Ch 1
Which task of a financial manager is the most important?
Make investment decisions
Why do firms create financial statements?
For external parties like investors to evaluate the financial conditions of the company.
Denise wants to have $1000 in her investment portfolio 3 years later. Portfolio's return is 8% per year. How much should she invest today?
$793.83
Nayeli pays a bank $2,000 today. In return, the bank pays her $120 at the end of each year, forever. What interest rate does this stream of cash flow have?
6%
What is 15% APR as a monthly rate?
1.25% or 0.0125
S corp. $8 earnings per share before taxes. Non-dividend income tax rate is 30%. How much earnings remain after all taxes are paid?
$5.60
Vincent Company has 300 million shares outstanding, trading at a price of $35 per share. Find Vincent Co's market capitalization.
Kellie is considering a savings bond that will pay $15,000 in 10 years. Interest rate is 6% per year. How much is the bond worth today?
$8375.92
Ramirez pays $200 each night to stay at Fredi's for 5 nights. Suppose the interest rate is 1% per night. If Ramirez decides to pay one lump-sum (PV) today instead of the multiple payments, how much would he have to pay?
$970.69
Nominal rate of interest is 2%. Rate of inflation is 4.55%. What is the real rate of interest?
-0.0244 or -2.44%
S corp. $8 earnings per share before taxes. Non-dividend income tax rate is 30%. Corporate tax rate is 40%. Dividend income tax rate is 15%. How much earnings remain after tax?
$5.60
Nayeli Company has Profit Margin of 3.7%, Asset Turnover of 2.4, Gross Margin of 3.2, and Equity Multiplier of 2.8. Find Nayeli Company's ROE.
24.864%
Messi pays $10,000 today. At the end of the next four years, he will receive $4,000, $3,000, $2,000, $1,000, in this order. Interest rate is 5%. Find NPV.
$919.01
You donate to your alma mater to fund a $30,000 party, forever, starting one year from today. Interest rate is 8% per year. Cost of party will rise by 4% per year. How much should you donate today?
$750,000
An account pays you a 30% effective 3-year rate. What is the equivalent rate over 6 months?
0.0447 or 4.47%
C-corp. $8 earnings per share before taxes; $3 dividends. Corp tax rate is 40%; dividend income tax rate 15%. How much do shareholders get after tax?
$2.55
Paul Corp has Accounts Payable of $29.2m, short-term Notes Payable of $5.5m, Current Maturities of Long-term Debt of $37.9m, and Other Current Liabilities of $6.0m. What is the total short-term debt?
$43.4m
RD's savings account has $1,500,000 right now. After 5 years, it has grown to $1,700,000. What rate of return has RD earned?
2.535%
Christian pays $300,000 per year to fund a villa construction for 8 years. Interest rate is 5% per year. The construction cost grows by 2% per year. How much does the growing annuity cost today?
$2,069,748.12
Convert an 18% APR to EAR in semiannual periods.
0.1881 or 18.81%
C corp. $8.50 earnings per share before tax. Corporate tax rate is 30%. Personal tax rate on dividends is 15%. Corp pays a $5 dividend. What is the total amount of taxes paid?
$3.30
Jordan LLP has market cap $1,050m, current liabilities $105m, short-term debt $50m, long-term liabilities $500m, long-term debt $200m, cash $300m. Find Jordan LLP's enterprise value.
$1,000m
You have $800 in the bank today. Interest rate is 8% per year. Suppose interest is calculated monthly. How much will you have after 6 months?
$832.54
Your parents deposit $10,000 to your savings account at the end of each year for 5 years. Interest rate is 5%. Growth rate is 2%. How much will you have in the account after all the deposits have been made?
$57,400.25
Jane can buy a Toyota GR86 for $28,000 today. Or, she can get a 5-year loan at 3% APR with monthly payments of $700. What should Jane do?
Buy the Toyota GR86 outright today.
BONUS 500: How should Jane journalize this transaction on her company's books?