TESTBANK
BUSINESS FINANCE
FINANCE 300
JAMES T. LINDLEY
PROFESSOR OF FINANCE
FALL 2009
DEPARTMENT OF ECONOMICS AND FINANCE AND INTERNATIONAL BUSINESS
COLLEGE OF BUSINESS ADMINISTRATION
THE UNIVERSITY OF SOUTHERN MISSISSIPPI
JAMES T. LINDLEY
PROFESSOR OF FINANCE
DEPARTMENT OF ECONOMICS AND FINANCE
INTERNATIONAL BUSINESS
COLLEGE OF BUSINESS
OFFICE: 314-H Greene Hall
PHONE 266-4637
FAX: 266-4639
EMAIL:
WEB SITE
TABLE OF CONTENTS
PROBLEMSCHAPTER
1-22 4 & 5
23-76 7
77-93 8
94-115 9 & 10
116-120 11
121-130 13
131-147 3 & 4
148-151 24
FUTURE VALUE AND PRESENT VALUE FORMULAS
FORMULAS AND CALCULATOR STROKES
(TEXAS INSTRUMENTS BA II PLUS SOLAR)
FUTURE VALUE OF A SUM
FUNCTIONKEY STROKE
Interest Rate Per PeriodI/Y
Time PeriodsN
Initial InvestmentPV (change to negative number)
Future ValueCPT--FV
PRESENT VALUE OF A SUM
FUNCTIONKEY STROKE
Interest Rate Per PeriodI/Y
Time PeriodsN
Future ValueFV
Present ValueCPT--PV
FUTURE VALUE OF AN ANNUITY
FUNCTIONKEY STROKE
Present ValueZERO
Interest Rate Per PeriodI/Y
Time PeriodsN
PaymentPMT
Future ValueCPT--FV
PRESENT VALUE OF AN ANNUITY
FUNCTIONKEY STROKE
Future ValueZERO
Interest Rate Per PeriodI/Y
Time PeriodsN
PaymentPMT
Present ValueCPT—PV
FIND PAYMENT FOR LOAN PV =
FUNCTIONKEY STROKE
Interest Rate Per PeriodI/Y
Time PeriodsN
Future ValueFV (FV is zero)
Loan AmountPV (PV Number is negative)
PaymentCPT—PMT
FIND INTEREST RATE ON LOAN
FUNCTIONKEY STROKE
Time PeriodsN
Future ValueFV (FV is zero)
Loan AmountPV (PV Number is negative)
PaymentPMT
Interest Rate Per PeriodCPT--I/Y
FIND TIME PERIOD ON LOAN
FUNCTIONKEY STROKE
Future ValueFV (FV is zero)
Loan AmountPV (PV Number is negative)
PaymentPMT
Interest Rate Per PeriodI/Y
Time PeriodsCPT--N
FIND AMOUNT OF ON LOAN
FUNCTIONKEY STROKE
Future ValueFV (FV is zero)
PaymentPMT
Interest Rate Per PeriodI/Y
Time PeriodsN
Loan AmountCPT--PV (PV Number will be negative)
Effective annual rate
WHERE K = Nominal Yearly Rate Of Interest m = Portion Of The Year
n = number of years
1. A rich aunt promises you $35,000 exactly 5 years after you graduate from college. What is the value of the promised $35,000 if you could negotiate payment upon graduation? Assume an interest rate of 12 percent. [$19,859.94]
2. Thirty years ago, Wayne McConnell bought ten acres of land for $500 per acre in what is now downtown Phoenix. If this land grew in value at a 10 percent per annum rate, what is it worth today? [$87,247]
3. You have been fortunate enough to win $10,000,000 in the lottery. You discover that you can be paid an amount per year over ten years or take the discounted value of the $10,000,000 today assuming a rate of discount equal to the T-Bill rate of 6.5%. What amount could you receive today? {$5,327,260]
4. Houston McNutt placed $50,000 in a mutual fund 7 years ago. Today the fund is worth $100,000. What rate of interest has he earned? [10.4%]
5. How long will it take the $2,000 that Ed Earl Stout placed in an account to double in value if it is earning a rate of 7.2%? [10 years]
6. You purchased gold as an investment 5 years ago at $267 an ounce. Today, gold is selling for $300 an ounce. What is the rate of return on your investment? [2.36%]
7. Ross Warden placed $1000 into an account that earns a nominal 5%, compounded quarterly, what will it be worth 5 years from today? [$1282.04]
8. You place $5,000 in your credit union at an annual interest rate of 12 percent compounded monthly. How much will you have in 2 years if all interest remains in the accounts? [$6,348.67]
9. Betty Walker has $5,436 in an account that has been paying an annual rate of 10%, compounded continuously, since she deposited some funds 10 years ago, how much was the original deposit? [$1,999.79]
10. Suppose Clayton Delaney has $2 million in a 2-year account paying a 6% nominal rate, compounded annually. Another bank offers Clayton an account for 2 years paying a 6% nominal rate, but compounded bimonthly (that is, 6 times a year). If he moves his account, how much additional interest will he earn over the 2 years? [$6,450.06]
11. According to a local department store, the store charges its customers 1% per month on the outstanding balances of their charge accounts. What is the effective annual rate on such customer credit? Assume the store recalculates your account balance at the end of each month. [12.68%]
12. Suppose that a local savings and loan association advertises a 6 percent annual rate of interest on regular accounts, compounded monthly. What is the effective annual percentage rate of interest paid by the savings and loan? [6.17%]
13. You have the opportunity to buy a perpetuity paying $1,000 annually. Your demanded rate of return on this investment is 15%. You would be essentially indifferent to buying or not buying the investment if it were offered at what price? [$6,666.67]
14. If you buy a factory for $250,000 and the terms are 20% down, the balance to be paid off over 30 years at a 12% rate of interest on the unpaid balance, what are the 30 equal annual payments? [$24,828.73]
15. You want to set up a trust fund. If you make a payment at the end of each year for twenty years and earn 10% per year, how large must your annual payments be so that the trust is worth $100,000 at the end of the twentieth year? [$1,745.96]
16. Starting on January 1, 1987, and then on each January 1 until 1996 (10 payments), you will make payments of $1,000 into an investment which yields 10 percent. How much will your investment be worth on December 31 in the year 2006? [$45,468.85]
17. Visser Distributors is financing a new truck with a loan of $24,000 to be repaid in 5 years with monthly installments at a yearly rate of 7.65%. What will monthly payment be? [$482.62]
18. Your bank has offered you a $15,000 loan. The terms of the loan require you to pay back the loan in five equal annual installments of $4,161.00. The first payment will be made a year from today. What is the effective rate of interest on this loan? [12.00%]
19. The new-car dealer offers you a new car and financing. She says the payments will be $400 per month for five years and the rate is 8.8%. What is the price of the car? [$19,360]
20. Find the present value for the following income stream if the interest rate is 12 percent and the payments occur at the end of each year. [$5,001.74]
YEARS CASHFLOW
1-4 $ 500
5-10 $ 800
11-15 $1,200
21. Find the present value of the cash flows shown using a discount rate of 8 percent. Assume that each payment occurs at the end of the year. [$1,166.80]
YEAR CASHFLOW
1-4 $100/yr.
5 200
6 300
7-15 100/yr.
16 400
22. The present value (t = 0) of the following cash flow stream is $5,979.04 when discounted at 12% annually. What is the value of the MISSING (t = 2) cash flow? [$2,999.93]
0 1 2 3 4
---|------|------|------|------|-----
$0 $1,000 $? $2,000 $2,000
CREDIT RATE DETERMINATION
TRADE CREDIT 2/10/NET 30 =
TRADE CREDIT 1/10/NET 40 =
****************************************************************************
23. Tide Inc. has a $200,000 loan from its bank at a nominal interest rate of 13 percent. The bank demands a compensating balance of 20 percent, but will pay 8 percent interest on the compensating balance. What is the effective interest cost of this loan? [14.25%]
24. Your boss wants to know the effective interest rate on a loan that requires a 10 percent compensating balance, has a 12 percent interest rate, and the lender takes the interest payment out of the loan proceeds at the beginning. [15.38%]
25. The Kane Corporation plans to place an order with a new supplier. Kane has been offered terms of 2/10, net 45 from the day the supplies are received. The cost of borrowing from the bank is 15 percent on an annual basis. What is the difference in interest rates between borrowing from the bank and taking the supplier’s terms? [8.45%]
26. You are going to place an order with a new supplier. You have been offered terms of 2/10, net 60 from the day you receive your supplies. Cost of borrowing from the bank is 20 percent (annual rate). What is the best course of action in paying the supplier? [Discount = 15.89% < 20%]
27. GTD Manufacturing needs a $100,000 loan to finance its inventory. It can open a line of credit with a local bank at a 13 percent interest rate. However, the firm must also maintain a 10 percent compensating balance. What is the effective interest rate on the loan? [14.44%]
28. CBT Inc. is borrowing $8,000 from a bank at 20 percent annual interest for six months and the lender takes the interest payment out of the loan proceeds at the beginning. What will be the effective annual rate of interest the firm will pay? [23.46%]
29. The Ohio Corporation is contemplating a substantial loan from the bank. A $5 million loan is available at the prime rate of 18 percent, but also has a 20 percent compensating balance requirement. What is the effective cost of the loan? [22.5%]
30. The Oklahoma Company has an outstanding bank loan of $400,000 at an interest rate of 12 percent. The company is required to maintain a 20 percent compensating balance in its checking account. What is the effective interest cost of the loan? Assume that the company would not normally maintain this average amount. [15%]
31. The Connor Company is having a cash liquidity problem. The financial controller wants to stop taking trade discounts and delay payment as much as possible. Their major supplier offers credit terms of 2/10, net 40. What is Connor's cost of credit if the firm does not take this discount? [27.86%]
32. The Omaha Company currently purchases an average $10,000 per day of raw materials on credit terms of net 30. The firm expects sales to increase substantially next year and anticipates that its raw material purchases will increase to an average $12,000 per day. If Omaha stretched its accounts payable an extra 15 days beyond the due date next year, how much additional short-term credit will be generated? [$240,000]
33. Cornhusker Inc., has a revolving credit agreement with its bank. The firm can borrow up to $2 million under the agreement at an annual interest rate of 9 percent. The firm is required to maintain a 15 percent compensating balance on any funds borrowed under the agreement and to pay a 0.5 percent commitment fee on the unused portion of the credit line. What would be the effective annual percentage cost to the firm of borrowing $250,000 under the terms of the credit agreement? [14.71%]
34. Iowa Co. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the approximate percentage cost of the non-free trade credit? [44.59%]
35. Montana Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of commercial paper for the firm. The dealer indicates that Montana could sell a $5 million issue maturing in 180 days at an interest rate of 7.5 percent per annum (deducted in advance). The fee to the dealer for selling the issue would be $7,500. Find Montana's effective annual interest cost of this commercial paper financing. Assume a 365 day year. [8.12%]
36. Michigan Motors has won a contract to supply certain engine parts for Chrysler. Previously its manufacturing division had averaged $8,000 of purchases a day (on terms net 20). The division simultaneously doubled purchases and negotiated extended credit terms of net 30. How much additional trade credit will be spontaneously generated by these measures? [$320,000]
37. Beene Inc. has credit terms of 1/15, net 45 from its supplier, but is able to stretch its payables and pay in 60 days with no penalty. What is the annual cost of trade credit to Beene? [8.49%]
38. The cost of short-term credit to a local business is 20 percent. The firm has trade credit offerings from three suppliers. The credit terms are: (A) 2/10/30, (B) 4/15/40, (C) 5/20/50. Which of these alternatives would you recommend? [(A) 44.59% (B) 81.49 (C) 86.65% Use Short-Term Credit]
39. You plan on working for 10 years and then leaving for the Alaskan 'back country.' You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the last 5 years. In addition, your family has given you a $5,000 graduation gift. If you put the gift and your future savings in an account paying 8% compounded annually, what will your 'stake' be when you leave for the wilderness 10 years hence? [$31,147.50]
40. Your grandmother is thrilled that you are going to college and plans to reward you at graduation in 4 years with a Porsche. She would like to set aside an equal amount at the completion of each of your college years from her meager pension. If her account earns 12 percent and a new Porsche will cost $50,000, how much must she deposit each year? Assume her first deposit is in exactly one year. [$10,461.72]
41. On January 1, 1985, a graduate student developed a financial plan which would provide enough money at the end of his graduate work (January 1, 1990) to open a business of his own. His plan was to deposit $8,000 per year, starting immediately, into an account paying 10% compounded annually. His activities proceeded according to plan except that at the end of his third year he withdrew $5,000 to take a Caribbean cruise, at the end of the fourth year he withdrew $5,000 to buy a used Camaro, and at the end of the fifth year he had to withdraw $5,000 to pay to have his dissertation typed. His account, at the end of the fifth year, will be less than the amount he had originally planned on by how much? [$16,550]
42. Tillie Thompson has been saving money or the last two years. She made deposits of $1,000 on January 1, 1998, and July 1, 1998, in a savings account paying 10.5% compounded semiannually. On January 1, 1999, she made a third deposit of $1,000, and the bank increased the interest rate paid on savings accounts to 11.5%. She made a fourth $1,000 deposit on July 1, 1999. How much will be in Ms. Thompson’s account on January 1, 2000? [$4,591.63]
43. Your 69-year old aunt has savings of $35,000. She has made arrangements to enter a home for the aged upon reaching the age of 80. Before going into the home, she wants to decrease the account balance by a constant amount each year for ten years, with a zero balance remaining. How much can she withdraw each year if she earns 6 % annually on her savings? Her first withdrawal would be one year from today. [$4,755.37]
44. You have agreed to pay a creditor $5,000 one year hence, $4,000 two years hence, $3,000 three years hence, $2,000 four years hence, and a final payment of $1,000 five years from now. Due to budget considerations you would like to make five equal annual payments to satisfy your contract. If the agreed upon interest is 5% effective per year, what should the equal annual payments be? [$3,097.43]
45. You have purchased a new sailboat and have the option of paying the entire $8,000 now or making equal, annual payments for the next 4 years, the first payment due one year from now. If your time value of money is 7 percent, what would be the largest amount for the equal, annual payments that you would be willing to undertake? [$2,361.83]
46. Herman has just turned 35 years old and wishes to provide for his old age. Suppose he invests $1,000 per year at an effective rate of 5 percent per year for the next 25 years, with the first deposit beginning one year hence. Beginning one year after his last $1,000 deposit he starts withdrawing $X per year for the next 20 years. How large must $X be in order to use up all of his funds? [$3,829.74]
47. Mr. Lewis age 29, wants to begin planning for his retirement at age 65. Upon retiring, he wants to be able to withdraw $15,000 per year on each birthday for 10 years. The first withdrawal will be on his 66th birthday. He will receive a large inheritance on his 30th birthday in two weeks, and he wants to know how much he needs to invest on that day to be able to attain his retirement income. He will invest the money in an account paying 10 percent annual interest for the life of the investment. How much does he need to deposit on his 30th birthday? HINT: (The interest earned between his 65th and 66th birthday is already incorporated in the calculation of the PV of the payout.) [$3,280]
48. John Roberts is retiring one year from today. How much should John currently have in a retirement account earning 10 percent interest to guarantee withdrawals of $25,000 per year for 10 years? [$153,615]
49. You have just had your thirtieth birthday. You have two children. One will go to college 10 years from now and require four beginning-of-year payments for college expenses of $10,000, $11,000, $12,000, and $13,000. The second child will go to college 15 years from now and require four beginning-of-year payments of $15,000, $16,000, $17,000, and $18,000. In addition, you plan to retire in 30 years. You want to be able to withdraw $50,000 per year (at the end of each year) from an account throughout your retirement. You expect to live 20 years beyond retirement. The first withdrawal will occur on your sixty-first birthday. What equal, annual, end-of-year amount must you save for each of the next 30 years to meet these goals, if all savings earn a 15 percent annual rate of return? [$3,123.10]
50 On December 1, 1999, Otto VanAuto borrowed $15,000 for his new car. The loan terms were: 48 month loan, payments beginning January 1, 2000, 11% interest. However, as a marketing promotion, a monthly payment will not be required on the month of his birthday, May. What will be the monthly payment for the loan? How much larger is this payment than a standard 48-month loan? [Monthly Payment = $423.44 : Difference = $35.76]
51. Digger O'Dell is the local friendly undertaker. His business has improved since he adopted his new motto, "I will be the last man to ever let you down." Given his expanded business, he wishes to build a new establishment financed with a short-term mortgage. He can borrow for eight years at 9 percent. He will pay monthly payments on the $50,000 he will borrow. Determine his monthly payment and develop an amortization schedule for the first four months. [Monthly Payment = $732.51]
BOND FORMULAS
ANNUAL BOND PRICE = +
SEMIANNUAL BOND PRICE = +