MyFinanceLab Answers and Explanations
The following study guide is designed to help finance students solve lab problems in week 2.
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- Week 2 MyFinanceLab Solutions and Explanations
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- What is the value at the end of year 8 of a $1,200 deposit at the beginning of year 1 and another $800 deposit at the beginning of year 5 if the interest rate is 6%?
- What is the present value of a $1,400 deposit at the end of year 1 and another $700 deposit at the end of year 5 if the interest rate is 8%?
- Given a 5 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,200, $1,300, $1,400, and $1,500.
- What is the future value of a $750 annuity payment over 7 years if the interest rate is 5%?
- What is the present value of a $750 annuity payment over 7 years if the interest rate is 5%?
- If the present value of an ordinary, 6-year annuity is $9,500 and the interest rate is 8.5 percent, what’s the present value of a annuity due with the same terms?
- Assume that you contribute $100 per month to a retirement plan for 15 years. Then you are able to increase the contribution to $350 per month for the next 25 years. Given an 7 percent interest rate, what is the value of your retirement plan after the 40 years?
- You wish to buy a $20,000 car. The dealer offers you a 4-year loan with a 7 percent APR. If you do not make any downpayment, what is the monthly payment?
- For the loan in Question #8, how would the payment differ if you paid interest only? What would happen when the loan matures at the end of year 4?
- A small business owner visits her bank to ask for a loan. The owner states that she can repay a loan at $1,000 per month for the next three years and then $1,500 per month for two years after that. If the bank is charging customers 5.5 percent APR, how much would it be willing to lend the business owner?
Week 2 Finance Lab Study Guide Contents
Over 20 powerful solution calculators included in the week 2 guide. Fully updated for the new classroom format!
- (Preparing common-size financial statements) Carver Enterprises
- (Analyzing common-size financial statements) Carver Enterprises
- (Using common-size financial statements) The S&H Construction Company
- (Liquidity analysis) Airspot Motors, Inc.
- (Future value) Compound Interest
- (Future value) Leslie Mosallam
- (Related to the Business of Life: Saving for Your First House) Future Value
- (Future value) Bob Terwilliger
- (Calculating expected revenues)Crusick Distribution Company
- (Forecasting cash flows using the expected value) Peterson Trucking
- (Financial Forecasting) Zapatera Enterprises
- (Solviog for i) Lance Murdock
- (Forecasting revenues using scenario analysis) Floating Homes, Inc
- (Break-even analysis) Farrington Enterprises
- (Break-even analysis) Marvel Manufacturing
- (Corporate income tax) Meyer Inc. has taxable income
- (Analyzing the quality of firm earnings) Kabutell, Inc. had net income
- All present value, future value, complex annuity calculators, etc.
Week 2 Assignment Preview
S&H Construction Company Problem
(Using common-size financial statements) The S&H Construction Company expects to have total sales next year totaling $14,500,000. ln addition, the firm pays taxes at 35 percent and will owe $286,000 in interest expense. Based on last year's operations the firm's management predicts that its cost of goods sold will be 60 percent of sales and operating expenses will total 26 percent. What is your estimate of the firm's net income (after taxes) for the coming year?
Zapatera Enterprises Problem
(Financial Forecasting) Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its CFO predicts that the firm's operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales. Last year Zapatera had $12.27 million in sales with net income of $1.24 million. The firm anticipates that next year's sales will reach $14.56 million with net income rising to $2.13 million. Given its present high rate of growth, the firm retains all of its earnings to help defray the cost of new investments.
Templeton Extended Care Problem(Defining capital structure weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $420 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 $330 million and invest only $90 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisitions.
Bond Value Problemsa. A bond that has a $ 1,000 par value (face value) and a contract or coupon interest rate of 10.5%. The bonds have a current market value of$ 1,124 and will mature in 10 years. The firm's marginal tax rate is 34%
b. A new common stock issue that paid a $1.84 dividend last year. The firm's dividends are expected to continue to grow at 6.6% per year forever. The price of the firm's common stock is now $27.91.
Cost of Capital Problem(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 following:a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 11.8%. The bond is currently selling for a price of $1,122 and will mature in 10 years. The firm's tax rate is 34%.b. If the firm’s bonds are not frequently traded, how would you go about determining a cost of debt for this company?c. A new common stock issue that paid a $1.76 dividend last year. The par value of the stock is $16, and the firm's dividends per share have grown at a rate of 7.2% per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $28.61.d. A preferred stock paying a 10.6% dividend on a $125 par value. The preferred shares are currently selling for $153.19.e. A bond selling to yield 12.6% for the purchaser of the bond. The borrowing firm faces a tax rate of 34%.