FINANCE PROBLEM :

QUESTION :

 

You find that a small business loan in the amount of 50,000 is the amount you need to purchase the restaurant location. After researching banks to find the best interest rate, you find that banks for small businesses offer the best interest rate of 9% interest that compounds monthly for 7 years.

 

    1. What is the monthly payment for this loan?
    2. Show the formula that you used and the values used for each variable to
      calculate the monthly payment.
    3. What is the unpaid balance of the loan at the end of the 1st year?
    4. Show the formula that you used and the values used for each variable to
      calculate the unpaid balance at the end of the 1st year.
    5. What is the unpaid balance at the end of the 6th year? Show the formula that
      you used and the values used for each variable to calculate the unpaid balance
      at the end of the 6th year.
 

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FINANCE PROBLEM :

QUESTION :

 

You find that a small business loan in the amount of 50,000 is the amount you need to purchase the restaurant location. After researching banks to find the best interest rate, you find that banks for small businesses offer the best interest rate of 9% interest that compounds monthly for 7 years.

 

    1. What is the monthly payment for this loan?
    2. Show the formula that you used and the values used for each variable to
      calculate the monthly payment.
    3. What is the unpaid balance of the loan at the end of the 1st year?
    4. Show the formula that you used and the values used for each variable to
      calculate the unpaid balance at the end of the 1st year.
    5. What is the unpaid balance at the end of the 6th year? Show the formula that
      you used and the values used for each variable to calculate the unpaid balance
      at the end of the 6th year.
 

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Finance Problem

1. Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450. have a life of five years, and would produce the cash flows shown in the following table.

 

Year Cash Flow

1 $512,496

2 -242,637

3 814,558

4 887,225

5 712,642

 

What is the NPV if the discount rate is 15.9 percent? (Enter negative amounts using negative sign e.g. -45.25. Round answer to 2 decimal places, e.g. 15.25.)

NPV is $_____________

 

2.Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.00 million. This investment will consist of $2.00 million for land and $10.00 million for trucks and other equipment. The land, all trucks, and all other equipment is expected to be sold at the end of 10 years at a price of $5.00 million, $2.00 million above book value. The farm is expected to produce revenue of $2.00 million each year, and annual cash flow from operations equals $1.80 million. The marginal tax rate is 35 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment. (Round intermediate calculations and final answer to 2 decimal places, e.g. 15.25.)

 

NPV$ ___________

 

The project should be accepted or rejected

 

3. Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountain’s opportunity cost of capital is 10.0 percent, and the costs and values of investments made at different times in the future are as follows:

 

Year Cost Value of Future Savings

(at time of purchase)

0 $5,000 $7,000

1 4,500 7,000

2 4,000 7,000

3 3,600 7,000

4 3,300 7,000

5 3,100 7,000

Calculate the NPV of each choice. (Round answers to the nearest whole dollar, e.g. 5,275.)

The NPV of each choice is:

 

NPV0 = $_________

 

NPV1 = $________

 

NPV2 = $_________

 

NPV3 = $_________

 

NPV4 = $_________

 

NPV5 = $_________

 

Suggest when should Bell Mountain buy the new accounting system?

Bell Mountain should purchase the system in .

year 1 year 2 year 3 year 4 year 5

 

4.Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 90 percent as high if the price is raised 10 percent. Chip’s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm’s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

 

At $20 per bottle the Chip’s FCF is $__________ and at the new price Chip’s FCF is $____________.

 

5.Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred stock, and 40 percent common stock. If the returns required by investors are 8 percent, 10 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

 

After tax WACC =_____________%

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Finance Problem

How much did you borrow for your house if your monthly mortgage payment for a 30 year
mortgage at 6.65% APR is $1,600?
. . A
.
$218,080
. . B
.
. $202,503
. . C
.
. $186,926
. . D
.
. $233,658
. . E
.
. $249,235
. . F

Shady Rack Inc. has a bond outstanding with 9.75 percent coupon, paid semiannually, and 17
years to maturity. The market price of the bond is $1,042.43. Calculate the bond’s yield to
maturity (YTM). Now, if due to changes in market conditions, the market required YTM suddenly
increases by 2% from your calculated YTM, what will be the percent change in the market price of
the bond?
. . A
.
. -17.09%
. . B
.
. -16.39%
. . C
.
. -17.76%
. . D
.
. -14.01%
. . E
.
. -15.66%
. . F
.
. -14.87%
.
Sanaponic, Inc. will pay a dividend of $6 for each of the next 3 years, $8 for each of the years 4-7,
and $10 for the years 8-10. Thereafter, starting in year 11, the company will pay a constant
dividend of $5/year forever. If you require 12 percent rate of return on investments in this risk
class, how much is this stock worth to you?
. A
.
. $37.77
. B
.
. $34.54
. C
.
. $50.50
. D
.
. $45.68
. E
.
. $41.46
. F
.
. $55.99
.
Your required rate of return is 15%. What is the net present value of a project with the following
cash flows?
.
. Year . 0 . 1 . 2 . 3 . 4 . 5
. Cash Flow . -750 . 450 . 350 . 150 . 125 . -100
.
. . A. 26.33
.
. . B
.
. 72.15
. . C
.
. 15.56
. . D
.
. 60.27
. . E
.
. 48.68
. . F
.
. 37.37
.
Please use the following information for this and the following two questions. BB Lean has
identified two mutually exclusive projects with the following cash flows.
. Year . 0 . 1 . 2 . 3 . 4 . Cash Flow Project A -52,000.00 . 18,000.00 . 17,000.00 . 15,000.00 . 12,000.00 . Cash Flow Project B
-52,000.00 . 17,800.00 . 10,000.00 . 12,000.00 . 17,000.00
The company requires a 11.5% rate of return from projects of this risk. What is the NPV of project
A?
. . A
.
. 5,972.87
. . B
.
. 417.37
. . C
.
. 1,395.64
. . D
.
. 1,624.90
. . E
.
. 5,180.35
. . F
.
. 972.57
.
What is the IRR of project B?
. . A
.
. 12.06%
. . B
.
. 12.94%
. . C
.
. 13.05%
. . D
.
. 20.80%
. . E
.
. 13.90%
. . F
.
. 14.68%
.
At what discount rate would you be indifferent between these two projects?
. . A
.
. 3.1177%
. . B
.
. 34.1306%
. . C
.
. 13.5250%
. . D
.
. 26.0812%
. . E
.
. 14.7386%
. . F
.
. 15.8950%
.
A bond with a face value of $1,000 has annual coupon payments of $100. It was issued 10 years
ago and has 7 years remaining to maturity. The current market price for the bond is $1,000.
Which of the following is true: I. Its YTM is 10%. II. Bond’s coupon rate is 9.5%. III. The bond’s
current yield is 10%.
. . A
.
. I, II Only
. . B
.
. I, III Only
. . C
.
. I, II, and III
. . D
.
. III Only
. . E
.
. I Only
. . F
.
. II, III Only
.
Riverhawk Corporation has a bond outstanding with a market price of $1,250.00. The bond has
10 years to maturity, pays interest semiannually, and has a yield to maturity of 9%. What is the
bond’s coupon rate?
. . A
.
. 13.61%
. . B
.
. 11.31%
. . C
.
. 9.77%
. . D
.
. 10.54%
. . E
.
. 12.08%
. . F
.
. 12.84%
.
You purchased a stock for $20 per share. The most recent dividend was $2.50 and dividends are
expected to grow at a rate of 8% indefinitely. What is your required rate of return on the stock?
. . A
.
. 17.64%
. . B
.
. 21.50%
. . C
.
. 17.00%
. . D
.
. 18.38%
. . E
.
. 19.25%
. . F
.
. 20.27%
.
Sales and profits of Growth Inc. are expected to grow at a rate of 25% per year for the next six
years but the company will pay no dividends and reinvest all earnings. After that, the dividends
will grow at a constant annual rate of 7%. At the end of year 7, the company plans to pay its first
dividend of $4.00 per share. If the required return is 16%, how much is the stock worth today?
. . A
.
. $22.80
. . B
.
. $15.96
. . C
.
. $20.52
. . D
.
. $25.08
. . E
.
. $18.24
. . F
.
. $13.68
.
Apple Sink Inc. (ASI) just paid a dividend of $2.50 per share. Its dividends are expected to grow at
26% a year for the next two years, 24% a year for the years 3 and 4, 16% for year 5, and at a
constant rate of 6% per year thereafter. What is the current market value of the ASI’s stock if
companies in this risk class have a 16% required rate of return?
. . A
.
. $56.03
. . B
.
. $48.35
. . C
.
. $51.29
. . D
.
. $45.54
. . E
.
. $54.27
. . F
.
. $42.87
.
The Retarded Company’s dividends are declining at an annual rate of 6 percent. The company
just paid a dividend of $4 per share. You require a 16 percent rate of return. How much will you
pay for this stock?
. . A
.
. $13.85
. . B
.
. $19.20
. . C
.
. $17.09
. . D
.
. $15.33
. . E
.
. $12.57
. . F
.
. $21.78
.
The dividend yield of a stock is 9 percent. If the market price of the stock is $18 per share and its
dividends have been growing at a constant rate of 6%, what was the most recent dividend paid by
the company?
. . A
.
. $1.36
. . B
.
. $1.53
. . C
.
. $1.02
. . D
.
. $1.70
. . E
.
. $1.19
. . F
.
. $0.85
.
Last year, Jen and Berry Inc. had sales of $45,000, cost of goods sold (COGS) of 12,000,
depreciation charge of $3,000 and selling, general and administrative (SG&A) cost of $10,000.
The interest costs were $2,500. Twenty percent of SG&A costs are fixed costs. If its sales are
expected to be $60,000 this year, what will be the estimated SG&A costs this year?
. . A
.
. $12,667
. . B
.
. $12,000
. . C
.
. $10,636
. . D
.
. $11,500
. . E
.
. $14,250
. . F
.
. $13,250
.
You require a risk premium of 3.5 percent on an investment in a company. The pure rate of
interest in the market is 2.75 percent and the inflation premium is 3 percent. US Treasury bills
are risk free. What should be the yield of the US Treasury bills? Use multiplicative form.
. . A
.
. 5.58%
. . B
.
. 6.09%
. . C
.
. 5.06%
. . D
.
. 6.35%
. . E
.
. 5.32%
. . F
.
. 5.83%
.
Bonds X and Y are identical, including the risk class. The only difference between A and B is in the
coupon payment as shown below.
.
. . Bond X . Bond Y
. Face value . $1,000 . $1,000
. Annual Coupon Payment . $120 . $130
. Payment Frequency . Semiannual . Annual
. Years to maturity . 15 . 15
. Price . $919.43 . ?
.
.
. What is the price of bond Y?
. . A
.
. $925.88
. . B
.
. $940.92
. . C
.
. $1,007.15
. . D. $956.95
.
. . E
.
. $973.44
. . F
.
. $989.75

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Finance Problem

Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

  1. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction?
  2. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon’s debt will be much riskier. As a result, the debt cost of capital will be 8%. What will be the expected return of equity in this case?
  3. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?

6. Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would be its cost of equity if it took on the average amount of debt for its industry at a cost of debt of 6%?

7. Your firm is financed 100% with equity and has a cost of equity capital of 12%. You are considering your first debt issue, which would change your capital structure to 30% debt and 70% equity. If your cost of debt is 7%, what will be your new cost of equity?

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Finance Problems

Problem 1

Chuck Sox makes wooden boxes in which to ship
motorcycles. Chuck and his three employees invest a total of 40
hours per day making the 120 boxes.
a) What is their productivity?
b) Chuck and his employees have discussed redesigning the process
to improve efficiency. If they can increase the rate to 125
per day, what will be their new productivity?
c) What will be their unit increase in productivity per hour?
d) What will be their percentage change in productivity?

Problem 2

Lillian Fok is president of Lakefront Manufacturing,
a producer of bicycle tires. Fok makes 1,000 tires per day with the
following resources:

Labor: 400 hours per day @ $12.50 per hour
Raw material: 20,000 pounds per day @ $1 per pound
Energy: $5,000 per day
Capital costs: $10,000 per day

a) What is the labor productivity per labor-hour for these tires at
Lakefront Manufacturing?
b) What is the multifactor productivity for these tires at
Lakefront Manufacturing?
c) What is the percent change in multifactor productivity if Fok
can reduce the energy bill by $1,000 per day without cutting
production or changing any other inputs?

Problem 3

Charles Lackey operates a bakery in Idaho Falls, Idaho.
Because of its excellent product and excellent location, demand has
increased by 25% in the last year. On far too many occasions, customers
have not been able to purchase the bread of their choice.
Because of the size of the store, no new ovens can be added. At a
staff meeting, one employee suggested ways to load the ovens differently
so that more loaves of bread can be baked at one time. This
new process will require that the ovens be loaded by hand, requiring
additional manpower. This is the only thing to be changed. If the
bakery makes 1,500 loaves per month with a labor productivity of
2.344 loaves per labor-hour, how many workers will Lackey need to
add? (Hint: Each worker works 160 hours per month.)

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