Fundamentals Of Financial Management
14th Edition
ISBN: 9781305629080
Author: Eugene F. Brigham, Joel F. Houston
Publisher: South-western College Pub (edition 14)
expand_more
expand_more
format_list_bulleted
Question
Chapter 5, Problem 1Q
Summary Introduction
To explain: The
Introduction:
Opportunity cost: The opportunity cost refers to the cost which an alternative investment of the similar risk had given. With the help of opportunity cost, the investor can choose the better lender as the best
Time-value of money analysis: The time-value of money analysis refers to that analysis which is done to understand the change in value of money with time. With the help of this analysis, it is determined that whether the value of money is increased or decreased with time. This analysis is used in financial and investment decisions and is very helpful for financial users and investors.
Expert Solution & Answer
Answer to Problem 1Q
- The opportunity cost refers to that cost which is left out to choose an alternative of the similar type and risk. If the risks associated with two options are the same and the individual has to choose one, the cost associated with that thing which is left is the opportunity cost.
- That is why opportunity cost is also called as the alternative cost.
- The opportunity cost plays an important role in the decisions of the user and in many other management decisions.
- The time value of money analysis is used by the investors. With the help of opportunity cost used in the time value of money analysis, the investors can choose the lenders which will give the best rate of return. When that option is chosen which gives the best rate of return, the future value of money is increased.
- The opportunity cost is shown for every
cash inflows andcash outflows on a time line. - In all the given situations, the interest rate is utilized as the single number.
Explanation of Solution
- The opportunity cost is a very important factor in making
financial and management decisions. - The time value of money analysis is done with the help of opportunity costs, by which the investors are able to make better decisions that helps them in earning more value of money in future.
- The time line is the visual representation of the time value of money analysis. The time line represents the time periods and the value of cash flows for that period with the interest rate.
- The single number which is used is the rate of interest, as the rate of interest is an important factor in this analysis.
Conclusion
Thus, the opportunity cost is the alternative cost, it is an important factor in time value of money analysis, and the interest rate is the single number used.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Analyze the attached general ledger and balance sheet to see if the current assets and general ledger are accurate. Why or why not?
Analyze the attached ledger and balance sheet and determine if the long-term assets and ledger are accurate. Why or why not?
What are the appropriate depreciation methods for the company, and how can we determine this based on the attached general ledger?
Based on these records, what strategy would be recommended to increase profitability and maintain strong liquidity?
Don't used Ai solution
Chapter 5 Solutions
Fundamentals Of Financial Management
Ch. 5 - Prob. 1QCh. 5 - Explain whether the following statement is true or...Ch. 5 - If a firms earnings per share grew from 1 to 2...Ch. 5 - Prob. 4QCh. 5 - Prob. 5QCh. 5 - The present value of a perpetuity is equal to the...Ch. 5 - Banks and other lenders are required to disclose a...Ch. 5 - What is a loan amortization schedule, and what are...Ch. 5 - Prob. 1PCh. 5 - Prob. 2P
Ch. 5 - FINDING THE REQUIRED INTEREST RATE Your parents...Ch. 5 - TIME FOR A LUMP SUM TO DOUBLE If you deposit money...Ch. 5 - TIME TO REACH A FINANCIAL GOAL You have 42,180.53...Ch. 5 - Prob. 6PCh. 5 - Prob. 7PCh. 5 - LOAN AMORTIZATION AND EAR You want to buy a car....Ch. 5 - PRESENT AND FUTURE VALUES FOR DIFFERENT PERIOOS...Ch. 5 - Prob. 10PCh. 5 - GROWTH RATES Shalit Corporations 2014 sales were...Ch. 5 - EFFECTIVE RATE OF INTEREST Find the interest rates...Ch. 5 - Prob. 13PCh. 5 - FUTURE VALUE OF AN ANNUITY Find the future values...Ch. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - EFFECTIVE INTEREST RATE You borrow 85,000; the...Ch. 5 - Prob. 18PCh. 5 - FUTURE VALUE OF AN ANNUITY Your client is 40 years...Ch. 5 - Prob. 20PCh. 5 - Prob. 21PCh. 5 - Prob. 22PCh. 5 - FUTURE VALUE FOR VARIOUS COMPOUNDING PERIODS Find...Ch. 5 - Prob. 24PCh. 5 - FUTURE VALUE OF AN ANNUITY Kind the future values...Ch. 5 - PV AND LOAN ELIGIBILITY You have saved 4,000 for a...Ch. 5 - EFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A...Ch. 5 - Prob. 28PCh. 5 - Prob. 29PCh. 5 - Prob. 30PCh. 5 - REQUIRED LUMP SUM PAYMENT Starting next year, you...Ch. 5 - Prob. 32PCh. 5 - FV OF UNEVEN CASH FLOW You want to buy a house...Ch. 5 - AMORTIZATION SCHEDULE a. Set up an amortization...Ch. 5 - Prob. 35PCh. 5 - NONANNUAL COMPOUNDING a. You plan to make five...Ch. 5 - Prob. 37PCh. 5 - Prob. 38PCh. 5 - REQUIRED ANNUITY PAYMENTS Your father is 50 years...Ch. 5 - Prob. 40PCh. 5 - Prob. 41SPCh. 5 - Prob. 42IC
Knowledge Booster
Similar questions
- Don't used Ai solutionarrow_forwardllumina Inc. is expected to pay its next dividend of $0.4 two years from now. This dividend should then grow at a rate of 10% for 3 years (till the end of year 5), and at a reduced rate of 6% thereafter. The market required rate of return is 16%. The price of the company's shares today is: $4.15 $4.39 $3.79 $3.96arrow_forwardA bank has made a loan charging a base lending rate of 8%. It expects a probability of default of 5%. If the loan is defaulted, it expects to recover 50% of its money through the sale of its collateral. The expected return on this loan is _____% (rounded to two decimal places).arrow_forward
- Ch 26: Assignment - Mergers and Corporate Control Widget Corp., which is considering the acquisition of Exteter Enterprise Inc., estimates that acquiring Exteter will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $13.0 $15.6 $19.5 Interest expense 5.0 5.5 6.0 Debt 35.2 41.6 44.8 Total net operating capital 107.1 109.2 111.3 Exteter Enterprise Inc. is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: •Exteter currently has a $38.00 million market value of equity and $24.70 million in debt. The risk-free rate is 3.5%, there is a 5.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity ISL of 9.10%. •Exteter's cost…arrow_forward3. Problem 30-03 (Plan Funding) Plan Funding eBook Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations: Year 11-15 16-20 21-25 Annual Total Payment $3,480,000 2,980,000 26-30 31-35 2,480,000 1,980,000 1,480,000 The current value of the firm's pension fund is $5.6 million. Assume that all cash flows occur at year-end. a. Consolidated's expected return on pension assets is 11%, and it uses 11% to discount the expected pension benefit payments. What is the present value of the firm's pension fund benefits? Do not round intermediate calculations. Round your answer to the nearest dollar. $ b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places. Funding ratio= which means the assets are select than the PV of benefits and the plan is select Less or greater Select underfunded overfundedarrow_forwardPlan Funding Consolidated Industries is planning to operate for 10 more years and then cease operations. At that time (in 10 years), it expects to have the following pension benefit obligations: Year 11-15 16-20 21-25 Annual Total Payment $3,500,000 3,000,000 2,500,000 26-30 31-35 2,000,000 1,500,000 The current value of the firm's pension fund is $6.1 million. Assume that all cash flows occur at year-end. a. Consolidated's expected return on pension assets is 12%, and it uses 12% to discount the expected pension benefit payments. What is the present value of the firm's pension fund benefits? Do not round intermediate calculations. Round your answer to the nearest dollar. $ b. Is the plan underfunded or overfunded? Do not round intermediate calculations. Round your answer to two decimal places. Funding ratio = which means the assets are -Select- than the PV of benefits and the plan is -Select- ☑. Less or Greater Overfunded or Underfundedarrow_forward
- Benefits and Contributions The Certainty Company (CC) operates in a world of certainty. It has just hired Mr. Jones, age 27, who will retire at age 65, draw retirement benefits for 14 years, and die at age 79. Mr. Jones' salary is $21,000 per year, but wages are expected to increase at the 6% annual rate of inflation. CC has a defined benefit plan in which workers receive 1% of the final year's wage for each year employed. The retirement benefit, once started, does not have a cost-of-living adjustment. CC earns 12% annually on its pension fund assets and uses a 10% rate to discount its expected future benefit payments. Assume that pension contribution and benefit cash flows occur at year-end. Do not round intermediate calculations. Round your answers to the nearest dollar. a. How much will Mr. Jones receive in annual retirement benefits? $ b. What is CC's required annual contribution to fully fund Mr. Jones' retirement benefits? $ c. Assume now that CC hires Mr. Smith at the same…arrow_forwardlab.infoseclearning.com/console/5061763/3047 310-win10 Project Three Milestone - GNS3 File Edit View Control Node Annotate Tools Help e 41 Sales_PC1 0000 Sales_PC2 Sales_PC3 Enforce US Keyboard Layout View Fullscreen Send Ctrl+Alt+Delete Reboot To exit full screen, press and hold esc ■C00/6@ Q Sales_Switch Human Resources_Switch Office_Router Sales PC4 Customer_Service_Switch X: -299.0 Y: -136.0 Z: 1.0 H Type here to search CS_FTP_Server HR_PC2 HR_PC1 7:19 PM 12/14/2024 Barrow_forwardAGG is a US multinational that manufactures specialist high tech parts in the airline engine industry. AGG is an established company with steady growth in turnover and dividends over the last 10 years. The company is undertaking a projected titled Project Big as a strategic response to the changing market scene. AGG will develop a new state of the art highly automated plant located in Cambodia which is expected to result in cost advantages if it is implemented. The details about the project are below • Initital investment has been estimated at $500m • • The annual pre tax savings in operating costs at current exchange rates has been calculated at $150m for the first four years (starting in the first year) The residual value of the project at the end of the four years is estimated to be $250m The initial investment, net of residual value, qualifies for capital allowance and can be claimed back on a straight line basis over the four years of the project. Current AGG's cost of capital is…arrow_forward
- You have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in twenty-six equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. Calculate the present value of the payments you will receive. Show your calculations using formulas in your paper or provide how to do the calculations in Excel. Explain why there is a difference between the present value of the Strayer lottery jackpot and the future value of the twenty-six annual payments based on your calculations and the information provided.arrow_forwardYou have just won the Strayer Lottery jackpot of $11,000,000. You will be paid in twenty-six equal annual installments beginning immediately. If you had the money now, you could invest it in an account with a quoted annual interest rate of 9% with monthly compounding of interest. Calculate the present value of the payments you will receive. Show your calculations using formulas in your paper or in an attached spreadsheet file.arrow_forwardThe approach uses a weighted average cost of capital that is unique to a particular project while determining the appropriate discount rate.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT