Finance Answers

For the next fiscal year, you forecast net income of $50,000 and ending assests of $500,000. Your firm payout ratio is 10%. Your beginning stockholders equity is $300,000 and your beginning total liabilities are $120,000. Your non-debt liabilites such as accounts payable are forecasted to increase by $10,000. Assume your beginning debt is $ 100000. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your​ debt-equity ratio​ constant?

Eberhart Manufacturing has projected sales of $145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the growth rate reaches 6 percent, where it is expected to remain indefinitely. There are
5.5 million shares of stock outstanding and investors require a return of 13 percent return on the company’s stock. The corporate tax rate is 40 percent.

a. What is your estimate of the current stock price?
b. Suppose instead that you estimate the terminal value of the company using a PE
multiple. The industry PE multiple is 11. What is your new estimate of the company’s
stock price?

Two firms operating under oligopoly are faced with two choices, to charge a high price or a low price. If one firm charges a low price while the other a high price, the firm that charges a low price attracts customers and earns a profit of $600,000 while the firm charging a high price loses customers and earns only $100,000. If both firms charge a high price they earn $400,000 each while if both charge a low price, they earn $200,000 each.
a) What profits are the firms likely to earn in the absence of cooperation?
b) If the firms cooperated, what profits would each firm earn?

A firm is considering employing one of the two machines A and B over a period of 4 years at the end of which the salvage value of each is zero. The cost of machine A is $10, 000 while that of machine B is $11, 000. The probability distributions of the returns for each machine are given in the table below.
PROBABILTY MACHINE A($) MACHINE B($)
0.25 6000 7000
0.50 5000 5000
0.25 4000 3000
The risk free discount rate is 10% while the risk premium applied as follows.
STANDARD DEVIATION($) RISK PREMIUM
0 – 999 0%
1000 – 1999 10%
2000 – 2999 10%
3000 – 3999 20%

Which of the two machines should be installed?

The owner of a firm expects to make a profit of $100 for each of the two years and be able to sell the firm at the end of the second year at $800. The owner of the firm believes the appropriate discount rate for the firm is 15%. What is the value of the firm?

A firm owned by an investor who invested $500, 000 earns a profit of $150, 000 a year. The best investment alternative for the investor is a portfolio of stocks and bonds earning a return of 12%. What is the economic profit?

Which would be most helpful when considering a large expenditure that might require repeating payments?


1 careful consideration of short-term goals
2 recording income and spending over the past year
3 creating a budget to consider future income and spending
4 learning more about different kinds of accounts to manage money

Hypothetical drug-development program requires $200 million in out-of pocket
costs over a 10-year period during which no revenues are generated, and with
only a 5% probability of success. However, if the drug development is successful, it
is plausible to assume that it could generate a net income of $2 billion per year over
a 10-year period of exclusivity from years 11–20. The present value of this income
stream in year 10 is $12.3 billion (using a 10% cost of capital).
(a) Compute the expected return and standard deviation (over a 10-year period) of
this investment

(a) Explain the advantages of using Value Added Statements (VAS) for interdivision for comparisons in decentralized firm.

• A coupon bond with a coupon rate of 8% and a face value of $1,000. Coupons
are paid out annually and the bond has 1 year to maturity. The current coupon
has just been paid out. The current price of the bond is $1018.772.
• A zero coupon bond with a face value of $1,000 and 2 years to maturity. The
bond trades at $907.029.
• An annuity that pays $50 every year for the next 3 years. The next payment will
be a year from now and the last payment will be 3 years from now. The annuity
is currently worth $136.967.
All these securities are risk-free. Note that there is no direct borrowing and lending
here, so if you want to borrow (lend) you need to sell (buy) an appropriate bond.
If you want to borrow (lend) you need to sell (buy) an appropriate bond.
Bank of Montreal offers a forward rate over year 3, f3, of 3%. That rate is good
for a loan or deposit of $10,000. Can you make money and eat a free lunch at
Bank of Montreal’s expense? If so, how?