Chapter 6
Question 6 Defe
ed payment terms are equivalent to a cash discount. Discuss and Explain this idea.
Question 13 Discuss the idea of capitalizing a stream of earnings in perpectuity. Where is this idea useful? Is there a financial asset that makes use of this idea
Question 14 When an annuity begins several time periods into the future, how do we calculate its present value today? Describee the procedure in a few words.
Problems
Problem 23 Charlie owes Joe $8,000 on a note that is due in five years with accumulated interest at 6%. Joe has an investment opportunity now that he thinks will earn 8%. There's a chance however that it will earn as little as 4%. A bank has offered to discount the note at 14% and give Joe cash that he can invest today.
a. How much ahead will Joe be if he takes the bank's offer and the investment does turn out to yield 18%.
b. How much behind will he be if the investment turns out to yield only 4%?
Problem 24 John Cleaver's grandfather died in 2015 and left him a trunk that had been locked in his attic for years. At the bottom of the trunk, John found a packet of 50 U.S. Savings Bonds that had never been cashed in. The bonds were purchased for $11.50 each in 1923 and pay 3% interest as long as they're held.
a. How much were the bonds worth in 2015?
b. How much would they have been worth if they paid interest at a rate more like that paid during the 1970s and 80s, say 7%?
c. Comment on the difference between the answers to parts (a) and (b).
Problem 26 The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the interest rate is 7%.
Problem 29 Blanchard Inc. would like to bo
ow $12 million for 20 years through a bond issue but has been having difficulty finding lenders willing to advance that much.The firm's investment banker has advised the CFO that potential bond buyers are not wo
ied about Blanchard's ability to make the periodic interest payments on such a loan. However, they are concerned that it will have enough cash on hand to repay the loan when the principal is due in 20 years. The banker has suggested that a sinking fund might allay their fears; he also said funds deposited in such accounts can be expected to earn about 6% annually.
How much would Blanchard have to deposit each year if the fund is started
a. When the bonds are issued
b. 5 years after the bonds are issued
c. 10 years after the bonds are issued
d. 15 years after the bonds are issued
Problem 37 Ryan and Laurie Middleton just purchased their first home with a traditional 6%, 30-year mortgage loan of $178,000
a. How much is their monthly payment
b. How much interest will they pay in their first month
c.If they make all their payments on time over the 30-year period, how much interest will they have paid ?
d. If Ryan and Laurie decide to move after 7 years, what will the balance of their loan be at that time?
Problem 44 Joe Fe
o's uncle is going to give him $250 a month for the next two years starting today. If Joe banks every payment in an account paying 6% compounded monthly, how much will he have at the end of three years?
Problem 52 Janet Elliott just turned 20 and received a gift of $20,000 from her rich uncle. Janet plans ahead and would like to retire on her 55th Birthday. She thinks she'll need to have about $2 million saved by that time in order to maintain her lavish lifestyle.
She wants to make a payment at the end of each year until it reaches $2 million when she turns 55. Assume she can invest at 7% compounded annually, ignore the effect of taxes?
a. How much will she have invest each year in order to achieve her objective?
b. What percent of the $2 million will have been contributed by Janet (including the $20,000 she got from her uncle.)
Problem 53 Me
itt Manufacturing needs to accumulate $20 million to retire a bond issue that matures in 13 years. The firm's manufacturing division can contribute $100,000 per quarter to an account that will pay 8%, compounded quartlerly. How much will the remaining have to contribute every month to a seconf account that pays 6% compounded monthly in order to reach the $20 million goal?
Problem 54 Carol Pasca just had her fifth birthday. As a birthday present, her uncle promised to contribute $300 per month to heer education fund until she turns 18 and starts college. Carol's parents estimate college will cost $2,500 per month for four years, but they don't think they will be able to save anything toward it for 8 years. How much will Carol's parents need to contribute to the fund each month starting on her 13th birthday to pay for her college education? Assume the fund earns 6% compounded monthly.
Chapter 7
Questions
Question 16 What In general, is meant by off balance sheet financing?
Question 22 Why are residuals important in negotiations between lessees and lessors
Question 24 Leasing is generally more expensive than bo
owing to buy, and FASB 13 has reduced the availability of off balance sheet financing. Why then is leasing popular?
Question 25 Leveraged leases offer tax advantages to unprofitable companies.
a. Why are they called leveraged?
b. Briefly, how do they work?
Problems
Problem 19 Apollo's Beta bond has just reached the end of its period of call protection, has ten years to go until maturity, and has a face value of $1,000. Its coupon rate is 16% and the interest rate is cu
ently 10%. Should Apollo refund this issue if refunding costs a total of 8% of the value of the debt refunded plus the call penalty.
Problem 21 Your friend Marvin is excited because he believes he's found an investment bargain. A
oker at QuickCash Investments has offered him an opportunity to buy a bond issued by Galveston Galleries Inc. at a very attractive price
Problem 27 Caruthers Inc is a small manufacturing firm and has the following summarized balance sheet.
Caruthers Inc. Balance Sheet ($000)
Cu
ent Assets $20 Cu
ent Liabilities $15
Fixed Assets 130 Long-term Debt 65
Total Assets $150 Equity XXXXXXXXXX
Total Liabilities and Equity $150
The firm is interested in acquiring a fleet of 10 Company Cars for its sales staff.
The cars have an economic life of seven years, but Caruthers plans to keep them for only three because it doesn't want it's salespeople driving around in old vehicles. The cars cost $20,000 each, and Caruthers is considering bo
owing to purchase them.
a. Restate Caruther's balance sheet after the loan is made.
b. Calculate the firm's debt ratio now and immediately after the loan is made.
c. Comment on the change in part (b). Words Only
d. Suggest a Solution and explain why it will qualify for accounting treatment that will avoid the problem highlighted in part B. (Words Only).
Problem 28 Henderson Engineering Ltd. Just leased a computer-aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Hendersen to purchase the machine at its fair market value as used equipment when the lease expires. Industry data indicate that sytems like these normally last for about eight years. Henderson could have purchased the machine for $50,000 with money bo
owed at 9%.
Does Hendersen have to capitalize the lease on its balance sheet? Why?
Problem 30 Wings Inc. is a Commuter Airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is 15 years, and no residual value is expected at the end.
a. What monthly lease payment must Nantucket charge to earn a 12% return on its investment if the plane wings wants costs $1.5 million?
b. What would Nantucket's return be if it agreed to accept annual payments of $200,000
Problem 32 Paxton sheet Metal Works Inc. is about to acquire a new stamping press that costs $400,000. It is considering purchase the asset with money it can bo
ow at 10%