1.

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

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

Future value$

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

Future value$

2.

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

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

Monthly rate on annuity % Effective annual rate %

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

Monthly annuity payment $

3.

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

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

Present value $

b. Is the factory a good investment?

NoYes

4.

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

Number of years

5.

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

Present Valuea. r = 12%, t = 8 years $ b. r = 12%, t = 16 yearsc. r = 6%, t = 8 yearsd. r = 6%, t = 16 years

6.

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

Monthly payment $

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

Effective annual interest rate %

7.

Refer the table below:

Maturity Coupon Bid Price Asked Price Asked Yield, %2012 May 15 1.375 101:05 101:06 0.782013 May 15 3.625 106:31 107:01 1.232014 May 15 4.75 111:22 111:23 1.702020 May 15 8.75 144:17 144:19 3.442025 Aug 15 6.875 133:07 133:11 3.942030 May 15 6.25 128:25 128:27 4.122040 May 15 4.375 100:28 100:29 4.32

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

Current yield %

8.

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

Coupon rate %

9.

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

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

Initial price $

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

New price $

10.

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

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

Rate of Return Bond 1 %Bond 2 %

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

YesNo

11.

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

Remaining period years

12.

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

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

P/E ratio

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

P/E ratio

13.

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

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

Stock price $

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

Dividend yield %

14.

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

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

Value of a share $

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

Stock price $

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

Expected rate of return %

15.

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

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

Present ValueYear 1 $ Year 2Year 3

16.

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

Expected growth rate %

17.

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

Expected rate of return %

18.

The following are the cash flows of two projects:

Year Project A Project B0 −$320 −$320 1 150 220 2 150 220 3 150 220 4 150

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

Project NPV A $ B

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

Project BProject A

19.

The following are the cash flows of two projects:

Year Project A Project B0 −$320 −$320 1 150 220 2 150 220 3 150 220 4 150

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

Project NPV A $ B

b. Which of these projects is worth pursuing?

Project AProject BBoth

20.

The following are the cash flows of two projects:

Year Project A Project B0 −$240 −$240 1 120 140 2 120 140 3 120 140 4 120

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

Project Payback Period A yearsB years

21.

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

Beginning EndAccounts receivable $1,600 $4,900 Accounts payable 780 340

Calculate net cash flow for the business for this period.

Net cash flow $

22.

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

INCOME STATEMENT$

$

23.

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

NPV $

24.

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

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

Method Operating Cash FlowAdjusted accounting profits $ Cash inflow/cash outflow analysisDepreciation tax shield approach

b. Are the above answers equal?

YesNo

25.

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

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

Equivalent Annual CostQuick & Dirty $ million Do-It-Right million

b. Which system should Blooper install?

Quick & DirtyDo-It-Right

26.

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $35,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $8,750. The grill will have no effect on revenues but will save Johnny’s $17,500 per year in energy expenses. The tax rate is 30%. Use MACRS depreciation schedule.

a. What are the operating cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Year Operating Cash Flows1 $ 23

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

Time Total Cash Flows0 $ 123

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

YesNo

27.

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

a. Find the depreciation charge each year.

Year Depreciation1 $ 23456

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

After-tax proceeds $

28.

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

Variable cost $ per burgerFixed cost $

29.

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

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

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

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

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

30.

A silver mine can yield 13,000 ounces of silver at a variable cost of $32 per ounce. The fixed costs of operating the mine are $52,000 per year. In half the years, silver can be sold for $48 per ounce; in the other years, silver can be sold for only $24 per ounce. Ignore taxes.

a. What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined?

Average cash flow $

b. Now suppose you can shut down the mine in years of low silver prices. Calculate the average cash flow from the mine.

Average cash flow $