Exam 5: The Time Value of Money

Jeanine withdrew $10,000 from an aggressive growth mutual fund, which returned 9.8% over the last 12 months. The funds were provided in exchange for a promissory note from her son's business to finance its expansion. The business has operated for five years and has no other debt. Inflation has been holding steady at 3.2%. The Canadian dollar, is at $1.015 to $1.00 US. Least risk, government securities are paying out 4.5%. If she believes that 1.5% will cover her risk exposure, what rate is the minimum she should realistically charge her son's business?

Rekka Resin Moulding Inc.'s earnings before tax (EBT) has declined between 3% and 7% in each of the past five quarters. The company is trying to finance the purchase of a $55,000 injection moulding machine. The Kelowna-Picton Credit Union has made the best offer at 8.5%, 2.5% over Prime. At the same time, Penticton Injection Inc. a company with steady earnings growth, has received financing for a similar project with the loan provided at .75% under Prime. Due to its declining earnings Rekka will be facing

Which of the following is the best description of the Rule of 72?

Millennium Laboratories can license one of its patented pharmaceutical products to a Japanese company for a five-year period. Millennium would like to insure that the fee it charges to the Japanese company will return no less than what the company projects it could have made had it marketed the product itself. Millennium believes it could have achieved a minimum of $400,000 in the first year, $10,500,000 in the second year, and $50 million, $65 million and $65 million at the end of each year. Given that interest rates are at 9%, what up-front fee paid immediately should Millennium charge?

Maple Cloud Services Inc. is considering the development a brand new type of cloud computing server that requires $85,000 to be spent at the end of each of the next six years. Revenues of $100,000 per year for five years start at the end of the of the second year. Should Maple pursue this opportunity?

Fandango Company's credit terms allow its customers to pay invoices in 30 days. Practice has not followed policy and the collection period is at 45 days. If Fandango's receivables are $164,565 and the company can earn 12% on capital invested, what is the opportunity cost it is experiencing by not adhering to their collection policy?

Gerald Electric Company will only sell a piece of switching equipment on credit if the customer puts $10,000 down. The balance of $40,000 can be paid at the end of 12 months. What amount should Gerald Electric be willing to accept today if the customer is willing to make the entire payment immediately. The company's credit terms are 14% per year compounded annually.

Ambidex Ltd. established five years ago, was capitalized with $4.5 million from the sale of common shares. The company retained 100% of its earnings through that period. This year Ambidex Ltd. declared a dividend which provided common shareholders with a return of 12% compounded annually. What was the amount of the dividend declared?

If the Company is required to make equal monthly payments into a sinking fund that will be used to pay off the amount that will be due at maturity of their bond issue and they wish to calculate what that payment will be, they will be determining

Next year interest rates are expected to be 8% and the price of a barrel of oil is expected to $110. The corresponding figures for the current year are 6% and $100. Assuming that long term interest rates in a stable economic environment are 4%, which of the following statements best expresses expected inflation levels for next year?

Which of the following, under most circumstances, would be paid with an annuity due?

If a contract specifies lease payments of $1,250 to be made at the beginning of each quarter for the next four years, what lump sum payment at the beginning of the lease should satisfy the landlord, if interest rates are at 12%, compounded quarterly?

Bottomly Industries has entered a capital lease with a financial institution for a warehouse on a small parcel of land. If the interest rate being charged is 12%, compounded every 2 months, and Bottomly will be making payments of $24,083 at the beginning of every two months [six times a year] for five years, what is the historical cost value of the asset that will appear on the Company's balance sheet?

Galhadi Telecommunications Ltd. can finance the purchase of $650,000 worth of electronic infrastructure by a bank loan where both principal and interest are paid at the end of the term. The interest rate being offered is 10%, compounded annually, maturing in 5 years. Alternatively, the company can enter into a lease to buy arrangement, where the interest rate is also 10% per year, compounded annually and payments of $158,442 are made at the beginning of each year for five years. Which is the better financial alternative and by how much?

Rekka Resin Moulding Inc purchases a building and equipment for $2 million. It puts $500,000 down and finances the rest over five years making quarterly payments starting one quarter from now. Interest is 8% per year, compounded quarterly. What is the quarterly payment?

A bond with a term of 20 years, a coupon rate of 8% paid at the end of every year and a face value of $1,000 was purchased November 1. By November 2nd interest rates had dropped to 6%. What is the selling price of the bond on November 2nd?

What quarterly payment at the beginning of each period for ten years should Mountain Leasing charge for a $100,000 chalet when interest rates are 12%?

Tuscarora Transportation is expected to require $450,000 to replace part of their fleet trucks in six years time. What yearly contribution at the end of each year will the company have to make to an investment paying 12% per annum to have sufficient money to purchase the trucks?

A $1,000 bond with 6% semi-annual coupon payments and a maturity date of 10 years is quoted at $864.11. What is the current interest rate?

A bond with the term of 20 years, face value of $5,000, a coupon rate of 8%, compounded quarterly and payments 4 times a year, was issued 15 years ago. Currently, interest rates are at 12%. What could the bond be sold for today?