Question 1. You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
Question 2. Your uncle offers you a choice of $30,000 in 50 years or $95 today. If money is discounted at 12 percent, which should you choose?
Question 3. Burns Fire and Casualty Company has $1,000 par value bonds outstanding at 11 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is:
a. 6 percent.
b. 8 percent.
c. 12 percent.
Question 4. Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket.
a. Compute its cash flow.
b. Assume it has $200,000 in depreciation. Recompute its cash flow.
c. How large a cash flow benefit did the depreciation provide?
d. Would the president of a firm on the New York Stock Exchange likely be satisfied with the earnings after taxes results in part c?
Question 5. You are called in as a financial analyst to appraise the bonds of the Holtz Corporation. The $1,000 par value bonds have a quoted annual interest rate of 14 percent, which is paid semiannually. The yield to maturity on the bonds is 12 percent annual interest. There are 15 years to maturity.
a. Compute the price of the bonds based on semiannual analysis.
b. With 12 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds?
Question 6. Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 12 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 16 percent. Either method will require an initial capital outlay of $75,000. The inflows from projected business over the next five years are given below. Which method should be selected using net present value analysis?
Year Method 1 Method 2
1 $18,000 $20,000
2 24,000 25,000
3 34,000 35,000
4 26,000 28,000
5 14,000 15,000
Question 7. Larry's Athletic Lounge is planning an expansion program to increase the sophistication of its exercise equipment. Larry is considering some new equipment priced at $20,000 with an estimated life of five years. Larry is not sure how many members the new equipment will attract, but he estimates his increased yearly cash flows for each of the next five years will have the following probability distribution. Larry's cost of capital is 14 percent.
P
(Probability) Cash Flow
.2 $2,400
.4 4,800
.3 6,000
.1 7,200
a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.
b. What is the expected net present value?
c. Should Larry buy the new equipment?
Question 8. Assume a $40,000 investment and the following cash flows for two alternatives.
Year Investment X Investment Y
1 $ 6,000 $15,000
2 8,000 20,000
3 9,000 10,000
4 17,000
5 20,000
Which of the alternatives would you select under the payback method?
Question 9. Aerospace Dynamics will invest $110,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. Should the project be undertaken? (Note that the fourth year's cash flow is negative.)
Year Cash Flow
1 $36,000
2 44,000
3 38,000
4 (44,000)
5 81,000
Question 10. The stock of Pills Berry Company is selling at $60 per share. The firm pays a dividend of $1.80 per share.
a. What is the annual dividend yield?
b. If the firm has a payout rate of 50 percent, what is the firm's P/E ratio?