BUSI 320 connect homework 4 solutions complete answers

BUSI 320 connect homework 4 solutions complete answers 

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Your parents have accumulated a $160,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $19,000 to help her get started, and they have decided to take year-end vacations costing $8,000 per year for the next four years. Use 9 percent as the appropriate interest rate throughout this problem. Use Appendix A and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

 

If your uncle borrows $61,000 from the bank at 11 percent interest over the nine-year life of the loan. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

At a discount rate of 10 percent, what is the present value of all three future benefits? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Del Monty will receive the following payments at the end of the next three years: $18,000, $21,000, and $23,000. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of $24,000 per year.

 

You wish to retire in 13 years, at which time you want to have accumulated enough money to receive an annual annuity of $28,000 for 18 years after retirement. During the period before retirement you can earn 9 percent annually, while after retirement you can earn 11 percent on your money.
 

What annual contributions to the retirement fund will allow you to receive the $28,000 annuity? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.

 

Franklin Templeton has just invested $9,060 for his son (age one). This money will be used for his son’s education 20 years from now. He calculates that he will need $50,899 by the time the boy goes to school.

 

You need $25,056 at the end of 6 years, and your only investment outlet is an 12 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. Use Appendix B and Appendix C for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

 

Your grandfather has offered you a choice of one of the three following alternatives: $8,000 now; $2,000 a year for ten years; or $36,000 at the end of ten years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.


a-1. Assuming you could earn 8 percent annually, compute the present value of each alternative: (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

What is the future value of a 11-year annuity of $2,400 per period where payments come at the beginning of each period? The interest rate is 14 percent. Use Appendix C for an approximate answer, but calculate your final answer using the formula and financial calculator methods. To find the future value of an annuity due when using the Appendix tables, add 1 to n and subtract 1 from the tabular value. For example, to find the future value of a $100 payment at the beginning of each period for five periods at 10 percent, go to Appendix C for n = 6 and i = 10 percent. Look up the value of 7.716 and subtract 1 from it for an answer of 6.716 or $671.60 ($100 × 6.716). (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Determine the amount of money in a savings account at the end of 5 years, given an initial deposit of $3,500 and a 8 percent annual interest rate when interest is compounded: Use Appendix A for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

a. $16,000 in 6 years at 10 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
   

b. $20,500 in 18 years at 7 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
   

c. $8,500 each year for 17 years at 8 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
   

d. $58,000 each year for 30 years at 10 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Your father offers you a choice of $115,000 in 10 years or $48,000 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. If money is discounted at 10 percent, what is the present value of the $115,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Your uncle offers you a choice of $114,000 in 10 years or $53,000 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.

  
a-1. If money is discounted at 9 percent, what is the present value of the $114,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

If you invest $13,500 today, how much will you have in each of the following instances? Use Appendix A as an approximate answer, but calculate your final answer using the formula and financial calculator methods.


a. In 11 years at 9 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $139,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 7.30 percent. If they increase to 9.50 percent, assume the value of the contracts will go down by 20 percent. Also, if interest rates do increase by 2.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $149,000. This expense, of course, will be separate from the futures contracts. 

 

Neveready Flashlights Inc. needs $329,000 to take a cash discount of 3/17, net 72. A banker will loan the money for 55 days at an interest cost of $10,300.  

 

The Reynolds Corporation buys from its suppliers on terms of 3/11, net 40. Reynolds has not been utilizing the discounts offered and has been taking 40 days to pay its bills.
  
Ms. Duke, Reynolds Corporation's vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 20 percent. The bank requires a 15 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement.  

 

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 2/13, net 50. Mr. Warner never takes the discount offered, but he pays his suppliers in 40 days rather than the 50 days allowed so that he is sure the payments are never late.  



If you borrow $3,500 at $590 interest for one year, what is your effective interest rate for the following payment plans? (Input your answers as a percent rounded to 2 decimal places.) 

 

Your company plans to borrow $11 million for 12 months, and your banker gives you a stated rate of 15 percent interest.  

 

a. Simple 15 percent interest with a compensating balance of 14 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

 

Carey Company is borrowing $275,000 for one year at 10.5 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. The principal refers to funds the firm can utilize effectively (Amount borrowed − Compensating balance).



McGriff Dog Food Company normally takes 21 days to pay for average daily credit purchases of $9,680. Its average daily sales are $10,300, and it collects accounts in 28 days.

 

b-1. If the firm extends its average payment period from 21 days to 31 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.)

 

Talmud Book Company borrows $18,100 for 45 days at 12 percent interest.



Dr. Ruth is going to borrow $5,800 to help write a book. The loan is for one year and the money can be borrowed at either the prime rate or the LIBOR rate. Assume the prime rate is 9 percent and LIBOR 1.0 percent less. Also assume there will be a $55 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

 

A pawnshop will lend $6,000 for 45 days at a cost of $35 interest.

 

Question 1
Compute the cost of not taking the following cash discounts. (Use a 360-day year. Do not round intermediate calculations. Input your final answers as a percent rounded to 2 decimal places.)  
 

Question 2
A pawnshop will lend $4,500 for 45 days at a cost of $35 interest.
 

What is the effective rate of interest? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 3
Mary Ott is going to borrow $10,300 for 60 days and pay $231 interest.  
 

What is the effective rate of interest if the loan is discounted? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 4
Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 6 percent and LIBOR 1.5 percent less. Also assume there will be a $40 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).    
 

a. What is the effective interest rate on the LIBOR loan What is the dollar cost of the loan? (Use a 360-day year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. Which loan has the lower effective interest cost?

 

Question 5
Talmud Book Company borrows $24,200 for 60 days at 15 percent interest.
 

What is the dollar cost of the loan? (Use a 360-day year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

 

Question 6
McGriff Dog Food Company normally takes 23 days to pay for average daily credit purchases of $9,590. Its average daily sales are $10,720, and it collects accounts in 29 days.  
 

a. What is its net credit position?

 

b-1. If the firm extends its average payment period from 23 days to 35 days (and all else remains the same), what is the firm's new net credit position? (Negative amount should be indicated by a minus sign.)

 

b-2. Has the firm improved its cash flow?

 

Question 7
Carey Company is borrowing $175,000 for one year at 8.5 percent from Second Intrastate Bank. The bank requires a 18 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed − Compensating balance).   
 

a. What is the effective rate of interest? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

 

b. What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

 

Question 8
Your company plans to borrow $12 million for 12 months, and your banker gives you a stated rate of 21 percent interest.  
 

Calculate the effective rate of interest for the following types of loans.  
a. Simple 21 percent interest with a compensating balance of 12 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
 

b. Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2 decimal places.)

 

c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.)

 

d. Discounted interest with a compensating balance of 6 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

 

Question 9
If you borrow $6,000 at $800 interest for one year, what is your effective interest rate for the following payment plans? (Input your answers as a percent rounded to 2 decimal places.)  
 

Question 10
Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 2/18, net 60. Mr. Warner never takes the discount offered, but he pays his suppliers in 50 days rather than the 60 days allowed so he is sure the payments are never late.  
 

What is Mr. Warner's cost of not taking the cash discount? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 11
The Reynolds Corporation buys from its suppliers on terms of 2/17, net 65. Reynolds has not been utilizing the discounts offered and has been taking 65 days to pay its bills.
 

Mr. Duke, Reynolds Corporation vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 15 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement.

 

a. Calculate the cost of not taking a cash discount. (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. What is the effective rate of interest on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

c. Do you agree with Duke's proposal?

 

Question 12
Neveready Flashlights Inc. needs $302,000 to take a cash discount of 2/19, net 71. A banker will loan the money for 52 days at an interest cost of $11,800.  
 

a. What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill in 71 days instead of 19 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

c. Should the firm borrow the money to take the discount?

 

d. If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $302,000?

 

e-1. What would be the effective interest rate in part d if the interest charge for 52 days were $11,300? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

e-2. Should the firm borrow with the 20 percent compensating balance requirement? (The firm has no funds to count against the compensating balance requirement.)

 

Question 13
Summit Record Company is negotiating with two banks for a $158,000 loan. Fidelity Bank requires a compensating balance of 16 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 8 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent. Compensating balances will be subtracted from the $158,000 in determining the available funds in part a.
 

a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

 

a-2. Which loan should Summit accept?

 

b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $25,280 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

 

c. Does your choice of banks change if the assumption in part b is correct?

 

Question 14
Charming Paper Company sells to the 12 accounts listed here.   
 

Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.

 

The current prime rate is 16.50 percent, and Capital charges 3.50 percent over prime to Charming as its annual loan rate.

 

a. Determine the maximum loan for which Charming Paper Company could qualify.

 

b. Determine how much one month’s interest expense would be on the loan balance determined in part a. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 15
The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $118,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 10.30 percent. If they increase to 12.50 percent, assume the value of the contracts will go down by 10 percent. Also if interest rates do increase by 2.2 percent, assume the firm will have additional interest expense on its business loans and other commitments of $72,000. This expense, of course, will be separate from the futures contracts.  
 

a. What will be the profit or loss on the futures contract if interest rates increase to 12.50 percent by December when the contract is closed out?

 

b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $72,000?

 

b-2. What percent of this $72,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places.)

 

c. Indicate whether there would be a profit or loss on the futures contracts if interest rates went down.

 

Question 16
What is the present value of the following? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. $8,100 in 14 years at 7 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. $16,800 in 9 years at 8 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. $26,500 in 20 years at 6 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 17
If you invest $15,250 today, how much will you have in each of the following instances? Use Appendix A as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. In 7 years at 9 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. In 18 years at 7 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. In 18 years at 10 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

d. In 20 years at 10 percent (compounded semiannually)? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 18
Your uncle offers you a choice of $117,000 in 10 years or $60,000 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. If money is discounted at 8 percent, what is the present value of the $117,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

a-2. Which offer should you choose?

 

Question 19
Your father offers you a choice of $100,000 in 10 years or $46,500 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. If money is discounted at 8 percent, what is the present value of the $100,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

a-2. Which offer should you choose?

 

b-1. Now assume the offer is $100,000 in 7 years or $46,500 today. What is the present value of the $100,000 at 8 percent for 7 years? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b-2. Now, which offer should you choose?

 

Question 20
How much would you have to invest today to receive the following? Use Appendix B or Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. $13,600 in 11 years at 8 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. $17,500 in 17 years at 13 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. $7,000 each year for 20 years at 8 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

d. $47,000 each year for 50 years at 17 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 21
At a growth (interest) rate of 15 percent annually, how long will it take for a sum to double? To triple? Use Appendix A for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
 

Question 22
Determine the amount of money in a savings account at the end of 3 years, given an initial deposit of $11,500 and an annual interest rate of 12 percent when interest is compounded: Use Appendix A for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
 

Question 23
Annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due).
 

What is the future value of a 11-year annuity of $1,900 per period where payments come at the beginning of each period? The interest rate is 13 percent. Use Appendix C for an approximate answer, but calculate your final answer using the formula and financial calculator methods. To find the future value of an annuity due when using the Appendix tables, add 1 to n and subtract 1 from the tabular value. For example, to find the future value of a $100 payment at the beginning of each period for five periods at 10 percent, go to Appendix C for n = 6 and i = 10 percent. Look up the value of 7.716 and subtract 1 from it for an answer of 6.716 or $671.60 ($100 × 6.716). (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 24
Your grandfather has offered you a choice of one of the three following alternatives: $10,000 now; $4,800 a year for eight years; or $56,000 at the end of eight years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. Assuming you could earn 9 percent annually, compute the present value of each alternative: (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

a-2. Which alternative should you choose?

 

b-1. If you could earn 10 percent annually, compute the present value of each alternative: (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

b-2. Which alternative should you choose?

 

Question 25
You need $25,156 at the end of 7 years, and your only investment outlet is an 7 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. Use Appendix B and Appendix C for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. What single payment could be made at the beginning of the first year to achieve this objective? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. What amount could you pay at the end of each year annually for 7 years to achieve this same objective? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 26
Franklin Templeton has just invested $10,160 for his son (age one). This money will be used for his son’s education 19 years from now. He calculates that he will need $103,673 by the time the boy goes to school.
 

What rate of return will Mr. Templeton need in order to achieve this goal? Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 27
You wish to retire in 12 years, at which time you want to have accumulated enough money to receive an annual annuity of $27,000 for 17 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money.
 

What annual contributions to the retirement fund will allow you to receive the $27,000 annuity? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 28
Del Monty will receive the following payments at the end of the next three years: $15,000, $18,000, and $20,000. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of $21,000 per year.
 

At a discount rate of 16 percent, what is the present value of all three future benefits? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 29
Your uncle borrows $62,000 from the bank at 12 percent interest over the ten-year life of the loan. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. What equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. How much of his first payment will be applied to interest? To principal? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

c. How much of his second payment will be applied to each? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

Question 30
Your parents have accumulated a $160,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $25,000 to help her get started, and they have decided to take year-end vacations costing $12,000 per year for the next four years. Use 7 percent as the appropriate interest rate throughout this problem. Use Appendix A and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. How much money will your parents have at the end of four years to help you with graduate school, which you will start then? (Round your final answer to 2 decimal places.)

 

b. You plan to work on a master’s and perhaps a PhD. If graduate school costs $26,140 per year, approximately how long will you be able to stay in school based on these funds? (Round your final answer to 2 decimal places.)

 

Question 31
Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 8 percent for one year. During this time period the dollar falls 11 percent against the euro. What is the effective interest rate on the loan for one year? (Consider the 11 percent fall in the value of the dollar as well as the interest payment.) (Compute your answer from a U.S. perspective. Input your answer as a whole percent.)