2024 – Problem 6 1 Future value of an ordinary annuity What is the future
Finance Questions – 2024
Problem 6-1: (Future value of an ordinary annuity). What is the future value of each of the following streams of payments?
1. $500 a year for 10 years compounded annually at 5 percent
2. $100 a year for 5 years compounded annually at 10 percent
3. $35 a year for 7 years compounded annually at 7 percent
4. $25 a year for 3 years compounded annually at 2 percent
Problem 13-4: (Forecasting revenues using scenario analysis)Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three categories based on selling price (high, medium, and low) and estimates the number of units it expects to sell under three different economic scenarios. These scenarios include a recession (Scenario I), a continuation of current conditions in which the economy is level (Scenario II), and a strong economy (Scenario III). These estimates are given below:
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Scenario I (Recession)
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Scenario II (Level Economy)
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Scenario III (Strong Economy)
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Probability
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25%
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50%
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25%
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High-Priced Boats Category
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Unit sales
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50
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400
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1,000
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Average price per unit
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$90,000
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$90,000
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$90,000
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Medium-Priced Boats Category
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Unit sales
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100
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800
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3,000
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Average price per unit
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$70,000
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$70,000
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$70,000
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Low-Priced Boats Category
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Unit sales
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200
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1,500
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5,000
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Average price per unit
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$50,000
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$50,000
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$50,000
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Using these estimates, calculate the expected revenue for Floating Homes, Inc. for the following year.
Problem 14-1: (Defining capital structure weights)Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $400 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition?
The appropriate wd weight is __ %. (Round to one decimal place)
Problem 14-3: (Individual or component costs of capital) Compute the cost of capital for the firm for the following: Compute each in % (Round to two decimal places)..
1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11%. The bonds have a current market value of $1,125 and will mature in 10 years. The firm’s marginal tax rate is 34%.
2. A new common stock issue that paid a $1.80 dividend last year. The firm’s dividends are expected to continue to grow at 7% per year forever. The price of the firm’s common stock is now $27.50.
3. A preferred stock that sells for $125, pays a 9% dividend and has a $100 par value that is selling at par.
4. A bond selling to yield 12% where the firm’s tax rate is 34%.
Problem 14-4: (Individual or component costs of capital) Your firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following: Compute each in % (Round to two decimal places)
1. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12%. The bond is currently selling for a price of $1,125 and will mature in 10 years. The firm’s tax rate is 34%.
2. If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?
3. A new common stock issue that paid a $1.75 dividend last year. The par value of the stock is $15, and the firm’s dividends per share have grown at a rate of 8% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.
4. A preferred stock paying a 10% dividend on a $125 par value. The preferred shares are currently selling for $150.
- A bond selling to yield 13% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.
Problem 12-1: (Determining relevant cash flows)Captain’s Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will be called Crunch Stuff n’ Stars. It is estimated that the sales for the new cereal will be $25 million; however, 20% of those sales will draw from former Crunch Stuff customers who have switched to Crunch Stuff n’ Stars and who would not have switched if the new product had not been introduced. What is the relevant sales level to consider when deciding whether or not to introduce Crunch Stuff n’ Stars?
Problem 18-1: (Measuring firm liquidity) The following table contains current asset and current liability balances for Deere and Company (DE):
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($ thousands)
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2008
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2007
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2006
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Current assets
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Cash and cash equivalents
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2,211,400
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2,278,600
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1,687,500
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Short-term investments
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0
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1,623,300
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0
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Net receivables
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3,944,200
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3,680,900
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3,508,100
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Inventory
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3,041,800
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2,337,300
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1,957,300
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Total current assets
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9,197,400
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9,920,100
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7,152,900
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Current liabilities
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Accounts payable
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6,562,800
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3,186,100
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4,666,300
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Short/current long-term debt
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8,520,500
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9,969,400
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8,121,200
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Other current liabilities
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0
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2,766,000
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0
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Total current liabilities
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15,083,300
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15,921,500
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12,787,500
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1. Measure the liquidity of Deere & Co. for each year using the company’s net working capital and current ratio.
2. Is the trend in Deere’s liquidity improving over this period? Why or why not?
Problem 18-2: (Measuring firm liquidity) The following table contains current asset and current liability balances for Microsoft Corporation (MSFT):
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2008
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2007
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2006
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Cash and cash equivalents
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10,339,000
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6,111,000
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6,714,000
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Short term investments
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13,323,000
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17,300,000
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27,447,000
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Net receivables
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15,606,000
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13,237,000
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11,256,000
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Inventory
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985,000
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1,127,000
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1,478,000
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Other current assets
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2,989,000
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2,393,000
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2,115,000
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Total current assets
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43,242,000
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40,168,000
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49,010,000
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Accounts payable
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12,830,000
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6,612,000
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9,521,000
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Short/current long-term debt
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0
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2,741,000
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0
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Other current liabilities
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17,056,000
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14,401,000
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12,921,000
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Total current liabilities
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29,886,000
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23,754,000
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22,442,000
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1. Assume that you are the lead banker for the syndicate of banks that manage Microsoft Corporation’s line of credit. Your boss has asked that you report to him on the current state of Microsoft’s liquidity. How would you describe the liquidity of Microsoft in 2008?
- Have there been recent changes in Microsoft’s liquidity? If so, have the changes been to improve the firm’s liquidity? Explain your observations.
Problem 15-4: (Adjusting a firm’s capital structure) Curley’s Fried Chicken Kitchen operates two southern cooking restaurants in St. Louis, MO, and has the following financial structure:
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Accounts payable
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$ 100,000
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Short-term debt
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400,000
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Current liabilities
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$ 500,000
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Long-term debt
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$2,000,000
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Owner’s equity
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1,500,000
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Total
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$4,000,000
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The firm is considering an expansion that would involve raising an additional $2 million.
- What is the firm’s debt ratio and interest-bearing debt ratio in its present capital structure?
2. If the firm wants to have a debt ratio of 50%, how much equity does the firm need to raise in order to finance the expansion?
Problem 15-5: (Describing a firm’s capital structure) The Home Depot, Inc. (HD) operates as a home improvement retailer primarily in the United States, Canada, and Mexico. The balance sheet for Home Depot, Inc. (HD) for February 3, 2008, included the following liabilities and owner’s equity:
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In Thousands of Dollars
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Financial Structure
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Liabilities
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Current liabilities
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Accounts payable
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$ 9,185,000
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Short/current debt
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2,047,000
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Other current liabilities
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1,474,000
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Total current liabilities
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$12,706,000
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Long-term debt
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11,383,000
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Other long-term liabilities
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2,521,000
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Long-term liabilities
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$13,904,000
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Stockholder equity
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$17,714,000
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Total
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$44,324,000
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1. What is Home Depot’s debt ratio and interest-bearing debt ratio?
2. If the market value of Home Depot’s common equity is $44.90 billion, what is the firm’s debt to value ratio? (Hint: assume that the market value of the firm’s interest-bearing debt equals its book value.)
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