Next year Dillon Mechanical Inc ’s EPS is expected to be $4. The firm is not expected to pay any dividends for the next four years. In year 5, a dividend of $1.50 is expected and subsequent dividends are expected to grow at 5 percent per year. The next year’s EPS of another firm, Sterling Inc., is expected to be $6. Sterling has just paid a dividend of $6 (cheques were mailed out today). Its dividends are expected to grow at 2 percent per year. Assume that the cost of capital for both firms is 15 percent. a. What should be the current share price of Dillon Mechanical Inc.? b. What should be the current share price of Sterling Inc.? c. What is the PVGO of Dillon Mechanical? d. What is the PVGO of Sterling?
> You work for a firm of management consultants that offers assistance to new businesses. One of your clients is Shorttress Manufacturing, a company that manufactures a small, but vital, component for the specialized lighting industry. Shorttress is a new
> Scott Wadzicki was hired in January 2020 to manage the home products division of Advanced Techno. As part of his employment contract, he was told that he would get an extra $5,000 bonus for every 1% increase by which the division's profits exceeded the p
> BBG Corporation manufactures a synthetic element, pixie dust. Management was surprised to learn that income before taxes had dropped even though the sales volume had increased. Steps had been taken during the year to improve profitability. The steps incl
> The following data relate to a year's budgeted activity for Rickuse Limited, a company that manufactures one product: ……………………………………………………………………………………………………………………… Units Beginning inventory …………………………………………………………………………………….. 40,000 Production …………………………
> Information for Large Orange Company is given in BE8.4. What is the total product cost for the company under absorption costing? Calculate product costs under absorption costing. Data from BE8.4: Large Orange Company produces basketballs. It incurred th
> The vice-president for sales of Huber Corporation has received the following income statement for November, which was prepared on a variable costing system. The firm has just adopted variable costing for its internal reporting. // The controller attach
> DDD Golf Ltd. produces and sells special golf balls for $20 for a pack of three. In May 2020, the company manufactured 30,000 packs (its normal volume) and sold 28,000 packs. The beginning inventory on May 1, 2020, was 5,000 packs. Production information
> The Wei Nan Company manufactures and sells personal organizers. The following are the operating data for the company for 2019 and 2020: There was no beginning inventory on January 1, 2019. The company used the FIFO method to calculate the cost of inven
> Big Sports Manufacturing produces basketballs used for indoor and outdoor games. The company has had significant troubles over the past few years, as the number of competitors in the basketball market has increased dramatically. Recently, the company wa
> ComfortCraft manufactures swivel seats for customized vans. It currently manufactures 20,000 seats per year, which it sells for $680 per seat. It incurs variable costs of $340 per seat and fixed costs of $4,420,000. It is considering automating the uphol
> Portland Optics, Inc., specializes in manufacturing lenses for large telescope cameras used in space exploration. Since the specifications for the lenses are determined by the customer and vary considerably, the company uses a job-order costing system. I
> Wingfoot Co. began operations on July 1, 2019. By the end of its first fiscal year, ended June 30, 2020, Wingfoot had sold 10,000 wingers. Selected data on operations for the year ended June 30, 2020, follow. (Any balance sheet figures are as at June 30,
> Boat Refit Inc. produces and sells custom parts for powerboats. The company uses a costing system based on actual costs. Selected accounting and production information for fiscal 2020 is as follows: Calculate the product cost contribution margin under va
> The vice-president of Abscorp Ltd. is not happy. Sales have been rising steadily, but profits have been falling. In September 2020, Abscorp had record sales, but the lowest profits ever. The results for the months of July, August, and September 2020 foll
> Allerdyce Corporation Ltd. (ACL) prepares external financial statements using absorption costing and internal financial statements using variable costing. You have the following information for the operations of ACL for the past two years: Calculate the
> Large Orange Company produces basketballs. It incurred the following costs during the year: Calculate product costs under variable costing. Direct materials ……………………………. $14,400 Direct labour ………………………………….. 25,600 Fixed manufacturing overhead ………. 12,0
> Harrison Pumps is a division of Liverpool Controls Corporation. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 60,000 units for $30 per unit. Imran Qureshi manages the
> Zaki Metal Company produces the steel wire that is used for the production of paper clips. In 2020, the first year of operations, Zaki produced 60,000 km of wire and sold 50,000 km. In 2021, the production and sales results were exactly reversed. In each
> Information for SpongeFun Products is provided in P8.36B. Calculate the product cost and prepare an income statement under normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 60,000 units to allocate th
> SpongeFun Products manufactures and sells a variety of swimming products. Recently, the company opened a new plant to manufacture a lightweight, inflatable boat. Cost and sales data for 2020 are shown below: Calculate the product cost; prepare income sta
> The Daniels Tool & Die Corporation has been in existence for a little over three years. The company's sales have been increasing each year as it builds a reputation. The company manufactures dies to its customers' specifications and therefore uses a
> Sun Company, a wholly owned subsidiary of Guardian Inc., produces and sells three main product lines. At the beginning of 2020, the president of Sun Company presented the budget to the parent company and accepted a commitment to contribute $15,800 to Gua
> Information for Xantra Corp. is provided in P8.32A. Calculate the product cost and prepare an income statement under normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 25,000 pairs to allocate the fixe
> Xantra Corp. is a manufacturer of specialty in-line skates. The operating results for 2020 are as follows: Calculate the product cost; prepare income statements under variable costing, absorption costing, and throughput costing; and reconcile the differe
> Amanjeet Chinmayi left her job as the production manager of a medium-sized firm two years ago to join a new firm that was manufacturing a revolutionary type of fitness equipment. Amanjeet was made the general manager at the start of operations, and the f
> Information for Alta Products Ltd. is provided in P8.29A. Calculate the product cost and prepare an income statement under normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 2,500 units to allocate the
> Determine whether each of the following costs would be classified as product costs or period costs under a throughput-costing system. Identify costs as product costs or period costs under throughput costing. Product Cost Period Cost Commission fees
> Alta Products Ltd. has just created a new division to manufacture and sell DVD players. The facility is highly automated and thus has high monthly fixed costs, as shown in the following schedule of budgeted monthly costs. This schedule was prepared based
> Basic Electric Motors is a division of Basic Electric Products Corporation. The division manufactures and sells an electric switch used in a wide variety of applications. During the coming year, it expects to sell 200,000 units for $8 per unit. Ester Mad
> AFN Company produces plastic that is used for injectionmoulding applications such as gears for small motors. In 2020, the first year of operations, AFN Company produced 4,000 tonnes of plastic and sold 3,500 tonnes. In 2021, the production and sales resu
> Blue Mountain Products manufactures and sells a variety of camping goods. Recently, the company opened a new plant to manufacture a lightweight, self-standing tent. Cost and sales data for the first month of operations (June 2020) are as follows: Calcula
> During its second year of operations, TGS Corporation produced 3,000 units and sold 2,800 units at $60 each. The beginning inventory comprised 100 units, and costs were unchanged from the previous year. Costs incurred during the second year were as follo
> Hardwood Inc. produces mostly wooden crates used for shipping products by ocean freighter. In 2020, Hardwood incurred the following costs: Calculate the manufacturing cost under absorption and variable costing and explain the difference. Wood used ……………
> Ortiz Company produced 9,000 units during the past year but sold only 8,200 of the units. The following additional information is also available: Determine the ending inventory under variable costing; determine whether absorption or variable costing woul
> Empey Manufacturing produces towels to be sold as souvenirs at sporting events throughout the world. Assume that units produced equalled units sold in 2020. The company's variable-costing income statement and other data are as follows: Calculate the prod
> Information for Bob's Company is provided in E8.19. Calculate the product cost and prepare an income statement under normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 93,860 units to allocate the fixe
> Information for Bob's Company is provided in E8.19. Calculate the product cost and prepare an income statement under absorption costing. Instructions a. Assuming the company uses absorption costing, calculate Bob's manufacturing cost per unit for 2020.
> Determine whether each of the following costs would be classified as product costs or period costs under an absorption-costing system. Identify costs as product costs or period costs under absorption costing. Product Cost Period Cost Commission fees
> Bob's Company builds custom fishing lures for sporting goods stores. In its first year of operations, 2020, the company incurred the following costs: Calculate the product cost and prepare an income statement under variable costing. Variable cost per un
> Information for Asian Windows is given in E8.17. Calculate total product cost and prepare an income statement using normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 8,000 units to allocate the fixed
> Asian Windows manufactures a hand-painted bamboo window shade for standard-size windows. Production and sales data for 2020 are as follows: Prepare income statements under absorption costing and variable costing. Instructions a. Prepare an income state
> Wu Equipment Company manufactures and distributes industrial air compressors. The following data are available for the year ended December 31, 2020. The company had no beginning inventory. In 2020, it produced 1,500 units but sold only 1,200 units. The u
> Information for Fresh Air Products is given in D8.12. Calculate total product cost and prepare an income statement using throughput costing. Instructions a. Assuming the company uses throughput costing: 1. Calculate the manufacturing cost per unit. 2. P
> Information for Fresh Air Products is given in D8.12. Calculate total product cost and prepare an income statement using normal costing. Instructions a. Assume the company uses normal costing and uses the budgeted volume of 13,500 units to allocate the
> Information for Fresh Air Products is given in D8.12. Calculate total product cost and prepare an income statement using variable costing. Instructions a. Assuming the company uses variable costing: 1. Calculate the manufacturing cost per unit. 2. Prepa
> Fresh Air Products manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below: Calculate total product
> Caspian Company produced 20,000 units and sold 18,000 during the current year. Under absorption costing, net income was $25,000. Fixed overhead was $190,000. Determine the net income under variable costing. Determine net income under variable costing.
> Information for Rafael Corp. is given in BE8.8. Prepare absorption-costing income statement and reconcile the difference in net income under the two approaches. a. Prepare an absorption-costing income statement. b. Reconcile the difference between the ne
> Determine whether each of the following costs would be classified as product costs or period costs under a variable-costing system: Identify costs as product costs or period costs under variable costing. Product Cost Period Cost Commission fees for
> Investors demand a rate of return of 15 percent on Sweet Life Food Inc. ’ s common shares. These shares are currently trading at $20 per share. Dividend payout for the current year is expected to be $1 per share. a. What is the implied long‐term growth r
> Prime Tire’s current dividend is $4. Dividends are expected to grow by 25 percent for years 1 to 3 and 10 percent thereafter. The required rate of return on the stock is 15 percent. What is Prime’s current stock price?
> Peele Clothiers Ltd. ’ s current dividend is $3.60. Dividends are expected to grow by 9 percent for years 1 to 3, 6 percent for years 4 to 7, and 2 percent thereafter. The required rate of return on the stock is 12 percent. What is the current stock pric
> Peak’s Organic Foods’ current dividend is $4. You expect the growth rate to be 10 percent for years 1 to 5, and 3 percent from years 6 to infinity. The required rate of return on this firm’s equity is 12.5 percent. Determine the following: a. The expecte
> OK Natural Foods’ current dividend is $5. You expect the growth rate to be 0 percent for years 1 to 5, and 2 percent for years 6 to infinity. The required rate of return on this firm’s equity is 10 percent. Determine the following: a. The expected divide
> Latta Incorporated has announced an annual dividend of $5.00. The firm has zero growth and the required rate of return for this type of firm is 10 percent. Assuming that the ex‐dividend date is January 20, calculate the expected stock price for Latta on
> Spinnaker Supplies Ltd. currently doesn’t pay any dividends but is expected to start paying dividends in five years. The first dividend is expected to be $1.80 and is expected to grow at 4.5 percent thereafter. The required rate of return for the firm
> Parker Imports Ltd. is expected to pay a $2 dividend in one year. The required rate of return is 9 percent. The firm uses a dividend payout ratio of 25 percent. Calculate the leading P/E ratio in the following cases: a. Expected growth rate 4 percent i.
> Ibis Company is expected to pay a $1.50 dividend next year. Dividends are expected to grow at 3 percent forever and the required rate of return is 7 percent. a. What is the price of Ibis today? b. What is the expected dividend yield? c. What is the expec
> Calculate the correlation coefficient ( ρ AB ) for the following situation: Еxpected Return on Return on Stock A in Stock B in Еxpected Probability of Occurrence This State This State State of the Economy High growth 25% 40% 55% Moderate g
> You have just been to see your broker at Acclaim Capital Inc. for advice about investing in the Empire Bank. The broker indicates that the Empire Bank has three different types of securities: debt, preferred shares, and common shares. She states: “Debt i
> FinCorp Inc. purchased a stock for $50. It expects to hold the stock for two years, receive a dividend of $1.50 at the end of each year, and sell the stock immediately after receiving the second dividend. Assume dividends are held in a zero‐interest savi
> How can we estimate the investor’s required rate of return for a traditional preferred share?
> How is a traditional preferred share valued?
> In what ways are preferred shares different from bonds?
> Why can the P/E ratio be viewed as a type of payback period?
> How do we generate a portfolio with a higher expected rate of return than that on the tangent portfolio?
> Why is the tangent portfolio so important?
> What is the risk of a portfolio consisting of a risk-free asset and a risky security?
> What is risk aversion and how do we know investors are risk averse?
> FinCorp Inc. is interested in the tradeoff between investing in two stocks, ABC and DEF. The expected return on ABC is 6 percent and on DEF is 18 percent. a. Graph the relationship between the expected return on the portfolio and the weight in DEF. b. Wh
> Why is the Sharpe ratio frequently referred to as a ‘risk-adjusted’ measure of performance?
> When is the expected return equal to the required return?
> 1. What is the expected return and standard deviation of a portfolio consisting of $7,500 invested in a risk free asset with an 8‐percent rate of return, and $2,500 invested in a risky security with a 20‐percent rate of return and a 25‐percent standard d
> Four risk factors, F 1 , F 2 , F 3 , and F 4 , have been identified to determine the required rate of return, as follows: ERi a0 bi1 F1 bi2 F2 bi3 F3 bi4 F4, where a0 , is the expected return on a security with zero systematic risk. Calculate the require
> You invested $100,000 in the following stocks: If the risk‐free rate is 5 percent and the market risk premium is 8 percent, what is the expected return on your portfolio? Stock Amount Beta АВС $20,000 0.8 DEF $30,000 1.2 GHI $15,000
> The variance of the market returns is 0.0576, and the covariance of the returns on ABC stock and the market is 0.09504. If the risk‐free rate is 5 percent and the market risk premium is 8 percent, what is the required rate of return of ABC?
> The expected return on stock A is 15 percent. The expected return on stock B is 9 percent. Assuming CAPM holds, if the beta of stock A is higher than the beta of stock B by 0.4, what should the risk premium be?
> Stock A has a beta of 1.8 and an expected return of 20 percent. Stock B has a beta of 1.2 and an expected return of 14 percent. If CAPM holds, what should the return on the market and the risk‐free rate be?
> Assuming CAPM is valid, can we have a situation where stock A has a required rate of return of 15 percent and a beta of 1.4, and stock B has a required rate of return of 20 percent and beta of 1.2?
> Determine the beta of QTax based on the following information: • Market expected return is 9 percent; standard deviation is 12 percent • R isk‐free rate is 3 percent • Current dividend is $4 • Dividend growth rate is 4 percent • Current stock price is $3
> Data on the daily performance of Carraway Corporation have been partially completed in the following table. Fill in the missing data. The closing price on one day is assumed to be the opening price for the next day. Carraway Corporation Performance T
> Which of the following are examples of systematic (market) risks? Which are examples of unsystematic (unique) risks? a. Inflation risk b. CFO’ s fraudulent activities c. Changes in interest rates d. Product tampering e. Political risk f. CEO’ s aversion
> You are valuing the Vancouver Rain‐Making Company (VRM) and need to calculate the following: a. Required rate of return (assume the market risk premium is 8 percent, the risk‐free rate is 3 percent, and the beta is 1.28) b. Price of VRM based on the curr
> Estimate the beta of the following stock: market risk premium = 25 percent, RF = 6 percent, P0 = $10, expected dividend at the end of the year = $2.50, P = $12.50 . Assume the market is in equilibrium.
> Stock FM has a standard deviation of 28 percent and a correlation coefficient of 0.7 with market returns. The standard deviation of market return is 16 percent, and the expected return is 13.5 percent. The risk‐free rate is 4.5 percent. a. What is the be
> TrenStar Inc. obtained the following incomplete information from ABC Company and has given you the task of completing the table. Security 1 Security 2 Weight in Beta Beta Security 1 Portfolio Beta Case 1 0.5 1.5 0.4 Case 2 0.65 0.5 1.3 Case 3 1.1 1.9
> Calculate the missing values for the following five efficient portfolios. The expected return on the market is 8 percent, with a standard deviation of 5 percent, and the risk‐free rate is 2 percent. Еxpected Portfolio Return Standar
> Jackie borrowed $1,000 at the risk‐free rate of 6 percent. She invested the borrowed money and her own money of $2,500 in a portfolio with a 15‐percent rate of return and a 25‐percent standard deviation. What is the expected return and standard deviation
> Why is the CAPM called a single-factor model?
> Briefly describe the strengths and weaknesses of the Fama-French model and the APT.
> Describe some of the criticisms of the CAPM, including Roll’s critique.
> To achieve a zero standard deviation for a portfolio, calculate the weights of stock A and stock B, assuming the correlation coefficient is −1. Expected Expected Return on Return on Probability Stock A in Stock B in of Occurrence Th
> You are forecasting the returns for PVC Company, a plumbing supply company, which pays a current dividend of $10. The dividend is expected to grow at a rate of 3 percent. You have identified two public companies, ABC and VJK, which appear to be comparabl
> Your client is confused. He owns shares in the Whistler Snow‐Making Company (WSMC) and wants you to explain your recommendation. Both of you agree on the following: WSMC has an expected return of 12 percent, a standard deviation of 9 percent, and a beta
> Obtain monthly returns for BlackBerry, the Royal Bank of Canada, and the S&P/TSX Composite Index for January to December 2015. (Note: Monthly historical prices, adjusted for dividends, are available from http:// ca.finance.yahoo.com. To obtain the data,
> Three of your friends (Jean, Evan, and Lee) are having an argument about investments and, because you have taken this course, have come to you for advice. The possible investments are set out in the following table. (Assume you cannot mix risky investmen
> A lawyer prosecuting a lawsuit against The Brokerage Company has hired you to conduct an investigation into the advice the company has been giving its clients. You observe that clients have invested in the following portfolios: Evaluate the advice The Br
> TrenStar Inc. has five clients with different risk and return preferences. The market portfolio has an expected return of 12 percent, with a standard deviation of 16 percent. The risk‐free rate is 4 percent. Each client has $2,500 to in
> TrenStar Inc. is planning to offer several investments to investors and is in the process of designing its marketing materials. Each investment’ s value in the future will be related to the return on the S&P/TSX Composite Index over
> Portfolio A has a beta of 0.82. Portfolio B has a beta of 1.05. RF is 3 percent and the market risk premium is 6 percent. Calculate the required rate of return of A and B. If the expected rate of return for both portfolio A and B is 8.5 percent, what inv
