worksheet

pollockashlee-finc400-4.xlsx

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FINC 400 Principles of Financial Management

Week 4 Homework Problems

Complete the following problems:

Problem 9-17

Problem 10-6

Problem 11-7

Problem 9-19

Problem 10-13

Problem 11-15

Problem 9-27

Problem 10-24

Problem 11-19

Master 11/2011-kT

Problem 9-17 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Western Sweepstakes
Discount Rate = i	12%
Periods = n	20
Annuity	50,000
PVIFA	7.469
	Solution:
		A	x	PVIFA	=	PVA
		50,000		7.469		373,450

Problem 9-19 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Bruce Sutter
Discount Rate = i	20%
Periods = n	5	PV	x	FVIF	=	FV
Present Value of Investment	-2,000	2,000		2.488		$4,976
FVIF	2.488
Discount Rate = i	15%
Periods = n	3	PV	x	FVIF	=	FV
Present Value of Investment	4,976	4,976		1.521		$7,569
FVIF	1.521

Problem 9-27 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Information
Discount Rate = i	8%
Periods = n	11
Annuity	2,000
FVIFA	15.645
Solution:	A	x	FVIFA	=	FVA
	2,000		15.645		$31,290

Problem 10-6 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Solution: Hartford Telephone Company
a)	Par Value	$1,000
	Interest	11%	Present Value of Interest Payments = A * PVIFA
	Time to Maturity=n	30	Present Value of Interest Payments =	$770.33
	Yield to Maturity = i	14%	Present Value of Principal Payment at Maturity = FV * PVIF
	Annuity = A	$110	Present Value of Principal Payment at Maturity =	$20.00
	PVIFA	7.003	Total Present Value or Price of the Bond =	$790.33
	PVIF	0.020
b)	Par Value	$1,000
	Interest	11%	Present Value of Interest Payments = A * PVIFA
	Time to Maturity=n	15	Present Value of Interest Payments =	$675.62
	Yield to Maturity = i	14%	Present Value of Principal Payment at Maturity = FV * PVIF
	Annuity = A	$110	Present Value of Principal Payment at Maturity =	$140.00
	PVIFA	6.142	Total Present Value or Price of the Bond =	$815.62
	PVIF	0.140
c)	Par Value	$1,000
	Interest	11%	Present Value of Interest Payments = A * PVIFA
	Time to Maturity=n	1	Present Value of Interest Payments =	$96.47
	Yield to Maturity = i	14%	Present Value of Principal Payment at Maturity = FV * PVIF
	Annuity = A	$110	Present Value of Principal Payment at Maturity =	$877.00
	PVIFA	0.877	Total Present Value or Price of the Bond =	$973.47
	PVIF	0.877

Problem 10-13 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
	Tom Cruise Lines, Inc.
	Par Value	$1,000	Real Rate of Return	3%
	Interest	12%	Inflation Rate	5%
	Time to Maturity=n	20	Risk Premium	4%
	Yield to Maturity = i	10%	Total Return	10%
	Annuity = A	$120
	PVIFA	8.514	Inflation Rate in 5 years	3%
	PVIF	0.149
Solution:
	Compute new required rate of return (yield to maturity)
	Real Rate of Return	3%
	Inflation Rate	3%
	Risk Premium	4%
	Total Return	10%
Present Value of Interest Payments = A * PVIFA
Present Value of Interest Payments =					$1,021.68
Present Value of Principal Payment at Maturity = FV * PVIF
Present Value of Principal Payment at Maturity =					$149.00
	Total Present Value or Price of the Bond =				$1,170.68

Problem 10-24 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
	North Pole Cruise Lines
	Annual Dividend	$8.00
	Original Required Rate of Return	8%
	New Required Rate of Return	6%
Solution:			Show your work!
a)	ORIGINAL PRICE
	Price of Preferred Stock	=	$8.00/.08=$100
	CURRENT VALUE
b)	Price of Preferred Stock	=	$8.00/.06=$133.33

Problem 11-7 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Goodsmith Charitable Foundation
Debt issued last year at	8%
Cost of debt last year	10%
Cost of debt this year	20%	higher than last year
Cost of debt this year	12.0%
Corporate Tax Rate (b)	35.0%
			a)
		Solution:
If the Goodsmith Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 20 percent increase?
			b)
If the receipts of the foundation were found to be taxable by the IRS (at a rate of 35 percent because of involvement in political activities), what would the aftertax cost of debt be?

Problem 11-15 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
Riley Coal Co.			Aftertax Cost of Debt
Yield	10.6%	Solution:
Corporate Tax Rate = T	35%
Dividend = Dp	$4.40
Price of Preferred Stock =Pp	$50		Aftertax Cost of Preferred Stock
Floatation Cost = F	$2.00
			Based on the facts above, is the treasurer correct?

Problem 11-19 - Refer to problems at the end of the chapter for details and instructions:
Use the template to complete the problem :
United Business Forms
Capital Structure
Debt	35%	Aftertax Cost of Debt	7%
Preferred Stock	15%	Cost of Preferred Stock	10%
Common Equity	50%	Cost of Common Equity	13%
Solution:
	Cost (aftertax)	Weights	Weighted Cost
Debt (Kd)
Preferred Stock (Kp)
Common Equity (Ke)
Weighted Average Cost of Capital (Ka)