Chapter 3

Working with Financial Statements

19. Days’ Sales in Receivables A company has net income of $195,000, a profi t margin of 9.40
percent, and an accounts receivable balance of $106,851. Assuming 75 percent of sales are on
credit, what is the company’s days’ sales in receivables? (should know)

24. Cost of Goods Sold. Holliman Corp. has current liabilities of $410,000, a quick ratio of 1.8,
inventory turnover of 4.2, and a current ratio of 3.3. What is the cost of goods sold for the
company? (should know)

Chapter 4
Long-Term Financial Planning and Growth

5. EFN The most recent financial statements for 7 Seas, Inc., are shown here:

Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not.
The company maintains a constant 50 percent dividend payout ratio. As with every other fi rm in
its industry, next year’s sales are projected to increase by exactly 15 percent. What is the external
fi nancing needed?

8. Sales and Growth The most recent fi nancial statements for Heng Co. are shown here:
Assets and costs are proportional to sales. The company maintains a constant 30 percent
dividend payout ratio and a constant debt–equity ratio. What is the maximum increase in sales
that can be sustained assuming no new equity is issued?

25. Calculating EFN The most recent fi nancial statements for Moose Tours, Inc., follow. Sales
for 2007 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate
and the dividend payout rate will also remain constant. Costs, other expenses, current assets, and
accounts payable increase spontaneously with sales. If the fi rm is operating at full capacity and
no new debt or equity is issued, what external fi nancing is needed to support the 20 percent
growth rate in sales? (should know)

26. Capacity Usage and Growth In the previous problem, suppose the fi rm was operating at
only 80 percent capacity in 2006. What is EFN now? (should know)

Chapter 5
Introduction To Valuation: The Time Value Of Money

Chapter 6
Discounted Cash Flow Valuation
2. Present Value and Multiple Cash Flows Investment X offers to pay you $7,000 per year for
eight years, whereas Investment Y offers to pay you $9,000 per year for fi ve years. Which of
these cash fl ow streams has the higher present value if the discount rate is 5 percent? If the
discount rate is 22 percent? (should know)

3. Future Value and Multiple Cash Flows Paradise, Inc., has identifi ed an investment project
with the following cash fl ows. If the discount rate is 8 percent, what is the future value of these
cash fl ows in year 4? What is the future value at a discount rate of 11 percent? At 24 percent?
Year Cash Flow
1 $ 700
2 950
3 1,200
4 1,300
12. Calculating EAR Find the EAR in each of the following cases:

30. Calculating EAR You are looking at an investment that has an effective annual rate of 18
percent. What is the effective semiannual return? The effective quarterly return? The effective
monthly return?

40. Calculating the Number of Payments You’re prepared to make monthly payments of $225,
beginning at the end of this month, into an account that pays 9 percent interest compounded
monthly. How many payments will you have made when your account balance reaches $20,000?

55. Amortization with Equal Payments Prepare an amortization schedule for a fi veyear loan
of $36,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments.
How much interest is paid in the third year? How much total interest is paid over the life of the
loan?

66. Calculating Annuity Payments This is a classic retirement problem. A time line will help in
solving it. Your friend is celebrating her 35th birthday today and wants to start saving for her
anticipated retirement at age 65. She wants to be able to withdraw $90,000 from her savings
account on each birthday for 20 years following her retirement; the fi rst withdrawal will be on
her 66th birthday. Your friend intends to invest her money in the local credit union, which offers
8 percent interest per year. She wants to make equal annual payments on each birthday into the
account established at the credit union for her retirement fund.
a. If she starts making these deposits on her 36th birthday and continues to make deposits until
she is 65 (the last deposit will be on her 65th birthday), what amount must she deposit annually
to be able to make the desired withdrawals at retirement?
b. Suppose your friend has just inherited a large sum of money. Rather than making equal annual
payments, she has decided to make one lump sum payment on her 35th birthday to cover her
retirement needs. What amount does she have to deposit?
c. Suppose your friend’s employer will contribute $1,500 to the account every year as part of the
company’s profi t-sharing plan. In addition, your friend expects a $25,000 distribution from a
family trust fund on her 55th birthday, which she will also put into the retirement account. What
amount must she deposit annually now to be able to make the desired withdrawals at retirement?

71. Break-Even Investment Returns Your financial planner offers you two different
investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 10-year, $20,000 annual
annuity. Both plans will make their fi rst payment one year from today. At what discount rate
would you be indifferent between these two plans? (should know)

Chapter 7
Interest Rates and Bond Valuation

8. Coupon Rates Wimbley Corporation has bonds on the market with 14.5 years to maturity, a
YTM of 6.8 percent, and a current price of $1,136.50. The bonds make semiannual payments.
What must the coupon rate be on these bonds?

18. Bond Yields Caribbean Reef Software has 8.4 percent coupon bonds on the market with nine
years to maturity. The bonds make semiannual payments and currently sell for 95.5 percent of
par. What is the current yield on the bonds? The YTM? The effective annual yield?

29. Components of Bond Returns Bond P is a premium bond with a 9 percent coupon. Bond D
is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments,
have a YTM of 7 percent, and have fi ve years to maturity. What is the current yield for bond P?
For bond D? If interest rates remain unchanged, what is the expected capital gains yield over the
next year for bond P? For bond D? Explain your answers and the interrelationships among the
various types of yields.

15. Bond Price Movements Bond X is a premium bond making annual payments. The bond
pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a
discount bond making annual payments. This bond pays a 7 percent coupon, has a YTM of 9
percent, and also has 13 years to maturity. If interest rates remain unchanged, what do you
expect the price of these bonds to be one year from now? In three years? In eight years? In 12
years? In 13 years? What’s going on here? Illustrate your answers by graphing bond prices
versus time to maturity. (should know)