REVIEW EXERCIES

1. The most recent financial statements for GPS, Inc., are shown here:

Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,400 was
paid, and the company wishes to maintain a constant payout ratio. Next year’s sales are projected
to be $21,840. What is the external financing needed?
2. Based on the following information, calculate the sustainable growth rate for Kaleb’s
Kickboxing:
Profit margin: 8.2%
Capital intensity ratio: 0.75
Debt–equity ratio: 0.4
Net income:$ 43.000
Dividends: $12.000
3. Seaweed Mfg., Inc., is currently operating at only 95 percent of fixed asset capacity. Current
sales are $550,000. How fast can sales grow before any new fixed assets are needed?
4. You have just made your first $4,000 contribution to your retirement account. Assuming you
earn an 11 percent rate of return and make no additional contributions, what will your account be
worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this
suggest an investment strategy?)
5. You expect to receive $10,000 at graduation in two years. You plan on investing it at 11
percent until you have $75,000. How long will you wait from now?
6. You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for
six more years at 8.4 percent per year. How much will you have in eight years?
7. Investment X offers to pay you $6,000 per year for nine years, whereas Investment Y offers to
pay you $8,000 per year for six years. Which of these cash flow streams has the higher present
value if the discount rate is 5 percent? If the discount rate is 15 percent?
8. You want to have $90,000 in your savings account 10 years from now, and you’re prepared to
make equal annual deposits into the account at the end of each year. If the account pays 6.8
percent interest, what amount must you deposit each year?
9. Big Dom’s Pawn Shop charges an interest rate of 30 percent per month on loans to its
customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the
shop report? What is the effective annual rate?
10. You are planning to save for retirement over the next 30 years. To do this, you will invest
$700 a month in a stock account and $300 a month in a bond account. The return of the stock
account is expected to be 11 percent, and the bond account will pay 6 percent. When you retire,
you will combine your money into an account with a 9 percent return. How much can you
withdraw each month from your account assuming a 25-year withdrawal period?
11. Prepare an amortization schedule for a five-year loan of $42,000. The interest rate is 8
percent per year, and the loan calls for equal annual payments. How much interest is paid in the
third year? How much total interes t is paid over the life of the loan?
12. Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able
to retire 30 years from now with retirement income of $20,000 per month for 25 years, with the
first payment received 30 years and 1 month from now. Second, he would like to purchase a
cabin in Rivendell in 10 years at an estimated cost of $380,000. Third, after he passes on at the
end of the 25 years of withdrawals, he would like to leave an inheritance of $900,000 to his
nephew Frodo. He can afford to save $2,500 per month for the next 10 years. If he can earn a 10
percent EAR before he retires and a 7 percent EAR after he retires, how much will he have to
save each month in years 11 through 30?