Revision

1. What is the present value of an investment of $1,000 to be received in three years at a

discount rate of 10 percent?  752
2. What is the future value of an investment of $1,000 to be received in three years at a discount
rate of 10 percent?  1331
3. You are interested in investing $10,000, a gift from your grandparents, for the next four years
in a mutual fund that will earn an annual return of 8 percent. What will your investment be
worth at the end of four years? (Round to the nearest dollar.) 13,605
4. Wes Ottey would like to buy a condo in Florida in six years. He is looking to invest $75,000
today in a stock that is expected to earn a return of 18.3 percent annually. How much will he
have at the end of six years? (Round to the nearest dollar.) 75k*(1+18.3%)^6 =
5. Carlyn Botti wants to invest $3,500 today in a money market fund that pays quarterly
interest at 5.5 percent. She plans to fund a scholarship with the proceeds at her alma mater,
Towson University. How much will Carlyn have at the end of seven years? (Round to the
nearest dollar.) 3500*(1+5.5%/4)^28 =
6. Hector Cervantes started on his first job last year and plans to save for a down payment on a
house in 10 years. He will be able to invest $12,000 today in a money market account that
will pay him an interest of 6.25 percent on a monthly basis. How much will he have at the
end of 10 years? 12k*(1+6.25%/12)^120
7. Chung Lee wants to invest $3,000 in an account paying 5.25 percent compounded quarterly.
What is the interest on interest after four years? 3000*(1+5.25%/4)^16 - 3000
8. Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years.
How much will he have to invest today in an account paying 8 percent annually to achieve
his target? (Round to nearest dollar.)
9. Rick Rodriquez plans to invest some money today so that he will receive $7,500 in three
years. If the investment he is considering will pay 3.65 percent compounded daily, how much
will he have to invest today?
10. You need to have $15,000 in five years to payoff a home equity loan. You can invest in an
account that pays 5.75 percent compounded quarterly. How much will you have to invest
today to attain your target in five years? (Round to the nearest dollar.)
11. Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree
to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round
to the nearest percent.
12. Trojan Traps manufactures an innovative mouse trap. Sales this year are $325,000. The
company expects its sales to go up to $500,000 in five years. What is the expected growth
rate in sales for this firm? (Round to the nearest percent.)
13. Petry Corp. is a growing company with sales of $1.25 million this year. The firm expects to
grow at an annual rate of 25 percent for the next three years, followed by a growth of 20
percent per year for the next two years. What will be Petry's sales at the end of five years?
(Round to the nearest percent.)
14. Your uncle is looking to double his investment of $10,000. He claims he can get earn 14
percent on his investment. How long will it be before he can double his investment?
15. Sally Wilson is planning her retirement. She is presently investing in a 401(k) but needs an
additional $500,000 to reach her retirement goal. As luck would have it, Sally just won a
brand new car that is worth $36,000 in a raffle. If Sally were to sell the car and invest the
$36,000 proceeds at a rate of 6.50%, compounded annually, how long will it be before Sally
could retire?
16. Chandler Corp. is expecting a new project to start producing cash flows, beginning at the end
of this year. They expect cash flows to be as follows:

1 2 3 4 5
$643,547 $678,214 $775,908 $778,326 $735,444

17. If they can reinvest these cash flows to earn a return of 8.2 percent, what is the future value
of this cash flow stream at the end of five years? (Round to the nearest dollar.)
18. Jack Stuart has loaned money to his brother at an interest rate of 5.75 percent. He expects to
receive $625, $650, $700, and $800 at the end of the next four years as complete repayment
of the loan with interest. How much did he loan out to his brother?
19. Transit Insurance Company has made an investment in another company that will guarantee
it a cash flow of $37,250 each year for the next five years. If the company uses a discount
rate of 15 percent on its investments, what is the present value of this investment? PVA=
20. Herm Mueller has invested in a fund that will provide him a cash flow of $11,700 for the
next 20 years. If his opportunity cost is 8.5 percent, what is the present value of this cash
flow stream? PV of an annuity PVA =
21. Jayadev Athreya has started on his first job. He plans to start saving for retirement early. He
will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a
return of 10 percent. How much will Jayadev have at the end of 45 years? FVA =
22. Zhijie Jiang is saving to buy a new car in four years. She will save $5,500 at the end of each
of the next four years. If she invests her savings at 6.75 percent, how much will she have
after four years? FVA =
23. Maricela Sanchez needs to have $25,000 in five years. If she can earn 8 percent on any
investment, what is the amount that she will have to invest every year at the end of each year
for the next five years?
24. John Harper has borrowed $17,400 to pay for his new truck. The annual interest rate on the
loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual
payment if he begins his payment beginning now? C=? 4,952
25. Your father is 60 years old and wants to set up a cash flow stream that would be forever. He
would like to receive $20,000 every year, beginning at the end of this year. If he could invest
in account earning 9 percent, how much would he have to invest today to receive his
perpetual cash flow? PV of perpetuity = C/i =
26. Chris Collinge has funded a retirement investment with $250,000 earning a return of 5.75
percent. What is the value of the payment that he can receive in perpetuity? C =PV*i =
14,375
27. You plan to save $1,400 for the next four years, beginning now, to pay for a vacation. If you
can invest it at 6 percent, how much will you have at the end of four years? FVA due =
28. Mark Holcomb has a five-year loan on which he will make annual payments of $2,235,
beginning now. If the interest rate on the loan is 8.3 percent, what is the present value of this
annuity?
29. Norwood Investments is putting out a new product. The product will pay out $25,000 in the
first year, and after that the payouts will grow by an annual rate of 2.5 percent forever. If
you can invest the cash flows at 7.5 percent, how much will you be willing to pay for this
perpetuity? PV of a growing perpetuity = CF1/(i-g)=500,000
30. Hill Enterprises is expecting tremendous growth from its newest boutique store. Next year
the store is expected to bring in net cash flows of $675,000. The company expects its
earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present
value of this growing annuity if the firm uses a discount rate of 18 percent on its
investments? PV of a growing annuity = 6,448,519
31. Desire Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate (APR) is
11.75 percent, and the compounding is daily, what is the effective annual rate (EAR)? EAR =
(1+APR/m)^m = 12.46%
32. Largent Supplies Corp. has borrowed to invest in a project. The loan calls for a payment of
$17,384 every month for three years. The lender quoted Largent a rate of 8.40 percent with
monthly compounding. At what rate would you discount the payments to find amount
borrowed by Largent? 8.4%/12 = 0.7%
33. In a game of chance, the probability of winning a $50 is 40 percent and the probability of
losing a $50 prize is 60 percent. What is the expected value of a prize in the game? E(r)
=40%*50 + 60%*(-50) = -10
34. Use the following table to calculate the expected return for the asset.

Return Probability

0.1 0.25
0.2 0.5
0.25 0.25
Er
=0.25*0.1+0.
5*0.2 +
0.25*0.25 =
0.1875
35. The expected return for the asset below is 18.75 percent. If the return distribution for
the asset is described as in the following table, what is the variance for the asset's
returns?

Return Probability

0.1 0.25
0.2 0.5
0.25 0.25
Var = 0.25*(0.1 – 0.1875)^2 + 0.5*(0.2 – 0.1875)^2 + 0.25*(0.25-0.1875)^2=0.00296

36. The expected return for Stock V is 24.5 percent. If we know the following information about
Stock Z, then what is the probability of the Dynamite state of the world occurring?

Return Probability

Poor 0.15 0.2

Lukewarm 0.28 0.7
Dynamite! 0.19 ?
0.245 = 0.2*0.15+0.7*0.28 +x*0.19
37. Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year,
the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock?
HPR =(65-45 +2.5)/45=0.5
38. Julio purchased a stock one year ago for $27. The stock is now worth $32, and the total
return to Julio for owning the stock was 37 percent. What is the dollar amount of dividends
that he received for owning the stock during the year? 37% = (32-27+x)/27  x = 4.99
39. Francis purchased a stock one year ago for $20, and it is now worth $24. The stock paid a
dividend of $3 during the year. What was the stock's rate of return from capital appreciation
during the year? (24 – 20)/20 =20%
(24-20+3)/20 = 35%
40. Gunther earned a 62.5 percent return on a stock that he purchased one year ago. The stock is
now worth $12, and he received a dividend of $1 during the year. How much did Gunther
originally pay for the stock? 62.5% = (12-P0+1)/P0 P0= 8
41. Babs purchased a piece of real estate last year for $85,000. The real estate is now worth
$102,000. If Babs needs to have a total return of 25 percent during the year, then what is the
dollar amount of income that she needed to have to reach her objective? (102k-85k+x)/85k
= 25%  x = $4,250
42. Genaro needs to capture a return of 40 percent for his one-year investment in a property. He
believes that he can sell the property at the end of the year for $150,000 and that the property
will provide him with rental income of $25,000. What is the maximum amount that Genaro
should be willing to pay for the property?
43. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is
currently selling for $28. Serox pays a $1.10 dividend per year. What was the rate of return
for owning Serox in the most recent year? (28-25+1.1)/25 = 16.4%
44. You have invested 40 percent of your portfolio in an investment with an expected return of
12 percent and 60 percent of your portfolio in an investment with an expected return of 20
percent. What is the expected return of your portfolio?  Er = 0.4*12% + 0.6*20% = 16.8%
45. You have invested 20 percent of your portfolio in Homer, Inc., 40 percent in Marge Co., and
20 percent in Bart Resources. What is the expected return of your portfolio if Homer, Marge,
and Bart have expected returns of 2 percent, 18 percent, and 3 percent, respectfully?
46. You invested $3,000 in a portfolio with an expected return of 10 percent and $2,000 in a
portfolio with an expected return of 16 percent. What is the expected return of the combined
portfolio? (3000/5000)*10% +(2000/5000)*16% = 12.4%
47. Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for
similar bonds is currently 9 percent. Assuming annual payments, what is the present value of
the bond? = 872
48. Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors
buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should
the company's bonds be priced at today? Assume annual coupon payments.
49. Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a
semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be
the current price of this bond? 1048
50. Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon
rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the
bonds sell for today? n = 20*2 = 40; i=7%/2 ; C = 78/2 = 39  1085
51. Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., at a price of 943.22.
The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in
the market will yield 10 percent today. Should she buy the bonds at the offered price?
C=90/2;i=10%/2;n=7*2 = 14  Price = 950
52. Shana Norris wants to buy five-year zero-coupon bonds with a face value of $1,000. Her
opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current
market price of these bonds? Price=? FV = 1000; r=8.5%, n =5, coupon = 0  Price = PV =
1000/(1+8.5%)^5 = 665
53. The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000.
Assume that coupon payments are normally semiannual. What will be the current market
price of these bonds if the opportunity cost for similar investments in the market is 6.75
percent? FV=1000, n=10*2 =20, r=6.75%/2 PV = 514.86
54. Jenny LePlaz is looking to invest in some five-year bonds that pay annual coupons of 6.25
percent and are currently selling at $912.34. What is the current market yield on such bonds?
n=5, Coupon = 62.5, PV = 912.34, FV = 1000 912.34 = 62.5*(1-1/(1+r)^5)/r +
1000/(1+r)^5 r=8.5%
55. Shawna Carter wants to invest her recent bonus in a four-year bond that pays a coupon of 11
percent semiannually. The bonds are selling at $962.13 today. If she buys this bond and
holds it to maturity, what would be her yield? N=4*2 =8, C = 110/2 =55, PV=962.13, FV =
1000 962.13 = 55*(1-1/(1+r)^8)/r + 1000/(1+r)^8  r = 6.11%*2=12,23%
56. Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent
semiannually. Given the current price of $878.21, what is the yield to maturity on these
bonds? 13%
57. Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a
coupon of 15 percent semiannually. Today, the bond is priced at $961.92. If she sold the bond
today, what would be her realized yield? (hint: calculate i in the formula of bond price
with the FV = selling price, PV = buying price)
PV = $921.77, FV = $961.92, n=7*2 = 14, C= 150/2 = 75 921.77 = 75*(1-1/(1+r)^14)/r +
961.92/(1+r)^14
58. Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The
bond pays coupons twice a year. What is the effective annual yield (EAY) on this
investment?
EAY = (1+6.7%/2)^2 = 6.81%
59. Zephyr Electricals is a company with no growth potential. Its last dividend (D0=D1) was
$4.50, and it expects no change in future dividends. What is the current price of the
company’s stock given a discount rate of 9 percent? P = 4.5/9% = 50
60. A communications company pays annual dividends of $8.50 with no possibility of it
changing in the next several years. If the firm’s stock is currently selling at $60.71, what is
the required rate of return? D=8.5 , P0 = 60.71  r= D/P0 = 8.5/60.71 = 14%
61. You are interested in investing in a company that expects to grow steadily at an annual rate
of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your
required rate of return is 10 percent, what is the most you would be willing to pay for this
stock?
g=6%, D0=2.3, r=10%--> P0=D1/(R-g) =2.3*(1+6%)/10%-6% = 60.95
62. Johnson Corporation has just paid a dividend of $4.45. The company has forecasted a growth
rate of 8 percent for the next several years. If the appropriate discount rate is 14 percent, what
is the current price of this stock? P=4.45(1+8%)/14%-8% =$80.10
63. Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5
percent. If the required rate of return is 7.75 percent, what is the stock’s current market price?
D=5.5,r=7.75  P0= D/R=70.97
64. The preferred stock of Acme International is selling currently at $110.35. If your required
rate of return is 9.75 percent, what is the dividend paid by this stock?
P0=110.35, R=9.75 D= P0*R = 10.76
65. Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40
percent for the next two years and then a growth rate of 20 percent for the following two
years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to
pay its first dividend of $1.25 a year from now (D1). If your required rate of return
(discount rate) on such stocks is 20 percent, what is the current price of the stock?
D1 = 1.25
D2 = 1.25*(1+40%) = 1.75
D4 = 2.45*(1.2)=2.94
D5 = 2.94*1.2 = 3.528
D6 = 3.528*1.08= 3.81
P5=D6/R-g = 3.81/(20%-8%)=31.75
P0 = 1.25/(1+20%) +1.75/1.2^2 + 2.45/1.2^3 +2.94/1.2^4 +3.528/1.2^5 +31.75/1.2^5=19.27
$15.63
66. BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years:
30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate
of 7 percent for the next several years. The company paid a dividend of $2.00 last week
(D0). If the required rate of return is 16 percent, what is the market value of this stock? 36.87

67. Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four
years. It then will settle to a constant-growth rate of 10 percent. The first dividend will be
paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what
is the current price of the stock?
D1=D2 = 0
D3=5
D4 = 5*1.25 = 6.25
D5 = 6.25*1.1 = 6.875
P4 = D5/18%-10% = 85.93
P0 = 0+0+ 5/1.18^3+6.25/1.18^4 +85.93/1.18^4 = 50.58

68. Assume that you are considering the purchase of a stock which will pay dividends of $4.50
during the next year. Further assume that you will be able to sell the stock for $85.00 one
year from today and that your required rate of return is 15 percent. How much would you be
willing to pay for the stock today? (Round off to the nearest $0.01)
15% = (85 – buying price +4.5)/buying price  Buy price=77.82
69. The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to
generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If
the appropriate discount rate for the firm is 13 percent, what is the NPV of this project?
NPV = -$2,744,320 +$1, 223,445/(1+13%)^1 + $2,007,812/(1.13)^2 + 3,147,890/(1.13)^3=
70. Johnson Entertainment Systems is setting up to manufacture a new line of video game
consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over
 the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the
company's required rate of return of 15 percent, what is the NPV of this project? $1,169,806

71. Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is
expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the
next four years. What is the payback period for this project? 2.12 years
72. Elmer Sporting Goods is getting ready to produce a new line of golf clubs by investing $1.85
million. The investment will result in additional cash flows of $525,000, $812,500, and
1,200,000 over the next three years. What is the payback period for this project? 2.43 years
73. Carmen Electronics bought new machinery for $5 million. This is expected to result in
additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is
12 percent. What is the discounted payback period for this project? If the firm's acceptance
period is five years, will this project be accepted? 6.12 years  No
74. LaGrange Corp. has forecasted that over the next four years the average annual after-tax
income will be $45,731. The average book value of the manufacturing equipment that is used
is $167,095. What is the accounting rate of return? ARR = Average NI/Average BV =
75. Stump Storage Co. is expecting to generate after-tax income of $155,708, $159,312, and
$161,112 for each of the next three years. The equipment used will have an average book
value of $251,575 over that period. What is the ARR? Average NI = ($155,708+ $159,312 +
$161,112)/3 = ; ARR =
76. Quick Sale Real Estate Company is planning to invest in a new development. The cost of the
project will be $23 million and is expected to generate cash flows of $14,000,000,
$11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20
percent. What is the internal rate of return on this project? (Round to the nearest percent.)
22%
77. A firm is considering taking a project that will produce $12 million of revenue per year. Cash
expenses will be $5 million, and depreciation expenses will be $1 million per year. If the firm
takes that project, then it will reduce the cash revenues of an existing project by $2 million.
What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal
tax rate?
Revenue = 12 – 2 =10
Expense = 5
Depre =1
EBIT = 4M
Tax = 0.4*4
NI = EBIT – Tax=2.4
CFO = FCF = NI + Dep = 3.4M

78. Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and
depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of
equipment during the year while increasing its inventory by $300,000 (with no corresponding
increase in current liabilities). The marginal tax rate for Provo is 40 percent.
a. What is Provo's cash flow from operations for 2008? CFO = 10
 Revenue =10M
Expense = 5
Dep=1M
EBIT = 4M
NI = 4*0.6 = 2.4
Operating CF = 2.4+1 = 3.4
b. What is Provo's free cash flow for 2008?
FCF = CFO – Capex – add WC = 3.4 - 0.5 – 0.3 =2.6M
c. What is Provo's NOPAT (net operating profit after tax) for 2008? =2.4
d. What is Provo's cash flows associated with investments for 2008? 0.8