Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 27 years to maturity, and a coupon rate of 3.6 percent paid annually. If the yield to maturity is 3.2 percent, what is the current price of the bond in euros?
> What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year ………………………………….. Cash Flow 0 ………………………………………. −$14,800 1 …………………………………….……
> Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year ……………………… Cash Flow 0 ………………….. −$52,000,000 1 ………………………. 74,000,000 2 …………………… − 12,000,000 a. If the company requires a return of 12 percent on its
> Consider the following two mutually exclusive projects: Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
> Bruin, Inc., has identified the following two mutually exclusive projects: a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this decision necessarily correct? b. If the required ret
> What is the IRR of the following set of cash flows? Year ………………………….. Cash Flow 0 ……………………………….. −$18,700 1 ……………………………………… 9,400 2 …………………………………… 10,400 3 ……………………………………… 6,500
> A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are some of the considerations that should come into play? To an
> What is the payback period for the following set of cash flows? Year …………………….. Cash Flow 0 …………………………… −$7,700 1 ……………………………….. 1,900 2 ……………………………….. 3,000 3 ……………………………….. 2,300 4 ……………………………….. 1,700
> Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $4.15 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively.
> Fegley, Inc., has an issue of preferred stock outstanding that pays a $3.80 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?
> Hailey Corp. pays a constant $9.45 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 10.7 percent, what is the current share price?
> Suppose you know that a company’s stock currently sells for $78 per share and the required return on the stock is 10.9 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s
> Caccamise Co. is expected to maintain a constant 3.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.3 percent, what is the required return on the company’s stock?
> Five Star Corporation will pay a dividend of $3.04 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s
> This one’s a little harder. Suppose the current share price for the firm in the previous problem is $67.25 and all the dividend information remains the same. What required return must investors be demanding on the company’s stock?
> Storico Co. just paid a dividend of $3.65 per share. The company will increase its dividend by 20 percent next year and then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend growt
> Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in eq
> Westco Co. issued 15-year bonds a year ago at a coupon rate of 5.4 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the current price of the bond in dollars?
> Consider four different stocks, all of which have a required return of 12 percent and a most recent dividend of $3.45 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 pe
> Penguin, Inc., has balance sheet equity of $7.9 million. At the same time, the income statement shows net income of $832,000. The company paid dividends of $285,000 and has 245,000 shares of stock outstanding. If the benchmark PE ratio is 16, what is the
> In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the terminal stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.41. Th
> Regal, Inc., currently has an EPS of $3.25 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 23, what is the target share price five years from now?
> In the previous problem, we assumed that the stock had a single stock price for the year. However, if you look at stock prices over any year, you will find a high and low stock price for the year. Instead of a single benchmark PE ratio, we now have a hig
> Meadow Dew Corp. currently has an EPS of $4.05, and the benchmark PE for the company is 21. Earnings are expected to grow at 4.9 percent per year. a. What is your estimate of the current stock price? b. What is the target stock price in one year? c. Assu
> Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 18 percent per year for the next 11 years before leveling off at 4 percent into perpetuity. The required return on the company’s stock is 11 percent. If t
> Impossible Corp. just paid a dividend of $1.93 per share. The dividends are expected to grow at 24 percent for the next eight years and then level off to a growth rate of 3.5 percent indefinitely. If the required return is 12 percent, what is the price o
> You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If the company currently ha
> E-Eyes.com just issued some new 20/20 preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.4 percent on this investment, how much does a share of preferred stock co
> Nikita Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $962. At this price, the bonds yield 5.1 percent. What must the coupon rate be on the bonds?
> Matterhorn Corporation stock currently sells for $49 per share. The market requires a return of 11 percent on the firm’s stock. If the company maintains a constant 3.5 percent growth rate in dividends, what was the most recent dividend per share paid on
> Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $12.40, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 9.5 percent on this stock, what will you pay for a share
> Orkazana Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 6 percent per year indefinitely. The required return on this stock is 10 percent,
> Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required return is 10 percent, and the company just paid a divide
> McCabe Corporation is expected to pay the following dividends over the next four years: $15, $11, $9, and $2.95. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 10.3
> Premier, Inc., has an odd dividend policy. The company has just paid a dividend of $3.75 per share and has announced that it will increase the dividend by $5 per share for each of the next five years and then never pay another dividend. If you require a
> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $14 per share 10 years from today and
> Quinoa Farms just paid a dividend of $2.95 on its stock. The growth rate in dividends is expected to be a constant 3.4 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the next
> Z Space, Inc., is a new company and currently has negative earnings. The company’s sales are $2.7 million and there are 175,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what is your estimate of an appropriate stock price? What if th
> The Dahlia Flower Co. has earnings of $3.64 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
> A Japanese company has a bond outstanding that sells for 96.318 percent of its ¥100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield to maturity of this bond?
> After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Cornwall Enterprises. Unfortunately, you will be the only person voting for you. If the company has 720,000 shares outs
> You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $700 per month in a stock account in real dollars and $300 per month in a bond account in real dollars. The effective annual return of the stock accou
> When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost
> The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004: Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?
> At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2021: The bond in the middle is callable in February 2022. What is the implied value of the call feature? Assume a par val
> Cookie Dough Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $900 every six months over the subsequent eight years, and f
> The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond wit
> Bond P is a premium bond with a coupon rate of 9 percent. Bond D has a coupon rate of 5 percent and is currently selling at a discount. Both bonds make annual payments, have a par value of $1,000, a YTM of 7 percent, and 15 years to maturity. What is the
> You want to have $2.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.1 percent and the inflation rate is 3.4 percent. What real amount must you deposit each year to achieve your goal?
> You’ve just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?
> Suppose your company needs to raise $65 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 4.9 percent, and you’re evaluating two issue alternatives: a semiannual coupon bond with a coupon
> Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The required return on the bonds will be 5.3 percent. Assume semi
> You have found the following historical information for the Daniela Company over the past four years: Earnings are expected to grow at 11 percent for the next year. Using the company’s historical average PE as a benchmark, what is the
> Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2021. What is the yield to maturity of the bond? What
> Milton Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
> You purchase a bond with a coupon rate of 6.4 percent, a par value of $1,000, and a clean price of $1,027. If the next semiannual coupon payment is due in two months, what is the invoice price?
> You purchase a bond with an invoice price of $1,053 and a par value of $1,000. The bond has a coupon rate of 5.3 percent, and there are four months to the next semiannual coupon date. What is the clean price of the bond?
> Uliana Co. wants to issue new 20-year bonds for some muchneeded expansion projects. The company currently has 6 percent coupon bonds on the market with a par value of $1,000 that sell for $967, make semiannual payments, and mature in 20 years. What coupo
> Williams Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 106.32 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 18 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change o
> Given that Hertz was down by 88 percent in the first half of 2020, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
> Both Bond Sam and Bond Dave have 7.1 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentag
> Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 6.8 percent, has a YTM of 6.2 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond pays a coupon rate of 6.2 percent, ha
> The next dividend payment by Im, Inc., will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. If the stock currently sells for $37 per share, what is the required return?
> The RLX Co. just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5 percent on the company’s stock, what is the current price? W
> Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.7 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 5.05 percent. What is the dollar price of the bond?
> Ashburn Corp. issued 25-year bonds two years ago at a coupon rate of 5.6 percent. The bonds make semiannual payments. If these bonds currently sell for 97 percent of par value, what is the YTM?
> You’ve observed the following returns on Pine Computer’s stock over the past five years: 8 percent, −12 percent, 14 percent, 21 percent, and 16 percent. a. What was the arithmetic average return on the company’s stock over this five-year period? b. What
> Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.
> What was the average annual return on large-company stocks from 1926 through 2019: a. In nominal terms? b. In real terms?
> Locate the Treasury bond in Figure 7.5 maturing in November 2026. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in dollars? Assume a par value of $10,000. Figure 7.5:
> Suppose you bought a bond with an annual coupon of 6 percent one year ago for $1,010. The bond sells for $1,025 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nomina
> Rework Problems 1 and 2 assuming the ending share price is $61. Problem 2: In Problem 1, what was the dividend yield? The capital gains yield? Problem 1: Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during t
> Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel® to answer the following questions: a. What is the probability that in any given year, the return on
> Over a 40-year period, an asset had an arithmetic return of 12.8 percent and a geometric return of 9.7 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5 years? 10 years? 20 years?
> In Problem 1, what was the dividend yield? The capital gains yield? Problem 1: Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $83. Compute the percentage total
> A stock has had the following year-end prices and dividends: What are the arithmetic and geometric average returns for the stock?
> A stock has had returns of 6 percent, 29 percent, 13 percent, −19 percent, 34 percent, and −2 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
> You find a certain stock that had returns of 18 percent, −23 percent, 16 percent, and 9 percent for four of the last five years. If the average return of the stock over this period was 10.3 percent, what was the stock’s return for the missing year? What
> You bought one of Great White Shark Repellant Co.’s 5.1 percent coupon bonds one year ago for $1,010. These bonds have a par value of $1,000, make annual payments, and mature 14 years from now. Suppose you decide to sell your bonds today, when the requir
> Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2019? Why do you think they were so high during this period? What relationship underlies your answer? Table 12.1: / / / / Figure
> Locate the Treasury issue in Figure 7.5 maturing in February 2029. What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume a par value of $10,000. Figure 7.5:
> Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium? Problem 10: For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T
> For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on th
> Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $83. Compute the percentage total return.
> A project has the following estimated data: Price = $53 per unit; variable costs = $22 per unit; fixed costs = $31,460; required return = 12 percent; initial investment = $46,200; life = four years. Ignoring the effect of taxes, what is the accounting br
> In each of the following cases, find the unknown variable:
> In each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even.
> In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures. Problem 5: We are evaluating a project that costs $84
> We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 51,000 units per year. Price per unit is $53, variab
> Use the results of Problem 26 to find the degree of operating leverage for the company in Problem 27 at the base-case output level of 20,000 tons. How does this number compare to the sensitivity figure you found in Problem 28? Verify that either approach
> Stinnett Transmissions, Inc., has the following estimates for its new gear assembly project: Price = $1,220 per unit; variable costs = $380 per unit; fixed costs = $3.75 million; quantity = 90,000 units. Suppose the company believes all of its estimates
> Say you own an asset that had a total return last year of 14.1 percent. If the inflation rate last year was 2.83 percent, what was your real return?
> Use the results of Problem 25 to find the accounting, cash, and financial break-even quantities for the company in Problem 27. Problem 25: This problem concerns the effect of taxes on the various break-even measures. a. Show that, when we consider taxes
> In Problem 27, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of
> Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3.1 million investment in threading equipment to get the project started; the project will last for five years. The acco
> This problem concerns the effect of taxes on the various break-even measures. a. Show that, when we consider taxes, the general relationship between operating cash flow, OCF, and sales volume, Q, can be written as: b. Use the expression in part (a) to
> Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2019 Toyota RAV4 Hybrid, which had a list price of $5,900 (including tax consequences) more than the comparable gasoline-on
> In Problem 20, McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables? Problem 20: McGilla Golf has decided to sel
> In the previous problem, you feel that the values are accurate to within only ± 10 percent. What are the best-case and worst-case NPVs? Problem 20: McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have
> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $365 per set. The company has spent $150,000 for a marketing study that determined the company will sell 55,000 sets per year for
