customers. (Ignore
possible sales in earlier or later quarters and assume all positive cash
flow is distributed as expenses or earnings to shareholders.)

Question 8
During the last year of operations, accounts receivable increased by
$9,200, accounts payable increased by $4,200, and inventories decreased
by $1,200. What is the total impact of these changes on the difference
between profits and cash flow? (Input the amount as a positive value.)
Question 9
Butterfly Tractors had $17.00 million in sales last year. Cost of goods
sold was $8.60 million, depreciation expense was $2.60 million, interest
payment on outstanding debt was $1.60 million, and the firm’s tax rate
was 35%.
Question 10
Candy Canes, Inc., spends $172,000 to buy sugar and peppermint in
April. It produces its candy and sells it to distributors in May for
$230,000, but it does not receive payment until June. For each month,
find the firm’s sales, net income, and net cash flow. (Leave no cells
blank - be certain to enter "0" wherever required. Negative amounts
should be indicated by a minus sign. Omit the "$" sign in your
responses.)
Question 11

The table below contains data on Fincorp, Inc., the balance sheet items
correspond to values at year-end of 2010 and 2011, while the income
statement items correspond to revenues or expenses during the year
ending in either 2010 or 2011. All values are in thousands of dollars.
Question 12
The table below contains data on Fincorp, Inc., the balance sheet items
correspond to values at year-end of 2010 and 2011, while the income
statement items correspond to revenues or expenses during the year
ending in either 2010 or 2011. All values are in thousands of dollars
Question 13
Here are simplified financial statements of Phone Corporation from a
recent year:
Question 14
Here are simplified financial statements of Phone Corporation from a
recent year

Question 15
Consider the following information:
Question 16
Chik’s Chickens has average accounts receivable of $5,833. Sales for
the year were $9,300. What is its average collection period? (Use 365
days in a year. Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Question 17
Salad Daze maintains an inventory of produce worth $380. Its total bill
for produce over the course of the year was $71,000. How old on
average is the lettuce it serves its customers? (Use 365 days in a year.
Do not round intermediate calculations. Round your answer to 2 decimal
places.)
Question 18
Assume a firm’s inventory level of $20,000 represents 20 days' sales.
What is the inventory turnover ratio? (Use 365 days in a year. Do not

round intermediate calculations. Round your answer to 2 decimal
places.)
Question 19
Lever Age pays a(n) 10% rate of interest on $9.0 million of outstanding
debt with face value $9.0 million. The firm’s EBIT was $3.0 million.
Question 20
Keller Cosmetics maintains an operating profit margin of 5.9% and asset
turnover ratio of 3.9
Question 21
Torrid Romance Publishers has total receivables of $2,980, which
represents 20 days’ sales. Total assets are $74,500. The firm’s operating
profit margin is 5.0%. Find the firm’s asset turnover ratio and ROA.
(Use 365 days in a year. Do not round intermediate calculations. Round
your answers to 2 decimal places.)
Question 22

A firm has a longterm debtequity ratio of 0.4. Shareholders’ equity is
$1.06 million. Current assets are $260,000,and the current ratio is 2.0.
The only current liabilities are notes payable. What is the total debt
ratio? (Round your answer to 2 decimal places.)
Question 23
A firm has a debt-to-equity ratio of 0.62 and a market-to-book ratio of
2.0. What is the ratio of the book value of debt to the market value of
equity? (Round your answer to 2 decimal places.)
Question 24
In the past year, TVG had revenues of $2.99 million, cost of goods sold
of $2.49 million, and depreciation expense of $89,300. The firm has a
single issue of debt outstanding with book value of $1.11 million on
which it pays an interest rate of 10%. What is the firm’s times interest
earned ratio? (Round your answer to 2 decimal places.)
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Question 1
Compute the present value of a $300 cash flow for the following
combinations of discount rates and times: (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
Question 2
Compute the future value of a $190 cash flow for the same combinations
of rates and times: (Do not round intermediate calculations. Round your
answers to 2 decimal places.)
Question 3

In 1880 five aboriginal trackers were each promised the equivalent of
100 Australian dollars for helping to capture the notorious outlaw Ned
Kelley. In 1995 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 $100. However, the
granddaughters also claimed that they were entitled to compound
interest.
Question 4
a-1. Calculate the present value of an annual payment of $1,050 you
would received for 12 years if the interest rate is 3%. (Do not round
intermediate calculations. Round your answer to 2 decimal places.)
a-2. Calculate the present value of an annual payment of $850 you
a-3. Which option would you prefer?
b-1. Calculate the present value of an annual payment of $1,050 you

b-2. Calculate the present value of an annual payment of $850 you
b-3. Which option would you prefer?
Question 5
Find the annual interest rate. (Do not round intermediate calculations.
Round your answers to 2
Question 6
If you earn 5.00% 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
places.)
Question 7
Investments in the stock market have increased at an average compound
rate of about 5% since 1903. It is now 2012.

Question 8
In mid-2010 a pound of apples cost $1.42, while oranges cost $1.26. Ten
years earlier the price of apples was only $1.00 a pound and that of
oranges was $.78 a pound.
Question 9
a. If you take out an $8,200 car loan that calls for 60 monthly payments
starting after 1 month at an APR of 12%, what is your monthly
payment? (Do not round intermediate calculations. Round your answer
to 2 decimal places.)
b. What is the effective annual interest rate on the loan? (Do not round
Question 10
Professor’s Annuity Corp. offers a lifetime annuity to retiring professors.
For a payment of $83,000 at age 65, the firm will pay the retiring
professor $675 a month until death
Question 11

You can buy property today for $2.5 million and sell it in 4 years for
$3.5 million. (You earn no rental income on the property.)
Question 12
A factory costs $450,000.You forecast that it will produce cash inflows
of $105,000 in year 1, $165,000 in year 2, and $270,000 in year 3. The
discount rate is 11%
Question 13
If the interest rate this year is 8.4% and the interest rate next year will be
10.4%, what is the future value of $1 after 2 years? What is the present
value of a payment of $1 to be received in 2 years? (Do not round
intermediate calculations. Round your answers to 4 decimal places.)
Question 14
A 10-year Treasury bond is issued with face value of $1,000, paying
interest of $72 per year. If market yields increase shortly after the
Tbond is issued, what is the bond’s coupon rate? (Round your answer to
1 decimal place.)

Question 15
A 10-year Circular File bond pays interest of $55 annually and sells for
$984. What are its coupon rate and yield to maturity? (Do not round
intermediate calculations. Round "Coupon rate" to 1 decimal place and
"Yield to maturity" to 2 decimal places.)
Question 16
A bond has 16 years until maturity, a coupon rate of 6.8%, and sells for
$1,106.
Question 17
General Matter’s outstanding bond issue has a coupon rate of 10.6%,
and it sells at a yield to maturity of 8.70%. The firm wishes to issue
additional bonds to the public at face value. What coupon rate must the
new bonds offer in order to sell at face value? (Round your answer to 2
decimal places.)
Question 18
Refer the table below:

Question 19
One bond has a coupon rate of 5.8%, another a coupon rate of 8.4%.
Both bonds have 9-year maturities and sell at a yield to maturity of 7%
Question 20
Sure Tea Co. has issued 4.6% annual coupon bonds that are now selling
at a yield to maturity of 6.5% and current yield of 5.8492%. What is the
remaining maturity of these bonds? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Question 21
Consider three bonds with 6.4% coupon rates, all selling at face value.
The short-term bond has a maturity of 4 years, the intermediate-term
bond has maturity 8 years, and the long-term bond has maturity 30
years.
Question 22

A 2-year maturity bond with face value of $1,000 makes annual coupon
payments of $96 and is selling at face value. What will be the rate of
return on the bond if its yield to maturity at the end of the year is (Do not
round intermediate calculations. Round your answers to 2 decimal
places.)
Question 23
A bond’s credit rating provides a guide to its risk. Longterm bonds
rated Aa currently offer yields to maturity of 4.5%. A-rated bonds sell at
yields of 4.8%. Assume a 10-year bond with a coupon rate of 4% is
downgraded by Moody’s from Aa to A rating
Question 24
Favored stock will pay a dividend this year of $2.64 per share. Its
dividend yield is 8%. At what price is the stock selling? (Do not round
intermediate calculations.)
Question 25
Preferred Products has issued preferred stock with an $6.27 annual
dividend that will be paid in perpetuity

Question 26
Waterworks has a dividend yield of 10.50%. If its dividend is expected
to grow at a constant rate of 7.50%, 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.)
Question 27
Steady As She Goes, Inc., will pay a year-end dividend of $3.10 per
share. Investors expect the dividend to grow at a rate of 5% indefinitely
Question 28
Integrated Potato Chips paid a $2.80 per share dividend yesterday. You
expect the dividend to grow steadily at a rate of 4% per year.
Question 29
Arts and Crafts, Inc., will pay a dividend of $3 per share in 1 year. It
sells at $50 a share and firms in the same industry provide an expected
rate of return of 12%. What must be the expected growth rate of the
company’s dividends? (Do not round intermediate calculations.)

Question 30
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and
dividends are all shrinking at a rate of 10% per year.
Question 31
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.
Question 32
No-Growth Industries pays out all of its earnings as dividends. It will
pay its next $3 per share dividend in a year. The discount rate is 12%
Question 33
Assume that market and book values are equal for current assets, current
liabilities, and debt and other long- term liabilities

Question 34
Grandiose Growth has a dividend growth rate of 20%. The discount rate
is 10%. The end-of-year dividend will be $2 per share
Question 35
Computer Corp. reinvests 60% of its earnings in the firm. The stock sells
for $55, and the next dividend will be $3.30 per share. The discount rate
is 10%. What is the rate of return on the company’s reinvested funds?
(Do not round intermediate calculations. Round your answer to 2
decimal places.)
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Question 1
The following are the cash flows of two projects:
Question 2
Question 3
Question 4
Question 5
A project that costs $3,300 to install will provide annual cash flows of
$830 for each of the next 6 years.

Question 6
A project that costs $2,400 to install will provide annual cash flows of
$590 for the next 5 years. The firm accepts projects with payback
periods of less than 5 years
Question 7
Consider projects A and B:
Question 8
a. Calculate the net present value of the following project for discount
rates of 0, 50, and 100%: (Leave no cells blank - be certain to enter "0"
wherever required. Do not round intermediate calculations. Round your
Question 9
A precision lathe costs $14,000 and will cost $24,000 a year to operate
and maintain. If the discount rate is 12% and the lathe will last for 3

years, what is the equivalent annual cost of the tool? (Do not round
Question 10
A new project will generate sales of $73.6 million, costs of $41.6
million, and depreciation expense of $9.6 million in the coming year.
The firm’s tax rate is 30%.
Question 11
Canyon Tours showed the following components of working capital last
year:
Question 12
Tubby Toys estimates that its new line of rubber ducks will generate
sales of $6.7 million, operating costs of $3.7 million, and a depreciation
expense of $0.7 million. Assume the tax rate is 40%.
Question 13

The owner of a bicycle repair shop forecasts revenues of $180,000 a
year. Variable costs will be $55,000, and rental costs for the shop are
$35,000 a year. Depreciation on the repair tools will be $15,000. Prepare
an income statement for the shop based on these estimates. The tax rate
is 30%. (Input all amounts as positive values.)
Question 14
The owner of a bicycle repair shop forecasts revenues of $188,000 a
year. Variable costs will be $57,000, and rental costs for the shop are
$37,000 a year. Depreciation on the repair tools will be $17,000. The tax
rate is 40%.
Question 15
A house painting business had revenues of $17,600 and expenses of
$10,600. There were no depreciation expenses. However, the business
reported the following changes in working capital:
Question 16
Talia’s Tutus bought a new sewing machine for $85,000 that will be
depreciated using the MACRS

Question 17
The only capital investment required for a small project is investment in
inventory. Profits this year were $9,400, and inventory increased from
$5,300 to $7,600. What was the cash flow from the project?
Question 18
Quick Computing installed its previous generation of computer chip
manufacturing equipment 3 years ago. Some of that older equipment
will become unnecessary when the company goes into production of its
new product. The obsolete equipment, which originally cost $42.5
million, has been depreciated straight-line over an assumed tax life of 5
years, but it can be sold now for $18.5 million. The firm’s tax rate is
30%. What is the after-tax cash flow from the sale of the equipment?
(Enter your answer in millions rounded to 2 decimal places.)
Question 19
Bottoms Up Diaper Service is considering the purchase of a new
industrial washer. It can purchase the washer for $8,500 and sell its old
washer for $4,500. The new washer will last for 5 years and save $2,200
a year in expenses. The opportunity cost of capital is 14%, and the firm’s
tax rate is 30%. What is the equivalent annual cost of the washer, if the
firm uses straight-line depreciation? (Do not round intermediate

Question 20
Johnny’s Lunches is considering purchasing a new, energyefficient
grill. The grill will cost $38,000 and will be depreciated according to the
3-year MACRS schedule. It will be sold for scrap metal after 3 years for
$9,500. The grill will have no effect on revenues but will save Johnny’s
$19,000 per year in energy expenses. The tax rate is 30%. Use MACRS
depreciation schedule.
Question 21
Revenues generated by a new fad product are forecast as follows:
Question 22
Blooper Industries must replace its magnoosium purification system.
Quick & Dirty Systems sells a relatively cheap purification system for
$25 million. The system will last 5 years. Do-It-Right sells a sturdier but
more expensive system for $28 million; it will last for 7 years. Both
systems entail $3 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 40%,
and the discount rate is 16%.

Question 23
The following table presents sales forecasts for Golden Gelt Giftware.
The unit price is $40. The unit cost of the giftware is $20.
Question 24
In a slow year, Deutsche Burgers will produce 2.0 million hamburgers at
a total cost of $3.6 million. In a good year, it can produce 4.5 million
hamburgers at a total cost of $5.1 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.)
Question 25
In a slow year, Deutsche Burgers will produce 5 million hamburgers at a
total cost of $5.2 million. In a good year, it can produce 10 million
hamburgers at a total cost of $6.2 million
Question 26
A project currently generates sales of $11.5 million, variable costs equal
to 40% of sales, and fixed costs of $3.5 million. The firm’s tax rate is
35%.

Question 27
A project currently generates sales of $11.5 million, variable costs equal
to 40% of sales, and fixed costs of $2.2 million. The firm’s tax rate is
40%.
Question 28
Emperor’s Clothes Fashions can invest $6 million in a new plant for
producing invisible makeup. The plant has an expected life of 5 years,
and expected sales are 7 million jars of makeup a year. Fixed costs are
$1.8 million a year, and variable costs are $2.5 per jar. The product will
be priced at $3.4 per jar. The plant will be depreciated straight-line over
5 years to a salvage value of zero. The opportunity cost of capital is
12%, and the tax rate is 40%
Question 29
The most likely outcomes for a particular project are estimated as
follows:
Question 30

Dime a Dozen Diamonds makes synthetic diamonds by treating carbon.
Each diamond can be sold for $120. The materials cost for a standard
diamond is $60. The fixed costs incurred each year for factory upkeep
and administrative expenses are $211,000. The machinery costs $2.0
million and is depreciated straight-line over 10 years to a salvage value
of zero
Question 31
Modern Artifacts can produce keepsakes that will be sold for $50 each.
Nondepreciation fixed costs are $1,500 per year and variable costs are
$30 per unit.
Question 32
A silver mine can yield 16,000 ounces of silver at a variable cost of $34
per ounce. The fixed costs of operating the mine are $56,000 per year. In
half the years, silver can be sold for $50 per ounce; in the other years,
silver can be sold for only $25 per ounce. Ignore taxes
Question 33
An auto plant that costs $170 million to build can produce a line of
flexfuel cars that will produce cash flows with a present value of $230
million if the line is successful but only $100 million if it is

unsuccessful. You believe that the probability of success is only about
50%. You learn whether the line is successful immediately after building
the plant
Question 34
Hit or Miss Sports is introducing a new product this year. If its
see-at-night soccer balls are a hit, the firm expects to be able to sell
54,000 units a year at a price of $60 each. If the new product is a bust,
only 34,000 units can be sold at a price of $55. The variable cost of each
ball is $30, and fixed costs are zero. The cost of the manufacturing
equipment is $6.9 million, and the project life is estimated at 10 years.
The firm will use straight-line depreciation over the 10-year life of the
project. The firm’s tax rate is 35%, and the discount rate is 10%.
Question 35
Hit or Miss Sports is introducing a new product this year. If its
see-at-night soccer balls are a hit, the firm expects to be able to sell
54,000 units a year at a price of $60 each. If the new product is a bust,
only 34,000 units can be sold at a price of $55. The variable cost of each
ball is $30, and fixed costs are zero. The cost of the manufacturing
equipment is $6.9 million, and the project life is estimated at 10 years.
The firm will use straight-line depreciation over the 10-year life of the
project. The firm’s tax rate is 35%, and the discount rate is 10%.

Hit or Miss Sports can expand production if the project is successful. By
paying its workers overtime, it can increase production by 29,000 units;
the variable cost of each ball will be higher, however, equal to $35 per
unit. By how much does this option to expand production increase the
NPV of the project? (Assume the probability the see-at-night soccer
balls will be a hit is 50%). (Do not round intermediate calculations.
Round your answer to the nearest dollar amount.)
Question 36
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BUSI 530 Week 5 HomeWork 5 () –
SOLUTIONS
1. Problem 11-1 Rate of Return (LO2)

A stock is selling today for $50 per share. At the end of the year, it pays
a dividend of $2 per share and sells for $56.
2. Problem 11-3 Real versus Nominal Returns (LO2)
You purchase 100 shares of stock for $40 a share. The stock pays a $2
per share dividend at year-end. What is the rate of return on your
investment for the end-of-year stock prices listed below? What is your
real (inflation-adjusted) rate of return? Assume an inflation rate of 3%.
(Leave no cells blank - be certain to enter "0" wherever required.
Negative values should be indicated by a minus sign. Do not round
intermediate calculations. Round your "Real Rate of Return" answers to
2 decimal places.)
3. Problem 11-9 Risk Premiums (LO1)
Here are stock market and Treasury bill percentage returns between
2006 and 2010:
4. Problem 11-17 Scenario Analysis (LO2)
Consider the following scenario analysis:

5. Problem 11--18 Portfolio Analysis (LO3)
You received credit for this question in a previous attempt
Scenario Recession Normal economy Boom
Rate of Return Probability Stocks Bonds .20 −9% +20%
.50 +21 +8 .30 +31 +8
6. Problem 11-22 Risk and Return (LO2, 4)
A stock will provide a rate of return of either −21% or +32%.
7. Problem 12-7 CAPM and Expected Return (LO2)

The risk-free rate is 7% and the expected rate of return on the market
portfolio is 11%.
8. Problem 12-12 CAPM and Cost of Capital (LO3)
The Treasury bill rate is 6% and the market risk premium is 7%.
9. Problem 12-19 CAPM and Valuation (LO3)
You are considering the purchase of real estate that will provide
perpetual income that should average $65,000 per year. How much will
you pay for the property if you believe its market risk is the same as the
market portfolio’s? The Tbill rate is 5%, and the expected market return
is 8.0%.

10. Problem 12-22 CAPM and Expected Return (LO2)
Stock A has a beta of .5, and investors expect it to return 10%. Stock B
has a beta of 1.5, and investors expect it to return 16%. Use the CAPM
to find the expected rate of return and the market risk premium on the
market. (Do not round intermediate calculations. Round your answers to
1 decimal place.)
11. Problem 12-29 CAPM (LO2)
We Do Bankruptcies is a law firm that specializes in providing advice to
firms in financial distress. It prospers in recessions when other firms are
struggling. Consequently, its beta is negative, −.1.
12. Problem 13 - -1 Cost of Debt (LO2)

Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a
coupon rate of 5%, paid annually. Today, the debt is selling at $1,050. If
the firm’s tax bracket is 40%, what is its aftertax cost of debt? (Do not
places.)
13. Problem 13--2 Cost of Preferred Stock (LO2)
Micro Spinoffs has preferred stock outstanding. The stock pays a
dividend of $7 per share, and the stock sells for $50. What is the return
on preferred stock?
14. Problem 13--3 Calculating WACC (LO3)
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value with a
coupon rate of 5%, paid annually. Today, the debt is selling at $1,250.
The firm’s tax bracket is 40%.
Micro Spinoffs also has preferred stock outstanding. The stock pays a
dividend of $12 per share, and the stock sells for $50.

Micro Spinoffs’s cost of equity is 26%. What is its WACC if equity is
50%, preferred stock is 20%, and debt is 30% of total capital? (Do not
places.)
Reactive Industries has the following capital structure. Its corporate tax
rate is 40%.
16. Problem 13--14 Cost of Equity (LO2)
Bunkhouse Electronics is a recently incorporated firm that makes
electronic entertainment systems. Its earnings and dividends have been
growing at a rate of 30%, and the current dividend yield is 3%. Its beta is
1.4, the market risk premium is 6%, and the risk-free rate is 5%.

17. Problem 13--16 Capital Structure (LO1)
Examine the following book-value balance sheet for University
Products, Inc. The preferred stock currently sells for $12 per share and
the common stock for $16 per share. There are 4 million common shares
outstanding.
Examine the following book-value balance sheet for University
Products, Inc. The preferred stock currently sells for $15 per share and
the common stock for $20 per share.
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BUSI 530 Week 6 Connect Exam 3
(SOLUTIONS)

Compute the present value of a $260 cash flow for the following
combinations of discount rates and times: (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
Compute the future value of a $280 cash flow for the same combinations
of rates and times: (Do not round intermediate calculations. Round your
In 1880 five aboriginal trackers were each promised the equivalent of
100 Australian dollars for helping to capture the notorious outlaw Ned
Kelley. In 2002 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 $100. However, the
granddaughters also claimed that they were entitled to compound
interest.

a-3. Which option would you prefer?
b-3. Which option would you prefer?
Find the annual interest rate. (Do not round intermediate calculations.
Round your answers to 2 decimal places.)
If you earn 4.50% 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
places.)

If you take out an $8,600 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.)
Professor’s Annuity Corp. offers a lifetime annuity to retiring professors.
For a payment of $78,000 at age 65, the firm will pay the retiring
professor $550 a month until death.
You can buy property today for $3.8 million and sell it in 4 years for
$4.8 million. (You earn no rental income on the property.)
A factory costs $450,000.You forecast that it will produce cash inflows
of $110,000 in year 1, $170,000 in year 2, and $280,000 in year 3. The
discount rate is 12%.
If the interest rate this year is 7.8% and the interest rate next year will be
9.8%, what is the future value of $1 after 2 years? What is the present
value of a payment of $1 to be received in 2 years? (Do not round
intermediate calculations. Round your answers to 4 decimal places.)
A 20-year Treasury bond is issued with face value of $1,000, paying
interest of $52 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.)
A 6-year Circular File bond pays interest of $80 annually and sells for
$986. What are its coupon rate and yield to maturity? (Do not round
intermediate calculations. Round "Coupon rate" to 1 decimal place and
"Yield to maturity" to 2 decimal places.)
A bond has 8 years until maturity, a coupon rate of 5%, and sells for
$1,065.
General Matter’s outstanding bond issue has a coupon rate of 11.2%,
and it sells at a yield to maturity of 9.00%. The firm wishes to issue
additional bonds to the public at face value. What coupon rate must the
new bonds offer in order to sell at face value? (Round your answer to 2
decimal places.)
What is the current yield of the 4.375% 2040 maturity bond? (Do not
places.)
One bond has a coupon rate of 5.6%, another a coupon rate of 8.3%.
Both bonds have 6-year maturities and sell at a yield to maturity of 7%.

Sure Tea Co. has issued 7.2% annual coupon bonds that are now selling
at a yield to maturity of 10% and current yield of 9.9987%. What is the
remaining maturity of these bonds? (Do not round intermediate
Consider three bonds with 6.2% coupon rates, all selling at face value.
The short-term bond has a maturity of 4 years, the intermediate-term
bond has maturity 8 years, and the long-term bond has maturity 30
years.
A 2-year maturity bond with face value of $1,000 makes annual coupon
payments of $106 and is selling at face value. What will be the rate of
return on the bond if its yield to maturity at the end of the year is (Do not
round intermediate calculations. Round your answers to 2 decimal
places.)
A bond’s credit rating provides a guide to its risk. Long-term bonds
rated Aa currently offer yields to maturity of 7.2%. A-rated bonds sell at
yields of 7.5%. Assume a 10-year bond with a coupon rate of 6.7% is
downgraded by Moody’s from Aa to A rating.
Favored stock will pay a dividend this year of $2.16 per share. Its
dividend yield is 9%. At what price is the stock selling? (Do not round
intermediate calculations.)

Preferred Products has issued preferred stock with an $7.26 annual
dividend that will be paid in perpetuity.
Waterworks has a dividend yield of 6.50%. If its dividend is expected to
grow at a constant rate of 3.50%, what must be the expected rate of
return on the company’s stock? (Do not round intermediate calculations.
Steady As She Goes, Inc., will pay a year-end dividend of $3.70 per
share. Investors expect the dividend to grow at a rate of 5% indefinitely.
Integrated Potato Chips paid a $1.20 per share dividend yesterday. You
expect the dividend to grow steadily at a rate of 6% per year.
Arts and Crafts, Inc., will pay a dividend of $7 per share in 1 year. It
sells at $70 a share and firms in the same industry provide an expected
rate of return of 14%. What must be the expected growth rate of the
company’s dividends? (Do not round intermediate calculations.)
You expect a share of stock to pay dividends of $2.00, $2.05, and $2.40
in each of the next 3 years. You believe the stock will sell for $32 at the
end of the third year.
No-Growth Industries pays out all of its earnings as dividends. It will
pay its next $6 per share dividend in a year. The discount rate is 21%.

Assume that market and book values are equal for current assets, current
liabilities, and debt and other long-term liabilities.
Grandiose Growth has a dividend growth rate of 20%. The discount rate
is 10%. The end-of-year dividend will be $2 per share.
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Question 1
Shares in Raven Products are selling for $60 per share. There are 1
million shares outstanding. What will be the share price in each of the

following situations? Ignore taxes. (Do not round intermediate
calculations.)
Question 2
The stock of Payout Corp. will go ex-dividend tomorrow. The dividend
will be $0.55 per share, and there are 16,000 shares of stock outstanding.
The market-value balance sheet for Payout is shown on the following
table. Ignore taxes.
Question 3
Good Values, Inc., is all-equity-financed. The total market value of the
firm currently is $240,000, and there are 3,000 shares outstanding. Good
Values plans to repurchase $24,000 worth of stock. Ignore taxes.
Question 4
Investors require an after-tax rate of return of 13% on their stock
investments. Assume that the tax rate on dividends is 30% while capital
gains escape taxation. A firm will pay a $3 per share dividend 1 year
from now, after which it is expected to sell at a price of $22.
Question 5

The expected pretax return on three stocks is divided between dividends
and capital gains in the following way:
Question 6
Find the sustainable and internal growth rates for a firm with the
following ratios: asset turnover = 1.60; profit margin = 5%; payout ratio
= 40%; equity/assets = 0.40. (Do not round intermediate calculations.
Round your answers to 2 decimal places.)
Question 7
Here are the abbreviated financial statements for Planners Peanuts:
Question 8
Here are the abbreviated financial statements for Planners Peanuts:
Question 9

ABC company financial manager believes that sales in 2012 could rise
by as much as 20% or by as little as 5%.
Question 10
The following tables contain financial statements for Dynastatics
Corporation. Although the company has not been growing, it now plans
to expand and will increase net fixed assets (that is, assets net of
depreciation) by $3,800,000 per year for the next 5 years and forecasts
that the ratio of revenues to total assets will remain at 1.50. Annual
depreciation is 10% of net fixed assets at the end of 2012. Fixed costs
are expected to remain at $69,000 and variable costs at 80% of revenue.
The company’s policy is to pay out twothirds of net income as
dividends and to maintain a book debt ratio of 25% of total capital.
Question 11
Plank’s Plants had net income of $6,000 on sales of $70,000 last year.
The firm paid a dividend of $600. Total assets were $300,000, of which
$150,000 was financed by debt.
Question 12
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–
Question 1
Income statement data:
Sales
Cost of goods sold
Balance sheet data:
Inventory

Accounts receivable
Accounts payable
$ 6,700 5,900
$ 660
280
440
Calculate the accounts receivable period, accounts payable period,
inventory period, and cash conversion cycle for the above firm:(Use 365
days in a year. Do not round intermediate calculations. Round your
answers to 1 decimal place.)
Question 2

A firm sells its $1,010,000 receivables to a factor for $969,600. The
average collection period is 1 month. What is the effective annual rate
on this arrangement? (Round your intermediate calculations to 4 decimal
places. Round your answer to 2 decimal places.)
Question 3
A firm is considering several policy changes to increase sales. It will
increase the variety of goods it keeps in inventory, but this will increase
inventory by $11,000. It will offer more liberal sales terms, but this will
result in average receivables increasing to $66,000. These actions are
expected to increase sales to $810,000 per year, and cost of goods will
remain at 70% of sales. Because of the firm’s increased purchases for its
own production needs, average payables will increase to $36,000. What
effect will these changes have on the firm’s cash conversion cycle? (Use
365 days in a year. Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Question 4
Complete the statement of sources and uses of cash from the following
entries:
Question 5

Here is a forecast of sales by National Bromide for the first 4 months of
2012 (figures in thousands of dollars):
Question 6
Paymore Products places orders for goods equal to 80% of its sales
forecast in the next quarter. What will be orders in each quarter of the
year if the sales forecasts for the next five quarters are as follows:
Question 7
forecast in the next quarter. The sales forecasts for the next five quarters
are as follows:
Question 8
are as follows:
Question 9

are as follows:
Question 10
are as follows:
Sales forecast $500 $490 $460 $510 $510
The firm pays for its goods with a 1-month delay. Therefore, on average,
two-fourths of purchases are paid for in the quarter that they are
purchased, and two-fourths are paid in the following quarter.
Paymore’s customers pay their bills with a 2month delay. Therefore, on
average, two-fourths of sales are collected in the quarter that they are
sold, and two-fourths are collected in the following quarter. Assume that
sales in the last quarter of the previous year were $460.
Paymore’s labor and administrative expenses are $62 per quarter and
that interest on long-term debt is $40 per quarter.

Suppose that Paymore’s cash balance at the start of the first quarter is
$19 and its minimum acceptable cash balance is $40. Work out the
short-term financing requirements for the firm in the coming year. The
firm pays no dividends. (Negative amounts should be indicated by a
minus sign. Do not round intermediate calculations.)
Question 11
are as follows:
Sales forecast $510 $500 $470 $520 $520
The firm pays for its goods with a 1-month delay. Therefore, on average,
three-fourths of purchases are paid for in the quarter that they are
purchased, and one-fourth are paid in the following quarter.
Paymore’s customers pay their bills with a 2month delay. Therefore, on
average, two-fourths of sales are collected in the quarter that they are
sold, and two-fourth are collected in the following quarter. Assume that
sales in the last quarter of the previous year were $470.
Paymore’s labor and administrative expenses are $70 per quarter and
that interest on long-term debt is $42 per quarter.

Suppose that cash balance at the start of the first quarter is $40 and its
minimum acceptable cash balance is $50.
Now assume that Paymore can borrow up to $100 from a line of credit at
an interest rate of 2% per quarter. Prepare a short-term financing plan.
Refer Spreadsheet 19.3 (Negative amounts should be indicated by a
minus sign. Leave no cells blank - be certain to enter "0" wherever
required. Do not round intermediate calculations. Round your answers to
2 decimal places.)
Question 12
Recalculate Dynamic Mattress’s financing plan (Spreadsheet 19.3)
assuming that the firm wishes to maintain a minimum cash balance of
$25 million instead of $20 million. Assume the firm can convince the
bank to extend its line of credit to $65 million. (Negative amounts
should be indicated by a minus sign. Leave no cells blank be certain to
enter "0" wherever required. Do not round intermediate calculations.
Enter your answers in millions rounded to 2 decimal places.)
Question 13
Company X sells on a 1/20, net 90, basis. Customer Y buys goods with
an invoice of $2,500.

Question 14
a-1. A firm currently offers terms of sale of 3/15, net 30. Calculate the
effective annual rate. (Use 365 days in a year. Do not round intermediate
a-2. Calculate the effective annual rate if the terms are changed to 4/15,
net 30. (Use 365 days in a year. Do not round intermediate calculations.
a-3. What effect will part (a-2) have on the implicit interest rate charged
to customers that pass up the cash discount?
b-1. Calculate the effective annual rate if the terms are changed to 3/25,
b-2. What effect will this have on the implicit interest rate charged to
customers that pass up the cash discount?
c-1. Calculate the effective annual rate if the terms are changed to 3/15,

c-2. What effect will this have on the implicit interest rate charged to
customers that pass up the cash discount?
Question 14
On January 25, Coot Company has $320,000 deposited with a local
bank. On January 27, the company writes and mails checks of $27,000
and $67,000 to suppliers. At the end of the month, Coot’s financial
manager deposits a $52,000 check received from a customer in the
morning mail and picks up the end-of- month account summary from the
bank. The manager notes that only the $27,000 payment of the 27th has
cleared the bank. What is the company’s ledger balance and available
balance with its bank?
Question 16
General Products writes checks that average $29,000 daily. These
checks take an average of 6 days to clear. It receives payments that
average $31,000 daily. It takes 3 days before these checks are available
to the firm.
Question 17

Anne Teak, the financial manager of a furniture manufacturer, is
considering operating a lock-box system. She forecasts that 600
payments a day will be made to lock boxes with an average payment
size of $2,000. The bank’s charge for operating the lock boxes is $.40 a
check. The interest rate is .013% per day.
Question 18
A firm offers terms of 3/15, net 45. Currently, two-thirds of all
customers take advantage of the trade discount; the remainder pay bills
at the due date.
Question 19
Microbiotics currently sells all of its frozen dinners cash on delivery but
believes it can increase sales by offering supermarkets 1 month of free
credit. The price per carton is $90, and the cost per carton is $60. The
unit sales will increase from 1,040 cartons to 1,100 per month.
Question 20
Locust Software sells computer training packages to its business
customers at a price of $103. The cost of production (in present value
terms) is $97. Locust sells its packages on terms of net 30 and estimates

that about 5% of all orders will be uncollectible. An order comes in for
30 units. The interest rate is 3% per month.
Question 21
The Branding Iron Company sells its irons for $210 apiece wholesale.
Production cost is $200 per iron. There is a 15% chance that a
prospective customer will go bankrupt within the next half-year. The
customer orders 1,000 irons and asks for 6 months’ credit. Assume an
9% per year discount rate, no chance of a repeat order, and that the
customer will pay either in full or not at all.
Question 22
A firm currently makes only cash sales. It estimates that allowing trade
credit on terms of net 30 would increase monthly sales from 120 to 130
units per month. The price per unit is $101, and the cost (in present
value terms) is $70. The interest rate is 1% per month.
Question 23
Sherman’s Sherbet currently takes about 5 days to collect and deposit
checks from customers. A lock-box system could reduce this time to 3
days. Collections average $40,000 daily. The interest rate is .02% per
day.

Question 24
The financial manager of JAC Cosmetics is considering opening a lock
box in Pittsburgh. Checks cleared through the lock box will amount to
$450,000 per month. The lock box will make cash available to the
company 2 days earlier.
Question 25
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