FV FV: Explanation

What is the future value of $900 deposited for one year earning an interest rate of 10 percent per year?
Future value
990 1%
Explanation:
FVN = PV (1 + i)N
FV1 = $900 (1 + 0.10)1
= $900 1.10
= $990
Compute the value in 26 years of a $1,500 deposit earning 8 percent per year. (Do not round
intermediate calculations and round your final answer to 2 decimal places.)
Future value
$
11,094.53 0.1%
Explanation:
FVN = PV (1 + i)N
FV26 = $1,500 (1 + 0.08)26
= $1,500 7.39635
= $11,094.53
A deposit of $850 earns interest rates of 8 percent in the first year and 11 percent in the second year.
What would be the second year future value? (Round your answer to 2 decimal places.)
Future value
$
1,018.98 1%
Explanation:
The time line for this problem is:

FV = PV (1 + i) (1 + j)
FV = $850 (1 + 0.08) (1 + 0.11)
= $850 1.08 1.11
= $1,018.98
Consider a $4,300 deposit earning 9 percent interest per year for 9 years.
What is the future value? (Do not round intermediate calculations and round your final answer to 2
decimal places.)
Future value
$
9,339.14 0.1%
How much total interest is earned on the original deposit? (Do not round intermediate calculations
and round your final answer to 2 decimal places.)
Total interest earned
5,039.14 0.1%
How much is interest earned on interest? (Do not round intermediate calculations and round your
final answer to 2 decimal places.)
$
Interest earned on the interest
1,556.14 0.1%
Explanation:
The $4,300 investment will grow to a future value of $9,339.14 [= FV9 = $4,300 (1 + 0.09)9], assuming
compounded interest over the 9 years. The total interest earned is $5,039.14. The interest earned on the
original investment is $387 per year for 9 years, or $3,483. The interest earned on the interest is the
difference of $1,556.14 [= $5,039.14 $3,483].
What is the present value of a $240 payment in one year when the discount rate is 6 percent? (Round
your answer to 2 decimal places.)
$
Present value
226.42 1%
Explanation:
PV = FV/(1+i)
PV = $240 / (1 + 0.06)
= $240 / 1.06
= $226.42
Ten years ago, Hailey invested $1,400 and locked in a 8 percent annual interest rate for 30 years (end 20
years from now). Aidan can make a 20-year investment today and lock in a 9 percent interest rate.
How much money should he invest now in order to have the same amount of money in 20 years as
Hailey?(Do not round intermediate calculations and round your final answer to 2 decimal places.)
Present value
$
2,513.68 0.1%
Explanation:
First, determine how much Hailey will have 20 years from now:
FV20 = PV -10 (1 + i)30
FV20 = $1,400 (1 + 0.08)30
= $1,400 10.06266
= $14,087.72
So, Aidan will have to deposit:
PV = FV20 / (1 + i)N
PV = $14,087.72 / (1 + 0.09)20
= $14,087.72 / 5.60441 = $2,513.68
Compute the present value of an $1,350 payment made in 9 years when the discount rate is 11 percent.
(Do not round intermediate calculations and round your final answer to 2 decimal places.)
$
Present value
527.75 1%
Explanation:
PV = FV/(1 + i)N
PV = $1,350 / (1 + 0.11)9
= $1,350 / 2.55804
= $527.75
Compute the present value of $5,100 paid in two years using the following discount rates: 9 percent in
the first year and 8 percent in the second year. (Do not round intermediate calculations and round
$
Present value
4,332.31 0.1%
explanation:
PV = FV / [(1 + i) (1 + j) ]
PV = $5,100 / [(1 + 0.09) (1 + 0.08)]
= $5,100 / [1.09 1.08]
= $5,100 / 1.17720
= $4,332.31
Which cash flow would you rather pay, $425 today or $500 in two years if interest rates are 10 percent?
Pay $500 in two years
Pay $425 today
= FV/(1 + i)N
= $500.} / (1 + {{1)2
= $500 / 1.21000
= $413.22
The present value of $500 to be paid in two years at 10 percent interest is $413. This amount is lower
than $425 paid today. Therefore, paying the $500 in two years is cheaper.
V
PV
Approximately how many years are needed to double a $500 investment when interest rates are 13.50
percent per year? (Round your answer to 2 decimal places.)
Period
years
5.33 1
Explanation:
N = 72 / 13.50 5.33 years

Approximately what interest rate is earned when an investment doubles over 12.2 years? (Round your
answer to 2 decimal places.)
%
Interest rate
5.90 1
Explanation:
N = 72 / 12.2 5.90 percent

Determine the interest rate earned on a $3,200 deposit when $3,800 is paid back in one year. (Round
Interest rate
%
18.75 1%
Explanation:
$3,200 (1 + i) = $3,800; Solving for i yields 18.75%

You invested $3,000 in the stock market one year ago. Today, the investment is valued at $3,660.
What return did you earn?
%
Return earned
22 1%
What return would you suffer next year for your investment to be valued at the original
$3,000? (Negative answer should be indicated by a minus sign. Do not round intermediate
calculations and round your final answer to 2 decimal places.)
Return earned
%
-18.03 1%
Explanation:
FVN = PV (1 + i)N
$3,660 = $3,000 (1 + i)1
(1 + i) = $3,660 / $3,000
i = 1.22 1 = 0.22 or 22.00% (first year return is positive)
FVN = PV (1 + i)N
$3,000 = $3,660 (1 + i)1
(1 + i) = $3,000 / $3,660
i = 0.8197 1 = 0.1803 or 18.03%
(second year return is negative)
What annual rate of return is earned on a $5,000 investment when it grows to $9,250 in six years? (Do
not round intermediate calculations and round your final answer to 2 decimal places.)
%
Annual rate of return
10.80 1%
Explanation:
FVN = PV (1 + i)N
$9,250 = $5,000 (1 + i)6
(1 + i)6 = $9,250 / $5,000
(1 + i)6 = 1.85
i = (1.85)(1/6) - 1 = 0.1080 or 10.80%
How long will it take $2,000 to reach $7,000 when it grows at 10 percent per year? (Do not round
years
Period
13.14 1
Explanation:
FVN = PV (1 + i)N
$7,000 = $2,000 (1 + 0.10)N
(1.10)N = $7,000 / $2,000 (the thousands cancel)
ln (1.10)N = ln 3.5
N ln 1.10 = ln 3.5
N = ln 3.5 / ln 1.10 = 1.25276 / 0.09531 = 13.14 years
= 13 years, 1.7 months
Compute the future value in year 8 of a $3,200 deposit in year 1 and another $2,700 deposit at the end
of year 3 using a 10 percent interest rate. (Do not round intermediate calculations and round your
$
Future value
10,584.27 0.1%
Explanation:
FV8 = $3,200 (1 + 0.10)7 + $2,700 (1 + 0.10)5 = $6,235.89 + $4,348.38 = $10,584.27

Given a 10 percent interest rate, compute the year 7 future value if deposits of $3,100 and $4,100 are
made in years 2 and 3, respectively, and a withdrawal of $1,000 is made in year 5. (Do not round
$
Future value
9,785.39 0.1%
Explanation:
FV7 = $3,100 (1 + 0.10) 5 + $4,100 (1 + 0.10) 4 $1,000 (1 + 0.10)2 = $4,992.58 + $6,002.81

$1,210.00 = $9,785.39
Given a 3 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4
of $1,050, $1,350, $1,350, and $1,450. (Do not round intermediate calculations and round your
$
Future value
5,750.16 0.1%
Explanation:
FV6 = $1,050 (1 + 0.03)5 + $1,350 (1 + 0.03)4 + $1,350 (1 + 0.03)3 + $1,450 (1 + 0.03)2

FV6 = $1,217.24 + $1,519.44 + $1,475.18 + $1,538.31 = $5,750.16
What is the future value of a $850 annuity payment over five years if interest rates are 9 percent? (Do
Future value
$
5,087.00 0.1%
Explanation:
Assume that you contribute $210 per month to a retirement plan for 15 years. Then you are able to
increase the contribution to $410 per month for the next 25 years. Given an 8 percent interest rate. What
is the value of your retirement plan after the 40 years? (Do not round intermediate calculations and
round your final answer to 2 decimal places.)
$
Future value of multiple annuities
923,316.92 0.01%
Explanation:
Break the annuity streams into a level stream of payments of $210 for 40 years and another level stream
of payments of $200 for the last 25 years.
Compute the present value of a $2,200 deposit in year 3 and another $1,700 deposit at the end of year 5
if interest rates are 8 percent. (Do not round intermediate calculations and round your final answer
to 2 decimal places.)
Present value
$
2,903.42 0.1%
Explanation:
PV = $2,200 (1 + 0.08)3 + $1,700 (1 + 0.08)5 = $1,746.43 + $1,156.99 = $2,903.42

You are looking to buy a car. You can afford $720 in monthly payments for five years. In addition to the
loan, you can make a $820 down payment. If interest rates are 9.75 percent APR, what price of car can
you afford? (Do not round intermediate calculations and round your final answer to 2 decimal
places.)
Present value
$
34,904.06 0.1%
Explanation:
What's the present value of a $870 annuity payment over four years if interest rates are 8 percent? (Do
Present value
$
2,881.55 0.1%
Explanation:
A perpetuity pays $180 per year and interest rates are 8.3 percent. How much would its value change if
interest rates increased to 9.8 percent? (Round your answer to 2 decimal places.)
Change in value
$
331.94 1%
Did the value increase or decrease?

Decrease
Explanation:
The difference between these perpetuities is $331.94. The value of the perpetuity decreased with an
increase in the interest rate.
A loan is offered with monthly payments and a 9.75 percent APR. Whats the loans effective annual rate
(EAR)? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Effective annual rate
Explanation:
%
10.20 1%
Whats the interest rate of a 8-year, annual $3,500 annuity with present value of $20,000? (Round your
%
Annuity interest rate
8.15
Explanation:
or TVM calculator: N = 8, PV = 20,000, PMT = 3,500, FV = 0, CPT I = 8.15%

You wish to buy a $24,000 car. The dealer offers you a 4-year loan with a 10 percent APR. What are the
monthly payments? (Do not round intermediate calculations and round your final answer to 2
decimal places.)
Payment
per month
608.70 0.1%
How would the payment differ if you paid interest only? (Do not round intermediate calculations and
Payment
per month
200.00 0.1%
Explanation:
If you only paid interest over the length of the loan and your principal balance was repaid at the end of
the 48 months, your payment would be $200.00 per month (= $24,000 0.10 12) for interest only and
you would owe $24,000 at the end of the 48 months, too.
Joey realizes that he has charged too much on his credit card and has racked up $4,300 in debt. If he
can pay $125 each month and the card charges 18 percent APR (compounded monthly), how long will it
take him to pay off the debt? (Do not round intermediate calculations and round your final answer
months
Time to pay off the debt
48.74 1%
Explanation:
or TVM calculator: PV = 4,300, PMT = 125, FV = 0, I = 1.500; CPT N = 48.74 months

Rachel purchased a $20,000 car three years ago using a 9 percent, 5-year loan. She has decided that
she would sell the car now, if she could get a price that would pay off the balance of her loan.
What is the minimum price Rachel would need to receive for her car? (Round the loan payment to the
nearest cent but do not round any other interim calculations. Round your final answer to 2
decimal places.)
$
The minimum price
9,087.72 0.1%
Explanation:
First calculate the monthly payment that she has been paying:
This is the minimum price the car needs to be sold for and it represents her break even price
You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no
special covenants. The Wall Street Journal reports that 1-year T-bills are currently earning 1.80 percent.
Your broker has determined the following information about economic activity and Moore Corporation
bonds:
Real interest rate = 0.75%
Default risk premium = 1.70%
Liquidity risk premium = 1.05%
Maturity risk premium = 2.30%
a. What is the inflation premium? (Round your answer to 2 decimal places.)
Expected IP
%
1.05
b. What is the fair interest rate on Moore Corporation 30-year bonds? (Round your answer to 2
decimal places.)
Fair interest rate
%
6.85
Explanation:
a. Expected IP = i RIR = 1.80% 0.75% = 1.05%

b. ij* = 1.05% + 0.75% + 1.70% + 1.05% + 2.30% = 6.85%
One-year Treasury bills currently earn 3.95 percent. You expect that one year from now, 1-year Treasury
bill rates will increase to 4.15 percent. The liquidity premium on 2-year securities is 0.05 percent. If the
liquidity theory is correct, what should the current rate be on 2-year Treasury securities? (Round your
Current rate
%
4.07 0.01
Explanation:
1
R2 = [(1 + 0.0395)(1 + 0.0415 + 0.0005)]1/2 1 = 4.07%
On March 11, 20XX, the existing or current (spot) 1-, 2-, 3-, and 4-year zero coupon Treasury security
rates were as follows:
1R1 = 0.85%,(0.45)
1R2 = 1.45%,(1.10)
1R3 = 1.85%, (1.50)
1R4 = 2.00%(1.65)
Using the unbiased expectations theory, calculate the 1-year forward rates on zero coupon Treasury
bonds for years 2, 3, and 4 as of March 11, 20XX. (Do not round intermediate calculations and round
your answers to 2 decimal places.)
years
Forward rates
%
2
2.05 0.01
%
2.65 0.01
2.45 0.01
Explanation:
f = [(1 + 1R2)2 / (1 + 1R1)] 1 = [(1 + 0.0145)2 / (1 + 0.0085)] 1 = 2.05%

3
2
3
2
3f1 = [(1 + 1R3) / (1 + 1R2) ] 1 = [(1 + 0.0185) / (1 + 0.0145) ] 1 = 2.65%
4
3
4
3
f
=
[(1
+
R
)
/
(1
+
R
)
]
1
=
[(1
+
0.0200)
/
(1
+
0.0185)
] 1 = 2.45%
4 1
1 4
1 3
2 1
Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded
on stock market for the first time. We usually refer to these first-time issues as which of the following?
initial public offerings
direct transfers
money market transfers
over-the-counter stocks
Which of the following statements is correct?
An IPO is an example of a primary market transaction.
Money markets are subject to wider price fluctuations and are therefore more risky than capital market
instruments.
A direct transfer of funds is more efficient than utilizing financial institutions.
The market segmentation theory argues that the different investors have different risk preferences which
determine the shape of the yield curve.
Which of these does NOT perform vital functions to securities markets of all sorts by channeling funds from those
with surplus funds to those with shortages of funds?
commercial banks
secondary markets
insurance companies
mutual funds
All of the following are types of financial institutions except _______.
Insurance companies
Pension funds
Thrifts
Federal Reserve Bank
Unbiased Expectations Theory Suppose that the current one-year rate (one-year spot rate) and expected one-year
T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows:
Using the unbiased expectations theory, what is the current (long-term) rate for four-year-maturity Treasury
securities?
6.00%
6.33%
6.75%
7.00%
R4 = [(1 + .05)(1 + .055)(1 + .065)(1 + .07)]1/4 - 1 = 6%
Liquidity Premium Hypothesis Based on economists' forecasts and analysis, one-year Treasury bill rates and
liquidity premiums for the next four years are expected to be as follows:
1
Using the liquidity premium hypothesis, what is the current rate on a four-year Treasury security?
7.736%
7.600%
7.738%
8.400%
R4 = [(1 + .0665)(1 + .0775 + .0010)(1 + .0785 + .0020)(1 + .0815 + .0025)]1/4 - 1 = 7.73548
One-year Treasury bills currently earn 4.5 percent. You expect that one year from now, one-year Treasury bill rates
will increase to 6.65 percent. The liquidity premium on two-year securities is 0.05 percent. If the liquidity theory is
correct, what should the current rate be on two-year Treasury securities?
1
5.24%
5.59%
5.65%
5.95%
1
R2 = [(1 + .045)(1 + .0665 + .0005)].5 - 1 = 5.59%
All of the following are benefits that financial institutions provide to our economy except _________.
Increased liquidity
Increased monitoring
Increased dollar amount of funds flowing from suppliers to fund users
Increased price risk
Interest rates A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is
2 percent and the real interest rate is 2.25 percent. The security's liquidity risk premium is 0.75 percent and maturity
risk premium is 0.90 percent.
The security has no special covenants. What is the security's equilibrium rate of return?
1.78%
3.95%
8.90%
17.8%
ij* = 2.00% + 2.25% + 3.00% + 0.75% + 0.90% = 8.90%
Determine the interest payment for the following three bonds (Assume a $1,000 par value.) (Leave no
cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places):
3.35 percent coupon corporate bond (paid semiannually)

4.10 percent coupon Treasury note
Corporate zero coupon bond maturing in ten years
$
16.75
$
20.50
$
0
Explanation:
3.35 percent coupon corporate bond (paid semiannually): 0.0335 $1,000 = $16.75
4.10 percent coupon Treasury note: 0.0410 $1,000 = $20.50
Corporate zero coupon bond maturing in ten years: 0.00 $1,000 = $0
A bond issued by Ford on May 15, 1997 is scheduled to mature on May 15, 2097. If today is November
15, 2016, what is this bonds time to maturity? (Use 365 days a year.)
Time to maturity
years and
80
months
6
Explanation:
May 15, 2097 minus November 15, 2016 = 80 years and 6 months
A 3.750 percent TIPS has an original reference CPI of 184.6. If the current CPI is 209.9, what is the par
value and current interest payment of the TIPS? (Do not round intermediate calculations and round
your final answers to 2 decimal places.)
Par value
1,137.05 .01%
Interest payment
21.32 1%
Explanation:
Par value = 209.9 / 184.6 $1,000 = $1,137.05

Interest payment = 0.03750 $1,137.05 = $21.32
Consider a 2.55 percent TIPS with an issue CPI reference of 193.8. The bond is purchased at the
beginning of the year (after the interest payment), when the CPI was 203.7. For the interest payment in
the middle of the year, the CPI was 206.7. Now, at the end of the year, the CPI is 210.4 and the interest
payment has been made.
What is the total return of the TIPS in dollars? (Do not round intermediate calculations and round
your final answer to 2 decimal places.)
Total return
$
62.02 0.1%
What is the total return of the TIPS in percentage? (Do not round intermediate calculations and
Total return
Explanation:
%
5.90 0.01
Gain = End of year value Beginning of year value =

210.4 / 193.8 $1,000 203.7 / 193.8 $1,000 = $1,085.66 $1,051.08 = $34.58
The mid-year interest payment was: 0.0255 206.7 / 193.8 $1,000 = $13.60
The end-of-year interest payment was: 0.0255 210.4 / 193.8 $1,000 = $13.84
Total dollar return = $34.58 + $13.60 + $13.84 = $62.02
As a percentage, the return was = $62.02 / $1,051.08 = 5.90%
Consider a 3.05 percent TIPS with an issue CPI reference of 184.9. At the beginning of this year, the CPI
was 191.6 and was at 201.5 at the end of the year.
What was the capital gain of the TIPS in dollars? (Do not round intermediate calculations and round
Capital gain
$
53.54 0.01
What was the capital gain of the TIPS in percentage? (Do not round intermediate calculations and
Capital gain
%
5.17 0.01
Explanation:
Gain = End of year value Beginning of year value =

201.5 / 184.9 $1,000 191.6 / 184.9 $1,000 = $1,089.78 $1,036.24 = $53.54
As a percentage, the gain was = $53.54 / $1,036.24 = 5.17%
Consider the following three bond quotes: a Treasury note quoted at 99:15, a corporate bond quoted at
103.30, and a municipal bond quoted at 101.95. If the Treasury and corporate bonds have a par value of
$1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in
dollars? (Do not round intermediate calculations and round your final answers to 2 decimal
places.)
Treasury note
Corporate bond
Municipal bond
994.69 0.01
$
1,033.00 0.01
$
5,097.50 0.01
Explanation:
Treasury note at 99:15: (99 + 15/32)% $1,000 = 0.9946875 $1,000 = $994.69

Corporate bond at 103.30: 103.30% $1,000 = 1.0330 $1,000 = $1,033.00
Municipal bond at 101.95: 101.95% $5,000 = 1.0195 $5,000 = $5,097.50
Compute the price of a 5.6 percent coupon bond with 10 years left to maturity and a market interest rate
of 9.0 percent. (Assume interest payments are semiannual.) (Do not round intermediate calculations
Bond price
$
778.87 1%
Is this a discount or premium bond?

Discount bond
Explanation:
or TVM calculator: N = 20, I = 4.5, PMT = 28.00, FV = 1,000; CPT PV = 778.87

Since the bonds price is less than $1,000, it is a discount bond.
A 6.45 percent coupon bond with fifteen years left to maturity is priced to offer a 7.9 percent yield to
maturity. You believe that in one year, the yield to maturity will be 7 percent. What is the change in price
the bond will experience in dollars? (Do not round intermediate calculations and round your
Change in bond price
Explanation:
Calculation of current bond price:
77.55 1%
A 8.3 percent coupon bond with 16 years left to maturity is priced to offer a 6.65 percent yield to maturity.
You believe that in one year, the yield to maturity will be 7.4 percent.
What would be the total return of the bond in dollars? (Do not round intermediate calculations and
Total return
$
2.72 1%
What would be the total return of the bond in percentage? (Do not round intermediate calculations
Total return
%
0.23 0.01
Explanation:
Calculation of the current bond price:
Whats the current yield of a 4.20 percent coupon corporate bond quoted at a price of 101.78? (Round
Current yield
%
4.13 0.01
Explanation:
4.20% / 101.78% = 0.0413 = 4.13%

What's the taxable equivalent yield on a municipal bond with a yield to maturity of 5.2 percent for an
investor in the 33 percent marginal tax bracket? (Round your answer to 2 decimal places.)
Taxable equivalent yield
%
7.76 0.01
Explanation:
A 5.40 percent coupon bond with 17 years left to maturity is offered for sale at $955.62. What yield to
maturity is the bond offering? (Assume interest payments are semiannual.) (Round your answer to 2
decimal places.)
Yield to maturity
%
5.81 0.01
Explanation:
TVM calculator: N = 34, PV = 955.62, PMT = 27.0, FV = 1,000; CPT I = 2.907% YTM = 2.907% 2 = 5.81%
A client in the 25 percent marginal tax bracket is comparing a municipal bond that offers a 5.0 percent
yield to maturity and a similar-risk corporate bond that offers a 6.70 percent yield.
Determine the equivalent taxable yield. (Round your answer to 2 decimal places.)
%
Equivalent taxable yield
6.67 0.01
Which bond will give the client more profit after taxes?
Corporate bond
Explanation:
First determine the ETY:
Since 6.67 percent is less than 6.70 percent, the client should take the corporate bond.
A 4.45 percent coupon municipal bond has 12 years left to maturity and has a price quote of 106.70. The
bond can be called in eight years. The call premium is one year of coupon payments. (Assume interest
payments are semiannual and a par value of $5,000.)
Compute the bonds current yield. (Round your answer to 2 decimal places.)
Current yield
%
4.17 0.01
Compute the yield to maturity. (Round your answer to 2 decimal places.)

Yield to maturity
%
3.75 0.01
Compute the taxable equivalent yield (for an investor in the 36 percent marginal tax bracket). (Round
%
Equivalent taxable yield
5.86 0.01
Compute the yield to call. (Round your answer to 2 decimal places.)

Yield to call
%
3.94 0.01
Explanation:
Current yield = (0.0445 $5,000) / (1.0670 $5,000) = 4.45% / 106.70% = 4.17%

TVM calculator: N = 24, PV = 5,335, PMT = 111.25, FV = 5,000; CPT I = 1.8757%
YTM = 1.8757% 2 = 3.75%
TVM calculator: N = 16, PV = 5,335, PMT = 111.25, FV = 5,222.50; CPT I = 1.972%

YTC = 1.972% 2 = 3.94%
The current yield is lower than the coupon rate because this is currently a premium bond. This is also
shown by the YTM , which is lower than the coupon rate. The YTC is comparatively high, but it is
currently unlikely that the bond will be called early since interest rates are only a little lower than the
coupon rate and the call premium would have to be paid.
Assume on a given day in October, the Dow Jones Industrial Average set a new high at a close of
22,634.53, which was up 145.30 that day.
What was the return (in percent) of the stock market that day? (Round your answer to 2 decimal
places.)
Return of stock market
%
0.65 0.01
Explanation:
FV = PV (1 + i)
22,634.53 = (22,634.53 145.30) (1 + i)
i = (22,634.53 / 22,489.23) 1 = 0.65%
Your discount brokerage firm charges $8.70 per stock trade.
How much money do you need to buy 160 shares of Pfizer, Inc. (PFE), which trades at $40.42? (Round
Amount needed
6,475.90
Explanation:
($40.42/share 160 shares) + $8.70 = $6,475.90

Your full-service brokerage firm charges $180 per stock trade.
How much money do you receive after selling 210 shares of Nokia Corporation (NOK), which trades at
$23.92? (Round your answer to 2 decimal places.)
$
Amount received
4,843.20
Explanation:
($23.92/share 210 shares) $180 = $4,843.20

A preferred stock from Duquesne Light Company (DQUPRA) pays $3.10 in annual dividends.
If the required return on the preferred stock is 6.00 percent, whats the value of the stock? (Round your
$
Value of stock
51.67 0.01
Explanation:
The growth rate g equals zero:
A firm is expected to pay a dividend of $1.15 next year and $1.30 the following year. Financial analysts
believe the stock will be at their price target of $30 in two years.
Compute the value of this stock with a required return of 11.1 percent. (Round your answer to 2
decimal places.)
Value of stock
Explanation:
$
26.39 0.1%
A firm recently paid a $0.60 annual dividend. The dividend is expected to increase by 12 percent in each
of the next four years. In the fourth year, the stock price is expected to be $42.
If the required return for this stock is 14.50 percent, what is its current value? (Do not round
Current value
$
26.71 1%
7_16_2012
Explanation:
Find the dividends in the next four years:

D1 = $0.60 (1 + 0.12) = $0.672
D2 = $0.672 (1 + 0.12) = $0.7526
D3 = $0.7526 (1 + 0.12) = $0.8430
D4 = $0.8430 (1 + 0.12) = $0.9441
= $0.672 / 1.145 + $0.7526 / 1.1452 + $0.8430 / 1.1453 + ($0.9441 + $42) / 1.14504 = $26.71
Annual dividends of General Electric (GE) grew from $0.83 in 2001 to $1.20 in 2006.
What was the annual growth rate? (Round your answer to 2 decimal places.)
Annual growth rate
%
7.65 0.01
Explanation:
Financial analysts forecast Limited Brands (LTD) growth rate for the future to be 8.5 percent. LTDs
recent dividend was $0.40.
What is the value of Limited Brands stock when the required return is 10.5 percent? (Round your
Value of stock
$
21.70 0.1%
Explanation:
Paychex Inc. (PAYX) recently paid an $0.82 dividend. The dividend is expected to grow at a 15 percent
rate. The current stock price is $60.51.
What is the return shareholders are expecting? (Do not round intermediate calculations and round
%
Shareholders return
16.56 1%
Explanation:
First convert D0 to D1: $0.82 (1 + 0.150) = $0.943.
A firm does not pay a dividend. It is expected to pay its first dividend of $0.30 per share in two years. This
dividend will grow at 14 percent indefinitely. Use a 15.5 percent discount rate.
Compute the value of this stock. (Round your answer to 2 decimal places.)
Stock Value
$
17.32 1%
Explanation:
New York Times Co. (NYT) recently earned a profit of $1.41 per share and has a P/E ratio of 19.30. The
dividend has been growing at a 7.25 percent rate over the past six years.
If this growth rate continues, what would be the stock price in six years if the P/E ratio remained
unchanged? What would the price be if the P/E ratio increased to 24 in six years? (Round your
answers to 2 decimal places.)
Stock price
Stock price with new P/E
Explanation:
$
41.42 0.01
$
51.50 0.01
Ultra Petroleum (UPL) has earnings per share of $1.69 and a P/E ratio of 33.20.
Whats the stock price? (Round your answer to 2 decimal places.)
Stock price
Explanation:
$
56.11 0.01
FedEx Corp stock ended the previous year at $108.19 per share. It paid a $0.50 per share dividend last
year. It ended last year at $111.49.
If you owned 340 shares of FedEx, what was your dollar return and percent return? (Round your
percent return answer to 2 decimal places.)
$
Dollar return
Percent return
1,292
3.51 0.01
Explanation:
Dollar Return = (Ending Value Beginning Value) + Income

= $111.49 340 $108.19 340 + $0.50 340 = $1,292
28.49*590-32.96*590+2.77*590
Percentage Return = $1,292 / ($108.19 340) = 3.51%
A corporate bond that you own at the beginning of the year is worth $890. During the year, it pays $48 in
interest payments and ends the year valued at $880.
What was your dollar return and percent return? (Round your "Percent return" to 2 decimal places.)
$
Dollar return
Percent return
38
4.27 0.01
Explanation:
Dollar Return = Capital gain + Income = $880 $890 + $48 = $38

1030
-1020 +32=
Percent return = $38 / $890 = 4.27%

Rank the following three stocks by their risk-return relationship, best to worst. Rail Haul has an average
return of 9 percent and standard deviation of 32 percent. The average return and standard deviation of
Idol Staff are 12 percent and 30 percent; and of Poker-R-Us are 6 percent and 39 percent.
Rank
1
2
3
Stock
Idol staff
Rail Haul
Poker-R-Us
Explanation:
Rank by coefficient of variation: Rail Haul CoV = 32 / 9 = 3.56, Poker-R-Us CoV = 39 / 6 = 6.50, and Idol
Staff CoV = 30 / 12 = 2.50.
An investor owns $10,000 of Adobe Systems stock, $11,000 of Dow Chemical, and $11,000 of Office
Depot. What are the portfolio weights of each stock? (Round your answers to 4 decimal places.)
Portfolio weights
Adobe System
0.3125 0.001
Dow Chemical
0.3438 0.001
Office Depot
0.3438 0.001
Explanation:
Total portfolio = $10,000 + $11,000 + $11,000 = $32,000

Adobe System weight = $10,000 / $32,000 = 0.3125
Dow Chemical weight = $11,000 / $32,000 = 0.3438
Office Depot weight = $11,000 / $32,000 = 0.3438
Year-to-date, Oracle had earned a 1.44 percent return. During the same time period, Valero Energy
earned 7.80 percent and McDonald's earned 0.52 percent.
If you have a portfolio made up of 25 percent Oracle, 20 percent Valero Energy, and 55 percent
McDonald's, what is your portfolio return? (Round your answer to 2 decimal places.)
Portfolio return
%
1.49 0.01
Explanation:
Portfolio Return = (0.25 1.44%) + (0.20 7.80%) + (0.55 0.52%) = 1.49%

The past five monthly returns for Kohls are 3.92 percent, 4.57 percent, 2.06 percent, 9.44 percent, and
2.94 percent. What is the average monthly return? (Round your answer to 3 decimal places.)
Average return
%
2.586 0.001
Explanation:
Average Return = (3.92% + 4.57% 2.06% + 9.44% 2.94%) / 5 = 2.586%

The past five monthly returns for Kohls are 3.88 percent, 4.47 percent, 2.02 percent, 9.42 percent, and
2.90 percent. Compute the standard deviation of Kohls monthly returns. (Do not round intermediate
Standard deviation
%
5.08 1%
Explanation:
Average Return = (3.88% + 4.47% 2.02% + 9.42% 2.90%) / 5 = 2.570%
Table 9.2 Average Returns for Bonds

1950 to 1959
1960 to 1969
1970 to 1979
1980 to 1989
1990 to 1999
2000 to 2009
Average
Average
Average
Average
Average
Average
Bonds
0.0%
1.5
5.5
13.7
9.7
8.1
Table 9.4 Annual Standard Deviation for Bonds
1950 to 1959
1960 to 1969
1970 to 1979
1980 to 1989
1990 to 1999
2000 to 2009
Bonds
4.8%
6.3
6.6
15.8
12.5
10.9
Calculate the coefficient of variation of the risk-return relationship of the bond market (Use the above
Tables) during each decade since 1950. (Round your answers to 2 decimal places.)
Decade
1950s
CoV
Not Available
1960s
4.20
1970s
1.20
1980s
1.15
1990s
1.29
2000s
1.35
Explanation:
The lower the coefficient of variation, the better the risk-return relationship. The early two decades, 1950s
and 1960s, have a poor risk-return relationship for bonds. The 1950s coefficient of variation is not
defined because the average return is zero. The poor relationship in the 1960s is caused by the very low
return in that decade. The three full decades since 1970 have had a good risk-return relationship.
If you own 800 shares of Alaska Air at $50.08, 850 shares of Best Buy at $58.52, and 600 shares of Ford
Motor at $8.81, what are the portfolio weights of each stock? (Round your answers to 3 decimal
places.)
Portfolio weights
Alaska Air
0.421 0.001
Best Buy
0.523 0.001
Ford Motor
0.056 0.001
Explanation:
Total portfolio
Alaska Air weight
Best Buy weight
Ford Motor weight
= (800 $50.08) + (850 $58.52) + (600 $8.81) = $95,092.00

= (800 $50.08) / $95,092.00 = 0.421
= (850 $58.52) / $95,092.00 = 0.523
= (600 $8.81) / $95,092.00 = 0.056
You have $18,000 to invest. You want to purchase shares of Alaska Air at $43.36, Best Buy at $52.22,
and Ford Motor at $8.96. How many shares of each company should you purchase so that your portfolio
consists of 20 percent Alaska Air, 30 percent Best Buy, and 50 percent Ford Motor? (Do not round
intermediate calculations and round your final answers to the nearest whole number.)
shares
Alaska air
83 1%
Best buy
103 1%
Ford motor
shares
shares
1,004 1%
Explanation:
Alaska Air: 0.20 $18,000 / $43.36 = 83 shares

Best Buy: 0.30 $18,000 / $52.22 = 103 shares
Ford Motor: 0.50 $18,000 / $8.96 = 1,004 shares
Because of rounding the number of shares and to allow for any commission or trading costs, you may
have to purchase a share or two less of a stock.
The table below shows your stock positions at the beginning of the year, the dividends that each stock
paid during the year, and the stock prices at the end of the year.
Beginning of
Dividend Per
Company
Shares
Year Price
Share
End of Year Price
Johnson Controls
600
$74.21
$1.43
$ 86.57
Medtronic
Direct TV
Qualcomm
700
900
600
58.87
26.24
44.38
0.67
54.81
25.69
40.22
0.52
What is your portfolio dollar return and percentage return? (Round your answers to 2 decimal places.)
Portfolio Return
$
Dollar return
3,222.00 1%
%
Percentage return
2.37 1%
Explanation:
Consider the following annual returns of Molson Coors and International Paper:
Year 1
Year 2
Year 3
Year 4
Year 5
Molson Coors International Paper

19.8%
5.2%
9.1
18.2
40.0
0.9
8.3
27.3
16.9
11.8
Compute each stocks average return, standard deviation, and coefficient of variation. (Round your
answers to 2 decimal places.)
Molson Coors
%
Average return
11.86 1%
Standard deviation
20.77 1%
Coefficient of variation
International Paper
%
0.32 1%
1.75 1%
%
17.63 1%
55.09 1%
Which stock appears better?

Molson Coors
Explanation:
Molson Coors has experienced a much higher average return than International Paper with slightly more
risk (standard deviation). Thus, it is not a surprise that Molson Coors has a significantly better (lower)
coefficient of variation. Molson Coors is superior on a risk-return basis.
At the beginning of the month, you owned $5,000 of General Dynamics, $9,000 of Starbucks, and $6,000
of Nike. The monthly returns for General Dynamics, Starbucks, and Nike were 6.30 percent, 1.42
percent, and 0.57 percent. What is your portfolio return? (Do not round intermediate calculations
Portfolio return
%
.77 1%
Explanation:
Total portfolio
= $5,000 + $9,000 + $6,000 = $20,000
General Dynamics weight = $5,000 / $20,000 = 0.2500
Starbucks weight
= $9,000 / $20,000 = 0.4500
Nike weight
= $6,000 / $20,000 = 0.3000
Portfolio return
= (0.2500 6.30%) + (0.4500 1.42%) + (0.3000 0.57%) = .77%
Compute the expected return given these three economic states, their likelihoods, and the potential
returns: (Round your answer to 2 decimal places.)
Economic State
Fast growth
Slow growth
Recession
Expected return
Probability Return
0.11
59 %
0.52
25
0.37
27
%
9.50 0.01
Explanation:
Expected return = (0.11 59%) + (0.52 25%) + (0.37 27%) = 9.50%

Following are three economic states, their likelihoods, and the potential returns:
Economic State
Fast growth
Slow growth
Recession
Probability Return
0.24
30 %
0.36
7
0.40
19
Determine the standard deviation of the expected return. (Do not round intermediate calculations and
round your answer to 2 decimal places.)
Standard deviation
%
19.33 0.1%
Explanation:
Expected return = (0.24 30%) + (0.36 7%) + (0.40 19%) = 2.12%

http://www.zenwealth.com/businessfinanceonline/RR/ERCalculator.html
Following are four economic states, their likelihoods, and the potential returns:
Economic State
Fast growth
Slow growth
Recession
Depression
Probabilit
y
0.25
0.60
0.13
0.02
Return
79 %
17
16
48
Compute the expected return and standard deviation. (Do not round intermediate calculations and
round your answers to 2 decimal places.)
Expected return
26.91 1% %
Standard deviation
33.00 1% %
Explanation:
Expected return = (0.25 79%) + (0.60 17%) + (0.13 16%) + (0.02 48%) = 26.91%
The average annual return on an Index from 1986 to 1995 was 10.05 percent. The average annual T-bill
yield during the same period was 3.25 percent.
What was the market risk premium during these ten years? (Round your answer to 2 decimal place.)
%
Average market risk premium
6.80
Explanation:
Average market risk premium = 10.05% 3.25% = 6.80%

If the risk-free rate is 3.60 percent and the risk premium is 1.6 percent, what is the required return?
(Round your answer to 1 decimal places.)
Required return
%
5.2
Explanation:
Required return = 3.60% + 1.6% = 5.2%

You have a portfolio with a beta of 1.81. What will be the new portfolio beta if you keep 88 percent of your
money in the old portfolio and 12 percent in a stock with a beta of 0.92? (Do not round intermediate
calculation and round your answer to 2 decimal places.)
New portfolio beta
1.70 0.01
Explanation:
New portfolio beta = (0.88 1.81) + (0.12 0.92) = 1.70

You own $12,375 of Olympic Steel stock that has an assumed beta of 2.78. You also own $17,820 of
Rent-a-Center (assumed beta = 1.44) and $19,305 of Lincoln Educational (assumed beta = 0.70).
What is the beta of your portfolio? (Do not round intermediate calculation and round your answer to
2 decimal places.)
Portfolio beta
1.49 1%
Explanation:
First determine the total value of the portfolio and the weights of each stock in the portfolio:
Total value = $12,375 + $17,820 + $19,305 = $49,500
Olympic Steel weight = $12,375 / $49,500 = 25%
Rent-a-Center weight = $17,820 / $49,500 = 36%
Lincoln Educational weight = $19,305 / $49,500 = 39%
Now compute the portfolio beta: (0.25 2.78) + (0.36 1.44) + (0.39 0.70) = 1.49
A manager believes his firm will earn a 16.50 percent return next year. His firm has a beta of 1.65, the
expected return on the market is 10.70 percent, and the risk-free rate is 4.70 percent.
Compute the return the firm should earn given its level of risk.
Required return
%
14.60
Determine whether the manager is saying the firm is undervalued or overvalued.

Undervalued
Explanation:
Use CAPM to determine the firms required return: 4.70% + 1.65 (10.70% 4.70%) = 14.60%
Since the return required for the level of risk is 14.60% and the manager believes a 16.50% return will be
achieved, the manager is saying the firm is undervalued.
Hastings Entertainment has a beta of 0.69. If the market return is expected to be 12.10 percent and the
risk-free rate is 5.10 percent, what is Hastings required return? (Round your answer to 2 decimal
places.)
%
Hastings required return
9.93 0.01
Explanation:
Hastings required return = 5.10% + 0.69 (12.10% 5.10%) = 9.93%

Suppose Paccars current stock price is $77.25 and it is likely to pay a $2.71 dividend next year. Since
analysts estimate Paccar will have an 5.0 percent growth rate, what is its required return? (Round your
Required return
%
8.51 0.01
Explanation:
Diddy Corp. stock has a beta of 1.1, the current risk-free rate is 5 percent, and the expected return on the
market is 15.00 percent.
What is Diddys cost of equity? (Round your answer to 2 decimal places.)
Cost of equity
%
16.00
Explanation:
iE = if + E [ E(iM) if ]
= 0.05 + 1.1 [0.150 0.05]
= 0.1600, or 16.00%
Oberon, Inc., has a $15 million (face value) 10-year bond issue selling for 99 percent of par that pays an
annual coupon of 8.35 percent.
What would be Oberons before-tax component cost of debt? (Round your answer to 2 decimal
places.)
Cost of debt
%
8.50 0.01
Explanation:
Yields iD = 0.085024, or 8.50%

Suppose that LilyMac Photography expects EBIT to be approximately $210,000 per year for the
foreseeable future, and that it has 1,000 10-year, 9 percent annual coupon bonds outstanding. (Use Table
11.1)
What would the appropriate tax rate be for use in the calculation of the debt component of LilyMacs
WACC?
Tax rate
%
39
Explanation:
The interest payments on the bonds would total 1,000 $1,000 0.09 = $90,000, resulting in EBT of
$210,000 $90,000 = $120,000. Since, as taxable income falls from $210,000 to $120,000 the firm is
entirely in the 39 percent tax bracket from Table 11.1, the average applicable tax rate would also be
equal to 39 percent.
ILK has preferred stock selling for 98 percent of par that pays a 6 percent annual coupon.
What would be ILKs component cost of preferred stock? (Round your answer to 2 decimal places.)
%
Cost of preferred stock
6.12 0.01
Explanation:
D1
i
P
$6
0.0612
=, or
6.12%
=
P0
$98
FarCry Industries, a maker of telecommunications equipment, has 5 million shares of common stock
outstanding, 2 million shares of preferred stock outstanding, and 20,000 bonds. Suppose the common
shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds
are selling for 98 percent of par.
What would be the weight used for equity in the computation of FarCrys WACC? (Round your answer
%
Weight used
73.53 0.01
Explanation:
5m $27
=
E+P+D
5m $27 + 2m $14.50 + 20,000 0.98

$1,000
$135m
= 0.7353, or 73.53%
$183.6m
Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its before-tax
cost of debt is 12 percent while its cost of equity is 16 percent. Assume the appropriate weightedaverage tax rate is 25 percent.
What will be JBs WACC? (Round your answer to 2 decimal places.)
WACC
%
14.46 0.01
Explanation:
WACC=
iE +
E+P+D
(1
iD TC)
iP +
E+P+D
E+P+D
=0.78 16% + 0 0% + 0.22 12% (1 0.25)

= 14.46%
BetterPie Industries has 7 million shares of common stock outstanding, 4 million shares of preferred
stock outstanding, and 20,000 bonds. Assume the common shares are selling for $45 per share, the
preferred shares are selling for $22.50 per share, and the bonds are selling for 98 percent of par.
What would be the weights used in the calculation of BetterPies WACC? (Do not round intermediate
calculations and round your answers to 2 decimal places.)
Equity weight
74.19 1%
Preferred stock weight
21.20 1%
%
%
Debt weight
4.62 1%
Explanation:
7m $45
=
7m $45 + 4m $22.50 + 20,000 0.98
$1,000
E+P+D
$315m
=
$424.60m
= 0.7419, or 74.19%
P
4m $22.50
=
7m $45 + 4m $22.50 + 20,000 0.98
$1,000
E+P+D
$90m
=
$424.60m
= 0.2120, or 21.20%
D
20,000 0.98 $1,000

=
7m $45 + 4m $22.50 + 20,000 0.98

$1,000
E+P+D
$19.6m
=
$424.60m
= 0.0462, or 4.62%
Suppose that Brown-Murphies common shares sell for $17.50 per share, that the firm is expected to set
their next annual dividend at $0.43 per share, and that all future dividends are expected to grow by 6
percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 10 percent on new equity
issues.
What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)
%
Cost of equity
8.73 0.01
Explanation:
D1
iE =
+g
P0 F
$0.43
=
+ 0.06
$17.50 (0.10 $17.50)
= 0.0873, or 8.73%
Suppose your firm has decided to use a divisional WACC approach to analyze projects. The firm
currently has four divisions, A through D, with average betas for each division of 0.5, 1.0, 1.2, and 1.5,
respectively. Assume all current and future projects will be financed with 0.60 debt and 0.40 equity, the
current cost of equity (based on an average firm beta of 1.0 and a current risk-free rate of 4 percent) is
12 percent and the after-tax yield on the companys bonds is 9 percent.
What will the WACCs be for each division? (Round your answers to 2 decimal places.)
WACCs
%
Division A
8.60 0.01
Division B
10.20 0.01
Division C
10.84 0.01
Division D
11.80 0.01
%
%
%
rev: 11_30_2013_QC_41453
Explanation:
We can solve for the expected rate of return on the market:

iE = if + E [E(iM) if]
12% = 4% + 1.0 [E(iM) 4%]

8% = [E(iM) 4%]
E(iM) = 12%
We can solve for the divisional costs of equity using the average divisional betas:
For Division A: iE = if + E [E(iM) if] = 4% + 0.5 [12% 4%] = 8.0%
For Division B: iE = if + E [E(iM) if] = 4% + 1.0 [12% 4%] = 12.0%
For Division C: iE = if + E [E(iM) if] = 4% + 1.2 [12% 4%] = 13.6%
For Division D: iE = if + E [E(iM) if] = 4% + 1.5 [12% 4%] = 16.0%
Finally, we can solve for the divisional WACCs
For Division A: WACC = E
iE + D
iD (1TC) = 0.4 8.0% + 0.6 9% = 8.60%
E+P+D
E+P+D
E
For Division B:
WACC
For Division C:
WACC
E+P+D
E+P+D
For Division D:
WACC
(1TC) = 0.4 12.0% + 0.6 9% =

iD10.20%
iE+
(1TC) = 0.4 13.6% + 0.6 9% =

iD10.84%
iE+
E+P+D
E+P+D
(1TC) = 0.4 16.0% + 0.6 9% =

iD11.80%
iE+
E+P+D
E+P+D
Suppose that MNINK Industries capital structure features 63 percent equity, 8 percent preferred stock,
and 29 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are
11.60 percent, 9.50 percent, and 9.00 percent, respectively.
What is MNINKs WACC if the firm faces an average tax rate of 34 percent? (Round your answer to 2
decimal places.)
%
WACC
9.79 0.01
Explanation:
E
WACC=
P
iE +
E+P+D
D
(1
iD TC)
iP +
E+P+D
E+P+D
=0.63 11.60% + 0.08 9.50% + 0.29 9.00% (1 0.34)
= 9.79%
An all-equity firm is considering the projects shown below. The T-bill rate is 5 percent and the market risk
premium is 8 percent.
PROJECT EXPECTED RETURN
A
8%
B
20
C
14
D
18
BETA
0.3
1.1
1.3
1.5
Calculate the project-specific benchmarks for each project. (Round your answers to 2 decimal
places.)
Project A
7.40
Project B
13.80
Project C
15.40
Project D
17.00
%
%
%
If the firm uses its current WACC of 13 percent to evaluate these projects, which project, will be
incorrectly rejected?
Project A
Explanation:
Using the firm's WACC of 13 percent as the IRR benchmark, project A would be rejected. Using equation
11-2, the project-specific benchmarks for each project should be:
For Project A: iE
= if + E [E (iM) if]
= 5% + 0.3 [8%]
= 7.40%
For Project B: iE
= if + E [E (iM) if]
= 5% + 1.1 [8%]
= 13.80%
For Project C: iE = if + E [E (iM) if]

= 5% + 1.3 [8%]
= 15.40%
For Project D: iE = if + E [E (iM) if]

= 5% + 1.5 [8%]
= 17.00%
If Project A's expected return of 8 percent had been compared to the project-specific required return of
7.40 percent, it would have been accepted. Therefore, Project A would have been incorrectly rejected if
the firm-wide WACC had been used as its benchmark.
Suppose you sell a fixed asset for $92,000 when it's book value is $114,000. If your company's marginal tax rate is
33%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
$99,260
$61,640
$114,000
$22,000
AT CF = $114,000 + ($92,000 $114,000) x (1 .33) = $99,260
Your Company is considering a new project that will require $720,000 of new equipment at the start of the project.
The equipment will have a depreciable life of 7 years and will be depreciated to a book value of $20,000 using
straight-line depreciation. The cost of capital is 13%, and the firm's tax rate is 40%. Estimate the present value of the
tax benefits from depreciation.
$176,904
$100,000
$60,000
$40,000
Depreciation = ($720,000 $20,000)/7 = $100,000
$100,000 x .40= $40,000 tax savings each period.
Across the entire project, these savings will constitute a 7 period annuity.
Pmt = 40,000, FV = 0, I = 13, N = 7, PV = 176,904
Your Company is considering a new project that will require $18,000 of new equipment at the start of the project. The
equipment will have a depreciable life of 5 years and will be depreciated to a book value of $3,000 using straight-line
depreciation. The cost of capital is 9%, and the firm's tax rate is 30%. Estimate the present value of the tax benefits
from depreciation.
$2,100
$900
$3,501
$3,000
Depreciation = ($18,000 $3,000)/5 = $3,000
$3,000 x .30= $900 tax savings each period.
Across the entire project, these savings will constitute a 5 period annuity.
Pmt = 900, FV = 0, I = 9, N = 5, PV = 3,501
KADS, Inc., has spent $340,000 on research to develop a new computer game. The firm is planning to
spend $140,000 on a machine to produce the new game. Shipping and installation costs of the machine
will be capitalized and depreciated; they total $44,000. The machine has an expected life of three years,
a $69,000 estimated resale value, and falls under the MACRS 7-year class life. Revenue from the new
game is expected to be $540,000 per year, with costs of $190,000 per year. The firm has a tax rate of 40
percent, an opportunity cost of capital of 11 percent, and it expects net working capital to increase by
$70,000 at the beginning of the project.
What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign.
Round your answers to 2 decimal places.)
Year
$
FCF
$
-254,000.00 0.1%
$
220,517.44 0.1%
$
228,024.64 0.1%
Explanation:
Year
Sales
0
$
0.00
1
$
540,000.
00
2
$
540,000.
00
3
$
540,000.
00
Fixed
costs
0.00
190,000.
00
190,000.
00
190,000.
00
Depre
ciation
0.00
26,293.6
0
45,061.6
0
32,181.6
0
EBIT
Taxes
"Net
income"
0.00
0.00
194,223.
84
220,517.
44
304,938.
40
121,975.
36
26,293.6
0
0.00
323,706.
40
129,482.
56
0.00
Depre
+ciation
OCF
0.00
182,963.
04
45,061.6
0
228,024.
64
317,818.
40
127,127.
36
190,691.
04
32,181.6
0
222,872.
64
366,457.9
NWC
70,000.0
0
0.00
0.00
70,000.0
0
FA
184,000.
00
0.00
0.00
73,585.2
8
FCF
254,000.
00
220,517.
44
228,024.
64
366,457.
92
You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You
estimate the sales price of The Tiff-any to be $410 per unit and sales volume to be 1,000 units in year 1;
1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to
$230 per unit and fixed costs are $100,000 per year. The project requires an initial investment of
$168,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual
market value of these assets at the end of year 3 is expected to be $36,000. NWC requirements at the
beginning of each year will be approximately 25 percent of the projected sales during the coming year.
The tax rate is 35 percent and the required return on the project is 11 percent.
What change in NWC occurs at the end of year 1?
$
Increase
51,250
Explanation:
Sales will go from $410,000 to $615,000 between years 1 and 2, so NWC will have to increase from
$102,500 to $153,750, an increase of $51,250.
You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You
estimate the sales price of The Tiff-any to be $440 per unit and sales volume to be 1,000 units in year 1;
1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to
$245 per unit and fixed costs are $100,000 per year. The project requires an initial investment of
$177,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual
market value of these assets at the end of year 3 is expected to be $39,000. NWC requirements at the
beginning of each year will be approximately 25 percent of the projected sales during the coming year.
The tax rate is 35 percent and the required return on the project is 11 percent.
What is the operating cash flow for the project in year 2?
$
Operating cash flow
145,775 0.1%
Explanation:
Year
Sales
Variable
costs
2
$
660,000
367,500
Fixed costs
Depreciatio
n
EBIT
Taxes
Net income
Depreciatio
100,000
59,000
$
133,500
46,725
86,775
59,000
+n
OCF
145,775
Suppose you sell a fixed asset for $119,000 when its book value is $139,000. If your companys marginal
tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash
flow of this sale)?
$
ATCF
126,000
explanation:
The after-tax cash inflow from the sale of the asset will be:
ATCF = Book value + (Market value Book value) (1 TC )
= $139,000 + ($119,000 $139,000) (1 0.35)
= $126,000
Your firm needs a computerized machine tool lathe which costs $47,000 and requires $11,700 in
maintenance for each year of its 3-year life. After three years, this machine will be replaced. The machine
falls into the MACRS 3-year class life category. Assume a tax rate of 34 percent and a discount rate of 11
percent.
If the lathe can be sold for $4,700 at the end of year 3, what is the after-tax salvage value?
$
Salvage value after tax
4,286.12 0.1%
Explanation:
The lathe will have a remaining book value of 7.41% $47,000 = $3,482.70. The after-tax cash flows
from the sale of the lathe will be:
ATCF = Book value + (Market value Book value) (1 TC)

= $3,482.70 + ($4,700 $3,482.70) (1 0.34)
= $4,286.12
You have been asked by the president of your company to evaluate the proposed acquisition of a new
special-purpose truck for $50,000. The truck falls into the MACRS 3-year class, and it will be sold after
three years for $19,400. Use of the truck will require an increase in NWC (spare parts inventory) of
$1,400. The truck will have no effect on revenues, but it is expected to save the firm $17,100 per year in
before-tax operating costs, mainly labor. The firms marginal tax rate is 34 percent.
What will the cash flows for this project be? (Negative amounts should be indicated by a minus sign.
Round your answers to 2 decimal places.)
Year
$
FCF
$
-51,400.00 0.1%
$
16,952.10 0.1%
18,842.50 0.1%
Explanation:
Year
Sales
0
$
1
0.00
Variab
le costs
0.00
Fixed
costs
0.00
Depre
ciation
0.00
EBIT
Taxes
"Net
income
"
Depre
+ciation
0.00
0.00
0.00
0.00
0.00
0.00
17,100.0
0
3
0.00
0.00
17,100.0
0
0.00
0.00
17,100.0
0
16,665.0
0
22,225.0
0
7,405.00
435.00
$ 5,125.00
$ 9,695.00
147.90
1,742.50
3,296.30
287.10
$ 3,382.50
$ 6,398.70
16,665.0
0
22,225.0
0
7,405.00
29,267.40
OCF
NW
C
FA
FCF
0.00
16,952.1
0
18,842.5
0
13,803.7
0
1,400.00
0.00
0.00
1,400.00
50,000.0
0
0.00
0.00
51,400.0
0
16,952.1
0
18,842.5
0
14,063.7
0
29,267.4
0
You are trying to pick the least-expensive car for your new delivery service. You have two choices: the
Scion xA, which will cost $16,500 to purchase and which will have OCF of $1,700 annually throughout
the vehicles expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost
$24,000 to purchase and which will have OCF of $900 annually throughout that vehicles expected 4year life. Both cars will be worthless at the end of their life. You intend to replace whichever type of car
you choose with the same thing when its life runs out, again and again out into the foreseeable future.
If the business has a cost of capital of 13 percent, calculate the EAC. (Negative amounts should be
indicated by a minus sign. Round your answers to 2 decimal places.)
Scion's EAC
Toyota's EAC
$
-8,688.11 0.1%
$
-8,968.66 0.1%
Which one should you choose?

Scion
Explanation:
One iteration of each delivery car will consist of the following cash flows:
Year
Scion xA CFs
Toyota Prius CFs
0
16,50
$
0
24,00
$
0
The NPV of one Scion xA will be:
1
1,70
$
0
$ 900
2
$ 1,700
$ 900
3
1,70
$
0
$ 900
$ 900
You are considering the purchase of one of two machines used in your manufacturing plant. Machine A
has a life of two years, costs $100 initially, and then $145 per year in maintenance costs. Machine B
costs $170 initially, has a life of three years, and requires $120 in annual maintenance costs. Either
machine must be replaced at the end of its life with an equivalent machine.
The discount rate is 11 percent and the tax rate is zero. Calculate the EAC. (Negative amounts should
be indicated by a minus sign. Round your answers to 2 decimal places.)
EAC
Machine A
Machine B
$
-203.39 1%
$
-189.57 1%
Which one should you choose?

Machine B
Explanation:
One iteration of each machine will consist of the following cash flows:
Year
Machine A CFs
Machine B CFs
0
$100
$170
The NPV of one Machine A will be:
1
$145
$120
2
$145
$120
3
$120
http://www.investopedia.com/calculator/netpresentvalue.aspx
Compute the NPV for Project M if the appropriate cost of capital is 7 percent. (Negative amount should
be indicated by a minus sign. Do not round intermediate calculations and round your final answer
Project M
Time:
Cash flow
NPV
0
$2,000
1
$550
2
$680
3
$720
4
$800
5
$300
$
519.90 1%
Should the project be accepted or rejected?

Accepted
Explanation:
$550
NP
$2,00
V
= 0 +
$680
+
(1.07)1
$720
+
(1.07)2
$800
+
(1.07)3
$300
+
(1.07)4
(1.07)5
$519.
=
90
Compute the NPV for Project K if the appropriate cost of capital is 7 percent. (Negative amount should
be indicated by a minus sign. Do not round intermediate calculations and round your final answer
Project K
Time:
Cash flow
NPV
0
1
$11,300 $5,650
2
$6,650
3
$6,650
4
$5,650
5
$11,300
$
1,470.74 0.1%

Accepted
Explanation:
$5,650
$6,650
NP
$11,30
V
= 0 +
+
(1.07)1
$6,650
$5,650
(1.07)2
(1.07)3
$11,300
+
(1.07)4
(1.07)5
$1,470.
=
74
Compute the payback statistic for Project A if the appropriate cost of capital is 9 percent and the
maximum allowable payback period is four years. (Round your answer to 2 decimal places.)
Project A
Time:
Cash flow
0
$2,400
1
$910
2
$900
3
$800
4
$580
5
$380
years
Payback
2.74 0.01

Accepted
Explanation:
Year
Cash Flow
Cumulative Cash Flow
0
$2,400
$2,400
1
$910
$1,490
2
$900
$590
3
$800
$210
4
$580
5
$380
This project will achieve payback at time 2 + $590/$800 = 2.74 years.

Compute the discounted payback statistic for Project D if the appropriate cost of capital is 11 percent and
the maximum allowable discounted payback is four years. (Do not round intermediate calculations
and round your final answer to 2 decimal places. If the project does not pay back, then enter a "0"
(zero).)
Project D
Time:
Cash flow
$12,600 $3,510
$4,500
$1,840
Discounted payback period
$0
$1,320

Rejected
Explanation:
Year
Cash Flow
0
$12,600
Present Value of Cash Flow

Cumulative Cash Flow
= $12,600
= $12,600
1
$3,510
$3,510/1.11
= $3,162.16
= $9,437.84
2
$4,500
$4,500 / (1.11)2
= $3,652.30
= $5,785.54
3
$1,840
$1,840 / (1.11)3
= $1,345.39
= $4,440.14
The NPV for this project is negative, so discounted payback never occurs.
Compute the IRR for Project F. The appropriate cost of capital is 13 percent. (Do not round
Project F
Time:
Cash flow
0
$11,700
1
$4,200
2
$5,030
3
$2,370
4
$3,000
IRR
10.45 1%

Rejected
Explanation:
$11,700
0=
$4,200
+
(1+IRR)0
$5,030
+
(1+IRR)1
$2,370
+
(1+IRR)2
$3,000
+
(1+IRR)3
(1+IRR)4
IRR = 10.45%
Since IRR < i, this project should be rejected.
Compute the MIRR statistic for Project J if the appropriate cost of capital is 10 percent. (Do not round
Project J
Time:
Cash flow
0
$1,300
1
$440
2
$1,630
3
$550
4
$390
5
$130
4
$0
$0 / (1.11
= $0.00
= $4,440.
MIRR
12.57 1%

Accepted
Explanation:
Year
Cash Flow
Present
Value (If
Negative)
1,300
$440
$1,630
$550
$390
$130
$ 1,300
1,793.94
$
Sum of PV
$440
(1.10)4
= $644.20
Future Value (If Positive)
$1,630
(1.10)3
= $2,169.53
Sum of FV
$550
$130
(1.10)3
= $413.22
(1.10)5
= $80.72
$390
(1.10)1
= $429.00
$3,242.73
1,793.94
$
Modified CFs
$3,242.73
With this new set of modified cash flows, the MIRR is:
$1,793.94
0
$3,242.73
+
(1+IRR)0
IRR =
(1+IRR)5
12.57%
Since our MIRR decision statistic is greater than the ten percent cost of capital, we would accept the
project under the MIRR method.
Compute the PI statistic for Project Z if the appropriate cost of capital is 7 percent. (Do not round
intermediate calculations and round your final answer to 2 decimal places. Include a minus sign
for negative answers.)
Project Z
Time:
Cash flow
PI
0
$3,000
1
$670
2
$800
%
-3.69 1%

Rejected
rev: 11_07_2012
3
$970
4
$620
5
$420
Explanation:
$670
NP
V = $3,000 +
$800
+
$970
+
(1.07)1
(1.07)2
$620
+
(1.07)3
$420
+
(1.07)4
(1.07)5
= $110.82
PI = $110.82
= -3.69%
$3,000
Since PI < 0, the project should be rejected.
Compute the PI statistic for Project Q if the appropriate cost of capital is 13 percent. (Do not round
Project Q
Time:
Cash flow
0
1
$12,400 $4,050
2
$4,880
3
$4,880
4
$2,850
PI
1.10 1%

Accepted
Explanation:
$4,050
NP
V = $12,400 +
$4,880
+
(1.13)1
$4,880
+
(1.13)2
$2,850
+
(1.13)3
(1.13)4
= $135.87
$135.87
PI =
1.10%
$12,400
Since PI > 0, this project should be accepted.
Suppose your firm is considering investing in a project with the cash flows shown below, that the required
rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and
discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Time:
Cash flow
0
1
$5,200 $1,250
2
$2,450
3
$1,650
4
5
6
$1,650 $1,450 $1,250
Use the NPV decision rule to evaluate this project. (Negative amount should be indicated by a minus
sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
NPV
2,139.64 0.1%
Should it be accepted or rejected?

Accepted
Explanation:
NP
$5,20
V =
+
0
$1,250
$2,450
+
(1.09)1
$1,650
+
(1.09)2
$1,650
+
$1,450
+
(1.09)3
$1,250
+
(1.09)4
(1.09)5
(1.09)6
= $2,139.64
The project should be accepted because the NPV is positive.
discounted payback statistics for the project are 3.5 and 4.5 years, respectively.
Time:
Cash flow
0
1
$4,900 $1,260
2
$2,460
3
$1,660
4
5
6
$1,660 $1,460 $1,260
Use the PI decision rule to evaluate this project. (Negative amount should be indicated by a minus
sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)
%
PI
55.13 1%

Accepted
Explanation:
$1,260
NP
V =
$4,900
$2,460
+
(1.08)1
$1,660
+
(1.08)2
$1,660
+
(1.08)3
$1,460
+
(1.08)4
$1,260
+
(1.08)5
(1.08)6
=$2,701.30
$2,701.30
PI =
55.13%
$4,900
Since PI > 0, the project should be accepted.
discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
Time:
Cash flow
0
1
2
3
4
5
$234,000 $65,700 $83,900 $140,900 $121,900 $81,100
Use the discounted payback decision rule to evaluate this project. (Do not round intermediate
years
Discounted payback
3.05 1%

Rejected
Explanation:
Cumulative PV of cash flow will switch from negative and positive between years 3 and 4:
Year
Cash Flow
234,000
$
$65,700
$83,900
$140,900
$121,900
$65,700
$83,900
$140,900
$121,900
(1.11)2
= $68,095.00
(1.11)3
= $103,025.00
(1.11)4
= $80,299.00
$106,715.69
$3,690.82
(1.11)1
Cash Flow PV
$ 234,000 = $59,189.19
Cum. Cash Flow PV 234,000 $174,810.81

$
$76,608.48
$3,690.82
Specifically,
DPB = 3 +
3.05
years,
which is greater than the maximum allowable
$80,299.00
discounted payback, so project should be rejected.
discounted payback statistics for your company are 3.0 and 3.5 years, respectively.
Time:
Cash flow
0
1
2
3
4
5
$238,000 $66,100 $84,300 $141,300 $122,300 $81,500
Use the PI decision rule to evaluate this project. (Negative amount should be indicated by a minus
sign. Do not round intermediate calculations and round your final answer to 2 decimal places.)
PI
%
51.35 1%
5
$ 81,100

Accepted
Explanation:
$66,100
NP
=$238,000
V
$84,300
$141,300
+
(1.11)
$122,300
+
(1.11)
(1.11)
$81,500
+
(1.11)5
(1.11)
= $122,215.74
$122,215.74
PI =
51.35%
$238,000
Since PI > 0, the project should be accepted.
discounted payback statistics for your company are 3 and 3.5 years, respectively.
Time:
Cash flow
0
$305,000
1
$51,800
2
$70,000
3
$113,000
4
$108,000
5
$67,200
Use the MIRR decision rule to evaluate this project. (Do not round intermediate calculations and
%
MIRR
10.82 1%

Rejected
Explanation:
Year
0
Cash Flow
$ 305,000
Future Value
(If Positive)
Sum of FV
Modified CFs $ 305,000
1
$51,800
$51,800 (1.12)4
= $81,508.30
With this new set of modified cash flows, the MIRR is:
$305,000
0 =
$509,760.46
+
(1+IRR)0
(1+IRR)5
2
$70,000
$70,000 (1.12)3
= $98,344.96
3
$113,000
$113,000 (1.12)2
= $141,747.20
4
$108,000
$108,000 (1.12)1
= $120,960.00
IRR = 10.82%
Since our MIRR decision statistic is less than the 12 percent cost of capital, we would reject the project
under the MIRR method.

FV FV: Explanation

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FV FV: Explanation

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What is the future value of $900 deposited for one year earning an interest rate of 10 percent per year?

The time line for this problem is:

Total interest earned

Interest earned on the interest

Pay $425 today

N = 72 / 13.50 5.33 years

N = 72 / 12.2 5.90 percent

$3,200 (1 + i) = $3,800; Solving for i yields 18.75%

FV8 = $3,200 (1 + 0.10)7 + $2,700 (1 + 0.10)5 = $6,235.89 + $4,348.38 = $10,584.27

FV7 = $3,100 (1 + 0.10) 5 + $4,100 (1 + 0.10) 4 $1,000 (1 + 0.10)2 = $4,992.58 + $6,002.81

FV6 = $1,050 (1 + 0.03)5 + $1,350 (1 + 0.03)4 + $1,350 (1 + 0.03)3 + $1,450 (1 + 0.03)2

Future value of multiple annuities

PV = $2,200 (1 + 0.08)3 + $1,700 (1 + 0.08)5 = $1,746.43 + $1,156.99 = $2,903.42

Did the value increase or decrease?

Annuity interest rate

or TVM calculator: N = 8, PV = 20,000, PMT = 3,500, FV = 0, CPT I = 8.15%

or TVM calculator: PV = 4,300, PMT = 125, FV = 0, I = 1.500; CPT N = 48.74 months

a. Expected IP = i RIR = 1.80% 0.75% = 1.05%

R2 = [(1 + 0.0395)(1 + 0.0415 + 0.0005)]1/2 1 = 4.07%

f = [(1 + 1R2)2 / (1 + 1R1)] 1 = [(1 + 0.0145)2 / (1 + 0.0085)] 1 = 2.05%

R2 = [(1 + .045)(1 + .0665 + .0005)].5 - 1 = 5.59%

3.35 percent coupon corporate bond (paid semiannually)

Par value = 209.9 / 184.6 $1,000 = $1,137.05

Gain = End of year value Beginning of year value =

Gain = End of year value Beginning of year value =

Treasury note at 99:15: (99 + 15/32)% $1,000 = 0.9946875 $1,000 = $994.69

Is this a discount or premium bond?

or TVM calculator: N = 20, I = 4.5, PMT = 28.00, FV = 1,000; CPT PV = 778.87

Calculation of current bond price:

Calculation of the current bond price:

4.20% / 101.78% = 0.0413 = 4.13%

Equivalent taxable yield

First determine the ETY:

Compute the yield to maturity. (Round your answer to 2 decimal places.)

Equivalent taxable yield

Compute the yield to call. (Round your answer to 2 decimal places.)

Current yield = (0.0445 $5,000) / (1.0670 $5,000) = 4.45% / 106.70% = 4.17%

TVM calculator: N = 16, PV = 5,335, PMT = 111.25, FV = 5,222.50; CPT I = 1.972%

($40.42/share 160 shares) + $8.70 = $6,475.90

($23.92/share 210 shares) $180 = $4,843.20

The growth rate g equals zero:

Find the dividends in the next four years:

First convert D0 to D1: $0.82 (1 + 0.150) = $0.943.

Dollar Return = (Ending Value Beginning Value) + Income

Dollar Return = Capital gain + Income = $880 $890 + $48 = $38

Percent return = $38 / $890 = 4.27%

Total portfolio = $10,000 + $11,000 + $11,000 = $32,000

Portfolio Return = (0.25 1.44%) + (0.20 7.80%) + (0.55 0.52%) = 1.49%

Average Return = (3.92% + 4.57% 2.06% + 9.44% 2.94%) / 5 = 2.586%

Average Return = (3.88% + 4.47% 2.02% + 9.42% 2.90%) / 5 = 2.570%

Table 9.2 Average Returns for Bonds

Table 9.4 Annual Standard Deviation for Bonds

= (800 $50.08) + (850 $58.52) + (600 $8.81) = $95,092.00

Alaska Air: 0.20 $18,000 / $43.36 = 83 shares

Molson Coors International Paper

Which stock appears better?

Expected return = (0.11 59%) + (0.52 25%) + (0.37 27%) = 9.50%

Expected return = (0.24 30%) + (0.36 7%) + (0.40 19%) = 2.12%

Average market risk premium

Average market risk premium = 10.05% 3.25% = 6.80%

Required return = 3.60% + 1.6% = 5.2%

New portfolio beta = (0.88 1.81) + (0.12 0.92) = 1.70