Question: Billingham Packaging is considering expanding its

> You observe a portfolio for five years and determine that its average return is 12% and the standard deviation of its returns is 20%. Can you be 95% confident that this portfolio will not lose more than 30% of its value next year?

> If returns of S&P 500 stocks are normally distributed, what range of returns would you expect to see 95% of the time? Base your answer on Figures 11.3 and 11.4. Each bar represents an investment's average return. Small Stocks 22.05 S&P 500 11.74

> RiverRocks (whose WACC is 12%) is considering an acquisition of Raft Adventures (whose WACC is 15%). What is the appropriate discount rate for RiverRocks to use to evaluate the acquisition? Why?

> RiverRocks, Inc., is considering a project with the following projected free cash flows: The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing the project. RiverRocks’ WACC is 12%

> A retail coffee company is planning to open 100 new coffee outlets that are expected to generate, in total, $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the coffee company’s WACC is 10%, what is the NPV of this expa

> The last four years of returns for a stock are as follows: a. What is the average annual return? b. What is the variance of the stock’s returns? c. What is the standard deviation of the stock’s returns? 2 4 -4% +28

> Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year. a. What is an estimate of Growth Company’s cost of equity? b. Growth

> Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and a cost of preferred stock of 9%. The market values of its debt, preferred stock, and equity are $10 million, $3 million, and $15 million, respectively, and its tax rate is

> Mackenzie Company has a price of $36 and will issue a dividend of $2 next year. It has a beta of 1.2, the risk-free rate is 5.5%, and it estimates the market risk premium to be 5%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CGDM,

> Ten annual returns are listed in the following table. *b. What is the geometric average return over the ten-year period? c. If you invested $100 at the beginning, how much would you have at the end? -19.9% 16.6% 18.0% -50.0% 43.3% 1.2% -16.5% 45.6% 4

> The following spreadsheet contains monthly returns for Cola Co. and Gas Co. for 2010. Using these data, estimate the average monthly return and volatility for each stock. Date Cola Co. Gas Co. Jan -10.84% -6.00% Feb 2.36% 1.28% Mar 6.60% -1.86% Apr 2

> Using your estimates from Problem 8 and the fact that the correlation of A and B is 0.48, calculate the volatility (standard deviation) of a portfolio that is 70% invested in stock A and 30% invested in stock B. In Problem 8 Realized Returns Year St

> Using the data in the following table, estimate the average return and volatility for each stock. Realized Returns Year Stock A Stock B 2005 -10% 21% 2006 20% 30% 2007 5% 7% 2008 -5% -3% 2009 2% -8% 2010 9% 25%

> Stocks A and B have the following returns (see My Finance Lab for the data in Excel format): a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of the two stocks? c. If their correlation is 0.46, what i

> Bill Clinton reportedly was paid $10 million to write his book My Life. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $8 million per year (

> You have $70,000. You put 20% of your money in a stock with an expected return of 12%, $30,000 in a stock with an expected return of 15%, and the rest in a stock with an expected return of 20%. What is the expected return of your portfolio?

> You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 50% of the money in GoldFinger (currently $25/share), 25% of the money in Moosehead (currently $80/share), and the remainder in Venture

> Explain the difference between the arithmetic average return you calculated in Problem 10a and the geometric average return you calculated in Problem 10b. Are both numbers useful? If so, explain why. Information from problem 10: Consider the following f

> Fremont Enterprises has an expected return of 15% and Laurelhurst News has an expected return of 20%. If you put 70% of your portfolio in Laurelhurst and 30% in Fremont, what is the expected return of your portfolio?

> You buy 100 shares of Tidepool Co. for $40 each and 200 shares of Madfish, Inc., for $15 each. What are the weights in your portfolio?

> The following table contains prices and dividends for a stock. All prices are after the dividend has been paid. If you bought the stock on January 1 and sold it on December 31, what is your realized return? Price Dividend Jan 1 10.00 Mar 31 11.00 0.2

> You are analyzing a stock that has a beta of 1.2. The risk-free rate is 5% and you estimate the market risk premium to be 6%. If you expect the stock to have a return of 11% over the next year, should you buy it? Why or why not?

> You are thinking of buying a stock priced at $100 per share. Assume that the risk free rate is about 4.5% and the market risk premium is 6%. If you think the stock will rise to $117 per share by the end of the year, at which time it will pay a $1 dividen

> Suppose Intel stock has a beta of 1.6, whereas Boeing stock has a beta of 1. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM, a. What is the expected return of Intel stock? b. What is the

> EJH has a beta of 1.2, CSH has a beta of 0.6, and KMS has a beta of 1.0. If you put 25% of your money in EJH, 25% in CSH, and 50% in KMS, what is the beta of your portfolio?

> What is the sign of the risk premium of a negative-beta stock? Explain. (Assume the risk premium of the market portfolio is positive.)

> Suppose the risk-free return is 4% and the market portfolio has an expected return of 10% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.32. What is its expected return?

> You are considering opening a new plant. The plant will cost $100 million upfront and will take one year to build. After that, it is expected to produce profits of $30 million at the end of every year of production. The cash flows are expected to last fo

> You hear on the news that the S&P 500 was down 2% today relative to the risk-free rate (the market’s excess return was -2% ). You are thinking about your portfolio and your investments in Apple and Procter & Gamble. a. If Apple’s beta is 1.4, what is you

> Consider the following five monthly returns: *b. Calculate the geometric average monthly return over this period. c. Calculate the monthly variance over this period. d. Calculate the monthly standard deviation over this period. 0.05 -0.02 0.04 0.08 -

> Given $100,000 to invest, construct a value-weighted portfolio of the four stocks listed below. Number of Shares Stock Price/Share ($) Outstanding (millions) Golden Seas 13 1.00 Jacobs and Jacobs 22 1.25 MAG 43 30 PDJB 10

> Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years and your cash flows from the contract would be $5 million per year. Your upfront setup costs to be ready to produce the part would be $8

> What was your dividend yield from investing in the stock in Problem 8? What was your capital gain? In Problem 8: Stock and Dividend Data Date Price Dividend Jan 1 33.88 Feb 5 30.67 0.17 May 14 29.49 0.17 Aug 13 32.38 0.17 Nov 12 39.07 0.17 Dec 31 41

> Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following

> Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an initial investment of $1000 plus an additional investment a

> You are forecasting incremental free cash flows for Daily Enterprises. Based on the information in Problems 1 and 2, what are the incremental free cash flows associated with the new machine?

> Your pro-forma income statement shows sales of $1,000,000, cost of goods sold as $500,000, depreciation expense of $100,000, and taxes of $160,000 due to a tax rate of 40%. What are your pro-forma earnings? What is your pro-forma free cash flow?

> You have forecast pro-forma earnings of $1,000,000. This includes the effect of $200,000 in depreciation. You also forecast a decrease in working capital of $100,000 that year. What is your forecast of free cash flows for that year?

> You have a depreciation expense of $500,000 and a tax rate of 35%. What is your depreciation tax shield?

> Hyperion, Inc., currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit, and this year’s sales are expected to be 20,000 units.

> Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales o

> Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $20 million per year. While many of these sa

> You are upgrading to better production equipment for your firm’s only product. The new equipment will allow you to make more of your product in the same amount of time. Thus, you forecast that total sales will increase next year by 20% over the current a

> The machine in Problem 1 will generate incremental revenues of $4 million per year along with incremental costs of $1.2 million per year. If Daily’s marginal tax rate is 35%, what are the incremental earnings associated with the new machine?

> Daily Enterprises is purchasing a $10 million machine. It will cost $50,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. If Daily uses straight-line depreciation, what are the depr

> You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 6% per

> If Billingham knows that it can sell the XC-750 to another firm for $2 million in two years, what kind of real option would that provide?

> What kind of real option does the XC-900 machine provide to Billingham in Problem 27?

> Why is it that real options must have positive value?

> Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to evaluate this project. Based on extensive research, it

> You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk, and complains, “We owe

> Markov Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its marginal corporate tax rate is 35%. The company plans t

> If Daily Enterprises uses MACRS instead of straight-line depreciation, which incremental free cash flows from Problem 10 would increase and which would decrease?

> Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The c

> Just before it is about to sell the equipment from Problem 20, Jones receives a new order. It can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what is it? Explain.

> You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10 million today and $5 million in one year. The government will pay you $20 million in one year upon the building

> The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $300,000. a. What is the book value of the equipment? b. If Jones sells the equipment today for $180,000 and its

> You purchased a machine for $1 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 35%. If you sell the machine right now (after three years of depreciation) for $700,000, what is your

> You have just completed a $20,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $100,000, but if you sold it today, you would net $115,000 after taxes. Outfitting the space for a coffee shop

> Beryl’s Iced Tea currently rents a bottling machine for $50,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This

> One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000 today. It will be depreciated on a straight-line basis over

> Recall the HomeNet example from the chapter. Suppose HomeNet’s lab will be housed in warehouse space that the company could have otherwise rented out for $200,000 per year during years 1–4. How does this opportunity cost affect HomeNet’s incremental earn

> Cellular Access, Inc., is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses.

> Orchid Biotech Company is evaluating several development projects for experimental drugs. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the project

> Kartman Corporation is evaluating four real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is 15%. The following table summarizes the initial cost and

> Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators do? NPV Use of Faci

> Your storage firm has been offered $100,000 in one year to store some goods for one year. Assume your costs are $95,000, payable immediately, and the cost of capital is 8%. Should you take the contract?

> Hassle-Free Web is bidding to provide Web-page hosting services for Hotel Lisbon. Hotel Lisbon pays its current provider $10,000 per year for hosting its Web page and handling transactions on it, etc. Hassle-Free figures that it will need to purchase equ

> Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain, but lasts much longer than the other. Its discount rate is 11%. It plans to continue with one of the two models for the foreseeable future; which one should

> You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease you the equipment for $10,000 per year if you sign a guaranteed five-year lease. The company would also maintain the equipment for you

> You are considering the following two projects and can only take one. Your cost of capital is 11%. a. What is the NPV of each project at your cost of capital? b. What is the IRR of each project? c. At what cost of capital are you indifferent between the

> You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end of the first year) in perpetuity. Investment B will gen

> You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table: a. What are the IRRs of the two projects? b. If your discount rate is 5%, what are the NPVs of the two projects? c. Why do IRR

> You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected to make $5 million in the year it is released and $2 million for the following four years. What is the payback perio

> You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $250 million. Once this investment is made, the mine is expected to produce revenues of $30 mill

> You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs $5.4 million upfront and is expected to generate $1.1 million per year for ten years and then have some shutdown costs in

> You have just been offered a contract worth $1 million per year for five years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12%. You are still negotiating the purchase price of the e

> You have an opportunity to invest $100,000 now in return for $80,000 in one year and $30,000 in two years. If your cost of capital is 9%, what is the NPV of this investment?

> Your firm is considering a project that will cost $4.55 million upfront, generate cash flows of $3.5 million per year for three years, and then have a cleanup and shutdown cost of $6 million in the fourth year. a. How many IRRs does this project have? b

> You own a coal mining company and are considering opening a new mine. The mine itself will cost $120 million to open. If this money is spent immediately, the mine will generate $20 million for the next ten years. After that, the coal will run out and the

> Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per year for ten years. The company will have to provide prod

> Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to eight hours of her time every month. Smith’s rate is $550 per hou

> How many IRRs are there in part (b) of Problem 9? Does the IRR rule work in this case? Information from Problem 9: Bill Clinton reportedly was paid $10 million to write his book My Life. The book took three years to write. In the time he spent writing,

> Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of $99. a. What is the bond’s yie

> General Electric has just issued a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $102. a. What is the bond’s yield to ma

> Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can only pay dividends out of earnings made after the debt issue and you must maintain a minimum quick (acid-test) ratio of 1:1. Your net income this year

> How many IRRs are there in part (a) of Problem 9? Does the IRR rule give the right answer in this case? Information from Problem 9: Bill Clinton reportedly was paid $10 million to write his book My Life. The book took three years to write. In the time h

> Your firm is issuing $100 million in straight bonds at par with a coupon rate of 6% and paying total fees of 3%. What is the net amount of funds that the debt issue will provide for your firm?

> You are finalizing a bank loan for $200,000 for your small business and the closing fees payable to the bank are 2% of the loan. After paying the fees, what will be the net amount of funds from the loan available to your business?

> You are the CFO of RealNetworks on July 1, 2008. The company’s stock price is $6.74 and its convertible debt (as shown in Table 15.7) is now callable. a. What is the value of the shares the bondholders would receive per $1000 bond if th

> A $1000 face value bond has a conversion ratio of 40. You estimate the transaction costs of conversion to be 3% of the face value of the bond. What price must the stock reach in order for you to convert?

> You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?

> Roundtree Software is going public using an auction IPO. The firm has received the following bids: Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will be the winning auction offer price? Price ($) Number of Shares 14.00 100

> Assuming that you own only the Series A preferred stock in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm do you own after the last funding round? Data from Pro

> Based on the information in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what fractions of the firm do the Series B, C, and D investors each own in your firm? In Problem 4 Round Price

> Three years ago, you founded your own company. You invested $100,000 of your own money and received 5 million shares of Series A preferred stock. Your company has since been through three additional rounds of financing. a. What is the pre-money valuation

> Your start-up company needs capital. Right now, you own 100% of the firm with 10 million shares. You have received two offers from venture capitalists. The first offers to invest $3 million for 1 million new shares. The second offers $2 million for 500,0

> Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars) (see MyFinanceLab for

> Starware Software was founded last year to develop software for gaming applications. The founder initially invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified a venture ca

> You have started a company and are in luck—a venture capitalist has offered to invest. You own 100% of the company with 5 million shares. The VC offers $1 million for 800,000 new shares. a. What is the implied price per share? b. What is the post-money v