Description

Chapter: 5 -Problem: 4 >> It is often the case that suppliers offer their customers to either pay the full amount of the invoice within a certain number of days, for example within 30 days, or receive a discount if they pay earlier, for example within 15 days. The first option would usually be referred to as ‘Net 30’. If, in the second option, the discount is 2 percent, the option would be referred to as ‘2/15, net 30’.Sup
Answer Preview: Assume a $100 invoice. La Tierra Inc. has the choice to …

, Chapter: 3 -Problem: 10 >> You want to test the speed with which stock market prices adjust to positive earnings’ announcements. Company A makes its earnings announcement on May 20 and Company B on June 16. You collected for each company daily share price returns two days before the event day and two days after the event day, as reported below. Company A has a beta of 1 and Company B a beta of 2. a. Calculate the alphas of
Answer Preview: a. The alphas of company A and company B are calculated below using the SML equation: b. and c. The …

, Chapter: 2 -Problem: 9 >> You borrowed $80,000 to finance the purchase of a property through a standard, 30-year fixed rate mortgage with an annual interest rate of 8 percent, compounded monthly.a. What is your monthly mortgage payment?b. How much interest and how much principal repayment are in your first monthly mortgage payment?c. How much interest will you pay over the full life of the mortgage?
Answer Preview: a. The monthly mortgage payment, call it X, is the solution to the equation: $80,000 …

, Chapter: 3 -Problem: 3 >> You invest one-third of your wealth in each of three stocks. The expected return and standard deviation of each individual stock is 10 percent and 20 percent, respectively. Each stock has a pairwise correlation of 0.50 with the returns of the two other stocks.a. What is the expected return of the portfolio?b. What is the risk reduction of investing in the portfolio containing the three stocks rela
Answer Preview: a. The expected return of the equally-weighted portfolio is the same as …

, Chapter: 11 -Problem: 9 >> The Rolleston Company (TRC), an all-equity financed company, generates perpetual free cash flow of $40 million. It holds $100 million of cash, has 50 million shares outstanding, and its shareholders require a 10 percent return on their investment in the firm. TRC management wants to invest the $100 million of cash in a project that would raise the firm’s future free cash flow by 20 percent without
Answer Preview: a. b. c. The investment should not be undertaken bec…

, Chapter: 2 -Problem: 6 >> A company borrowed $10 million for five years from Atlantic Bank. The company pays Atlantic Bank a fixed annual rate of 8 percent and must pay back the $10 million loan at the end of the borrowing period. A year has passed since the loan was made and Atlantic Bank wants to sell the loan to Pacific Bank.a. If the interest rate is now 7 percent, what is the value of the loan?b. What would be the val
Answer Preview: a. The loan will generate fixed interest income of $800,000 (8% …

, Chapter: 4 -Problem: 5 >> Below is some income statement information on company ABD. Prepare an income statement for each of the three years. Show your computations.  Transcribed Image Text: Sales Interest expense Cost of goods sold Administrative and selling expenses Income tax expense Earnings after tax Year 1 $21,087 75 1
Answer Preview: Year 1 Gross profit = Sales Cost of goods sold = $21,087 $16,182 = $4,905 Operating profit = Gross p…

, Chapter: 11 -Problem: 5 >> The International Supplies Company (ISC) has convertible preferred stocks trading at $80 and serving an annual dividend of $2.40. The preferred is convertible into two shares of ISC common stocks. Shares of common stocks are currently trading at $32.a. What is the conversion ratio of the convertible preferred?b. What is the conversion price of a share of common stock?c. What is the conversion prem
Answer Preview: a. The conversion ratio is 2 (two common stocks for e…

, Chapter: 10 -Problem: 2 >> Consider a 6 percent coupon bond with a $1,000 face value maturing tomorrow.a. What would be the price at which the bond is quoted?b. According to bond conventions, what is the bond’s flat price?c. What is the accrued interest if the bond pays a coupon semi-annually?d. What is the bond’s invoice price?
Answer Preview: a. The bond is quoted at $1,000. It excludes the last coupon payment. b. The bonds fla…

, Chapter: 4 -Problem: 8 >> Prepare the managerial balance sheet of the following US company balance sheet (the company applies US GAAP):  Transcribed Image Text: In millions Assets Current assets: Cash and cash equivalents Short-term investments Merchandise inventories Deferred income taxes Other current assets Total current
Answer Preview: Invested capital(in millions) Cash Working capital requirement Net assets …

, Chapter: 16 -Problem: 5 >> Return to the WTM case in the chapter where it is said that WTM could hedge its exposure to the price risk of copper by purchasing a call option for $336 that would give it the right to buy one ton of copper in three months for $6,000. The spot price of a ton of copper is $6,000 and the risk-free rate is 5 percent. a. What is the annual volatility of the price of copper?b. What would be the call p
Answer Preview: a. C[S 0 = $6,000; X = $6,000; T = 0 25; R F = 5%; S = 25 01%] = $336 …

, Chapter: 2 -Problem: 1 >> What is the interest rate that makes you indifferent between $1,000 in one year and $1,180 in three years?
Answer Preview: If indifferent then the present valu…

, Chapter: 16 -Problem: 9 >> The Pacific Food Company (PFC) has created a new concept restaurant that serves low-calorie healthy pizza at competitive prices. The restaurant costs $1.2 million to launch and is expected to generate a free-cash-flow stream with a present value of $1 million and a volatility of 30 percent. Identical restaurants can be opened in one year at the same cost and with the same present value. The risk-f
Answer Preview: a. PFCshould not open a restaurant now because this proj…

, Chapter: 10 -Problem: 10 >> The General Distribution Company (GDC) is a privately-held company in the wholesale food distribution sector. You collected data on a sample of five listed companies in the same sector which are similar to GDC. Get five estimates of GDC’s equity value based on the following data:  Transcribed Image Text:
Answer Preview: The estimated equity value of GDC ranges from a minimum o…

, Chapter: 4 -Problem: 3 >> Below are incomplete balance sheets of OQ Corporation (figures in millions). a. Compute the missing amounts, and show the balance sheet at year-ends 1, 2, 3, and 4. Show your computations. b. Comment on the asset and liability structure of the firm. Transcribed Image Text: End-of-year for balance sh
Answer Preview: a. Year 1 Non current assets= Total assets Current assets= $21,094 $3,092 = $18,002 Total liabilities and owners equity = Total assets = $21,094 Owner…

, Chapter: 5 -Problem: 6 >> Following the bankruptcy of Lehmann Brothers on September 15, 2008, the shortterm credit market came to a halt. Many companies found themselves unable to renew their short-term debt and fell into financial distress. If, at that time, your company held a lot of cash, would you have felt immune to the financial crisis?
Answer Preview: Not necessarily. The cash held by your firm would …

, Chapter: 2 -Problem: 4 >> You can purchase a car with one of the following two financing plans. You make a down payment of $12,000 and 36 monthly payments of $400 starting immediately. Alternatively, you can make 60 monthly payments of $492 starting next month without any down payment. Which plan offers a better deal if the interest rate is 6 percent?
Answer Preview: PV(Plan 1) = $12,400 + $400ADF(T=35; k=6%/12) = …

, Chapter: 2 -Problem: 10 >> A junior employee, who just turned 25, decides to set up a personal retirement fund to supplement her government-funded pension plan during her first 20 years of retirement. She wants to have an annual income of $50,000 starting when she turns 65 and ending on her 84th birthday.a. What lump sum must she invest today at 6 percent in order to achieve her retirement plan?b. How much must she invest e
Answer Preview: a. The capital needed at 65, call it X, is an immedia…

, Chapter: 2 -Problem: 8 >> The municipal government has imposed a temporary, five-year tax increase on the value of property that will raise $80 million at the end of the first year. Property values are estimated to grow at a rate of 3 percent per year.a. What is the present value of the total amount of tax the proposal will raise if the discount rate is 8 percent?b. What is the present value of the total amount of tax the
Answer Preview: a. It is the present value, at 8 percent, of an annuity of …

, Chapter: 3 -Problem: 9 >> Below are the recent performances of four investment funds, a market index (M), and a risk-free asset (F): a. Fill in the empty cells in the table above.b. What are the alphas of the above portfolios? How did the investment funds perform? Transcribed Image Text: Investment Fund Average return Averag
Answer Preview: a. The market has a beta of one; the risk-free asset h…

, Chapter: 2 -Problem: 3 >> a. What would be the compounded value of one dollar in three years if the annual interest rate is 3 percent in Year 1 and is expected to rise to 5 percent in Year 2 and 6 percent in Year 3?b. What constant annual interest rate would produce the same compounded value over three years?
Answer Preview: a. b. (1 …

, Chapter: 10 -Problem: 4 >> Consider a two-year, 5 percent coupon bond selling at par. Answer the following questions.a. What is the bond’s yield to maturity? What assumption does the yield make regarding the first coupon payment? b. Assume that in a year the one-year market rate is 7 percent (this future rate is unknown today; it is assumed to be known to illustrate the reinvestment risk). What is the return a bondholder wi
Answer Preview: a. The yield to maturity is the same as the coupon rate (5%) because the bond is selling at par. The …

, Chapter: 3 -Problem: 5 >> The market portfolio has an expected return of 9 percent with a 10 percent volatility. The risk-free rate is 4 percent. A stock has a 20 percent volatility and a correlation coefficient of minus 0.10 with the market.a. What is the stock’s beta? What does its sign indicate?b. What is the stock’s expected return? Explain why it is lower than the risk-free rate.
Answer Preview: a. The negative sign indicates that the stock returns have a tendency to move in the opposit…

, Chapter: 10 -Problem: 6 >> A three-year, 4 percent government bond is trading at $1,001. The spot yield curve indicates that the 1-year spot rate is 2 percent, the 2-year spot rate is 3 percent, and the 3-year spot rate is 4 percent. Is there an arbitrage opportunity, that is, is it possible to earn a riskless profit by constructing a portfolio with no net investment (assume all transaction costs are zero)? Describe this po
Answer Preview: The prices of the three zero-coupon bonds are: Taken toget…

Additional Information

15 Reviews for Finance For Executives Managing For Value Creation Textbook Questions And Answers