p-4) 4. You are planning to invest $2,500 today for three years at a nominal
interest rate of 9 percent with annual compounding.
a. What would be the future value (FV) of your investment?
b. Now assume that inflation is expected to be 3 percent per year
over the same three-year period. What would be the investments
FV in terms of purchasing power?
c. What would be the investment’s FV in terms of purchasing
power if inflation occurs at a 9 percent annual rate?9-6)
9-9) 9. Assume you are planning to invest $5,000 each year for six years
and will earn 10 percent per year. Determine the future value
(FV) of this annuity if your first $5,000 is invested at the end of
the first year.
9-14) 14. You are considering borrowing $150,000 to purchase a new
a. Calculate the monthly payment needed to amortize an 8
percent fi xed-rate 30-year mortgage loan.
b. Calculate the monthly amortization payment if the loan in (a)
was for 15 years.
9-15) 15. Assume a bank loan requires an interest payment of $85 per year
and a principal payment of $1,000 at the end of the loan’s eight-year life.
a. At what amount could this loan be sold for to another bank if
loans of similar quality carried an 8.5 percent interest rate?
That is, what would be the present value (PV) of this loan?
b. Now, if interest rates on other similar quality loans are 10
percent, what would be the PV of this loan?
c. What would be the PV of the loan if the interest rate is 8
percent on similar quality loans?
10-2) 2. What are the major sources of long-term funds available to business
corporations? Indicate their relative importance.
10-6) 6. The Garcia Company’s bonds have a face value of $1,000, will
mature in ten years, and carry a coupon rate of 16 percent. Assume
interest payments are made semi-annually.
a. Determine the present value of the bond’s cash flows if the
required rate of return is 16 percent.
b. How would your answer change if the required rate of return
is 12 percent?
10-7) 7. Judith, Inc., bonds mature in eight years and pay a semi-annual
coupon of $55. The bond’s par value is $1,000.
a. What is their current price if the market interest rate for
bonds of similar quality is 9.2 percent?
b. A change in Fed policy increases market interest rates 0.50
percentage points from their level in part (a). What is the
percentage change in the value of Judith, Inc. bonds from
their value in part (a)?
c. Better profits for Judith, Inc. reduces the market interest rate
for its bonds to 9.0 percent. What is the percentage change in
the value of Judith, Inc. bonds from the answer in part (b)?
10-21)21.You purchased 200 shares of H2O Corporation stock at a price of
$20. Consider each of the following announcements separately. What
will the price of the stock be after each change? How many shares will
you own? What will be the total value of your holdings (value of stock
plus any income)?
a. The firm announces a 10 percent stock dividend.
b. The firm announces a two-for-one stock split .
c. The firm announces a $0.50 per share dividend (in your
answer use the price of the stock on the ex-dividend date).
d. The firm announces it will repurchase 10 percent of its shares;
you do not offer to sell any of your shares10-24) 24. Why does dividend income growth exceed that of bond income growth over a period of time?
10-25) 25. The French Thaler and Company’s stock has paid dividends of
$1.60 over the past 12 months. Its historical growth rate of dividends
has been 8 percent, but analysts expect the growth to slow to 5 percent
annually for the foreseeable future.
a. Determine the value of the stock if the required rate of return
on stocks of similar risk is 15 percent.b. If analysts believe the risk premium on the stock should be
reduced by 2 percentage points, what is the new required rate of
return on French Thaler and Company stock? How much should
its price change from the answer you computed in part (a)?
11-4) 4. You purchased shares of Broussard Company using 50 percent
margin; you invested a total of $20,000 (buying 1,000 shares at a price
of $20 per share) by using $10,000 of your own funds and borrowing
$10,000. Determine your percentage profi t or loss under the following
situations (ignore borrowing costs, dividends, and taxes). In addition,
what would the percentage profi t and loss be in these scenarios if
margin were not used?
a. the stock price rises to $23 a share
b. the stock price rises to $30 a share
c. the stock price falls to $16 a share
d. the stock price falls to $10 a share
11-6) 6. The Trio Index is comprised of three stocks, Eins, Zwei, and Tri.
Their current prices are listed below.
STOCK PRICE AT TIME ( t)
a. Between now and the next time period, the stock prices of Eins
andZwei increase 10 percent while Tri increases 20 percent.
What is the percentage change in the price-weighted Trio Index?
b. Suppose instead that the price of Eins increases 20 percent
whileZwei and Tri rise 10 percent. What is the percentage
change in the price-weighted Trio Index? Why does it differ
from the answer to part a?
11-9)9. A U.S. fi rm wants to raise $10 million of capital so it can invest in
new technology. How much will it need to raise to net $10 million
using the average costs of raising funds in the chapter?
11-10)10. A U.S. fi rm wants to raise $15 million by selling 1 million shares
at a net price of $15. We know that some say that fi rms “leave
money on the table” because of the phenomenon of underpricing.
a. Using the average amount of underpricing in U.S. IPOs, how
many fewer shares could it sell to raise these funds if the fi rm
received a net price per share equal to the value of the shares
at the end of the fi rst day’s trading?
b. How many less shares could it sell if the IPO was occurring in
c. How many less shares could it sell if the IPO was occurring in
d. How many less shares could it sell if the IPO was occurring in
11-12)12. Boneyard Biscuits’ Dutch auction for an IPO was a great success.
The fi rm offered 100 million shares. Bids appear below.
BIDDER BID PRICE NUMBER OF SHARES
Manahan $25.25 25 million
Campbell 24.95 30 million
Maloney 24.75 25 million
Touma 24.40 10 million
Clark 24.40 30 million
Fry 24.25 15 million
a. What is the clearing price?
b. What options do Boneyard and its underwriters have for allocating
shares? How many shares will each bidder receive under each option?
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