21. A firm has a plowback ratio of 80 percent and a sustainable growth rate of 7.759 percent.
The capital intensity ratio is 1.2 and the debt-equity ratio is .5. What is the profit
margin?
7.2 percent
.07759 = [.8  ROE]  [1 – (.8  ROE)]; ROE = 9%; .09 = PM  (1  1.2)  (1 + .5); PM
= 7.2 percent
22. The process of finding the present value of some future amount is often called:
discounting.
23. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today,
both Joe and Marie’s investments are each worth $8,500. Which one of the
following statements is correct concerning their investments?
Marie earned an annual interest rate of 27.73 percent.
Joe: $8,500 = $5,000  (1 + r)10; r = 5.45 percent; Marie: $8,500 = $2,500  (1 + r)5; r
= 27.73 percent; The correct answer states that Marie earned 27.73 percent interest.
Joe:
Enter
10
-5,000
8,500
N I/Y PV PMT
FV
Solve for
5.45
Marie:
Enter
N
Solve for
5
-2,500
I/Y PV PMT
FV
27.73
8,500
24. You want to have $10,000 saved ten years from now. How much less do you have to
deposit today to reach this goal if you can earn 6 percent rather than 5 percent on
your savings?
$555.18
Present value = $10,000  [1  (1 + .06)10] = $5,583.95; Present value = $10,000  [1
 (1 + .05)10] = $6,139.13; Difference = $6,139.13 - $5,583.95 = $555.18
Enter
N
Solve for
Enter
N
10
6
I/Y PV PMT
10
5
I/Y PV PMT
10,000
FV
-5,583.95
10,000
FV
Solve for
-6,139.13
25. A perpetuity differs from an annuity because:
perpetuity payments never cease.
26. You need some money today and the only friend you have that has any is your ‘miserly’
friend. He agrees to loan you the money you need, if you make payments of $20 a
month for the next six month. In keeping with his reputation, he requires that the
first payment be paid today. He also charges you 1.5 percent interest per month.
How much money are you borrowing?
$115.65


1  1/(1  .015)6 
AduePV  $20  
  1  .015 = $20  5.697187165  1.015 =
.015


$115.65
Enter
N
Solve for
6
I/Y PV PMT
1.5
-20BGN
FV
115.65
27. You estimate that you will have $24,500 in student loans by the time you graduate. The
interest rate is 6.5 percent. If you want to have this debt paid in full within five
years, how much must you pay each month?
$479.37
 
.065 512  
1  1 /(1  12 )  
 ; $24,500 = C  51.10864813; C = $479.37
$24,500  C   

.065




12
Enter
N
Solve for
512
I/Y PV PMT
6.5/12
24,500
FV
-479.37
28. Your insurance agent is trying to sell you an annuity that costs $100,000 today. By
buying this annuity, your agent promises that you will receive payments of $384.40
a month for the next 40 years. What is the rate of return on this investment?
3.45 percent
 
r 4012  
1  1 /(1  12 )
 
$100,000  $384.40   
 ; This can not be solved directly, so it’s
r




12
easiest to just use the calculator method to get an answer. You can then use the
calculator answer as the rate in the formula just to verify that you answer is correct.
Enter
N
Solve for
4012
I/Y PV PMT
/12
FV
3.45
-100,000
384.40
29. One year ago, the Jenkins Family Fun Center deposited $3,600 in an investment account
for the purpose of buying new equipment four years from today. Today, they are
adding another $5,000 to this account. They plan on making a final deposit of
$7,500 to the account next year. How much will be available when they are ready
to buy the equipment, assuming they earn a 7 percent rate of return?
$20,790.99

 
 

FV  $3,600  (1.07)5  $5,000  (1.07)4  $7,500  (1.07)3 ; FV = $20,790.99
Enter
N
Solve for
Enter
N
Solve for
Enter
N
Solve for
5
7
-3,600
I/Y PV PMT
FV
5,049.19
4
7
-5, 000
I/Y PV PMT
FV
6,553.98
3
7
-7,500
I/Y PV PMT
FV
9,187.82
Future value = $5,049.19 + $6,553.98 + $9,187.82 = $20,790.99
30. Your credit card company charges you 1.5 percent per month. What is the annual
percentage rate on your account?
18.00 percent
APR = .015  12 = .18 = 18 percent