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Present Value of Cash Flows and Calculations in Capital Budgeting

1 Prepare a December 31 balance sheet using the following data:
The par value of the firm's common stock is $100.
Cash $ 4,000
Patents 82,000
Accounts payable 6,000
Accounts receivable 8,000
Taxes payable 2,000
Machinery 34,000
Bonds payable 7,000
Accumulated retained earnings 6,000
Capital surplus 19,000

2 Calculate the present value of the following cash flows discounted at 10 percent.
a. $1,000 received seven years from today.
b. $2,000 received one year from today.
c. $500 received eight years from today.

3 Calculate the present value of $5,000 received 12 years from today. Assume a stated annual interest rate of 10 percent, compounded quarterly.

4 Consider a bond with a face value of $1,000.The coupon payment is made semiannually and the yield on the bond is 12 percent (effective annual yield).Howmuchwould you pay for the bond if:
a. The coupon rate is 8 percent and the remaining time to maturity is 20 years?
b. The coupon rate is 10 percent and the remaining time to maturity is 15 years?

5 Compute the internal rate of return on projects with the following cash flows.

Year project a b
0 _3,000 _6,000
1 2,500 5,000
2 1,000 2,000

6 General Motors exports cars to Spain, but the strong dollar against the euro hurts sales of GM cars in Spain. In the Spanish market, GM faces competition from Italian and French car makers, such as Fiat and Renault, whose operating currencies are the euro. What kind of measures would you recommend so that GM can maintain its market share in Spain?


Solution Summary

This solution creates a Balance Sheet for December using the information provided as well as show step-by-step calculations for capital budgeting values such as present value, bond value, internal rate of return, and market share.