Suppose the company in Problem 1 has a market-to-book ratio of 1.0 and the stock price remains constant.
Problem 1:
Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then EBIT will be 40 percent lower. The company is considering a $65,000 debt issue with an interest rate of 7 percent. The proceeds will be used to repurchase shares of stock.
There are currently 7,400 shares outstanding. Ignore taxes for this problem.
a. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in ROE for economic expansion and recession, assuming no taxes.
b. Repeat part (a) assuming the firm goes through with the proposed recapitalization.
c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 21 percent
> You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.17 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
> Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that
> No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4.5 million in collections per day and requires a $340,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region s
> In a typical month, the Monk Corporation receives 80 checks totaling $113,000. These are delayed four days on average. What is the average daily float? Assume 30 days in a month
> The Torrey Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20 percent of sales
> Sexton Corp. has projected the following sales for the coming year:a. Calculate payments to suppliers assuming that the company places orders during each quarter equal to 30 percent of projected sales for the next quarter. Assume that the company pays im
> Your company will generate $47,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 7.1 percent, what is the present value of the savings?
> Your firm has an average collection period of 31 days. Current practice is to factor all receivables immediately at a discount of 1.25 percent. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely
> Consider a firm with a contract to sell an asset for $145,000 four years from now. The asset costs $91,700 to produce today. Given a relevant discount rate of 11 percent per year, will the firm make a profit on this asset? At what rate does the firm just
> Consider the following financial statement information for the Newk Corporation:Calculate the operating and cash cycles. How do you interpret your answer?
> Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $365. The company has a 45-day collection period. Calculate cash collections in each of the four q
> You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R, 35 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36, respectively.What is the portfolio beta?
> Simmons Mineral Operations, Inc. (SMO), currently has 530,000 shares of stock outstanding that sell for $68 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. SMO has a five-for-three stock split?b. SM
> For the company in Problem 2, show how the equity accounts will change if:Problem 2:The owners’ equity accounts for Vidi International are shown here:Common stock ($.50 par value) ……………………………………………………… $ 25,000Capital surplus …………………………………………………………………………
> Cori’s Corp. has an equity value of $13,315. Long-term debt is $8,200. Net working capital, other than cash, is $2,750. Fixed assets are $17,380. How much cash does the company have? If current liabilities are $2,025, what are current assets?
> Below are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash and the amount:,,,
> Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2018:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale
> The following is the sales budget for Profit, Inc., for the first quarter of 2018:Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the sale15 percent in the second month after the saleThe accounts rec
> If you put up $41,000 today in exchange for a 5.1 percent, 15-year annuity, what will the annual cash flow be?
> Ginger, Inc., has declared a $5.35 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. The company’s stock sells for $74.20 p
> In Problem 8, suppose the company instead decides on a four-for-one stock split. The firm’s 65 cent per-share cash dividend on the new (postsplit) shares represents an increase of 10 percent over last year’s dividend o
> You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30- year mortgage loan for 80 percent of the $3,400,000 purchase price. The monthly payment on this loan will be $16,500. What is the APR on this loan? The EAR?
> Consider the following information:b. What is the variance of this portfolio? The standard deviation?
> The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $53 per share. What effects will the distribution of the stock dividend have on the equity accounts?Common stock ($1 par
> The market value balance sheet for Bobaflex Manufacturing is shown here. The company has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 12,
> In Problem 5, suppose the company has announced it is going to repurchase $18,200 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase
> The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding.The company has declared a dividend of $1.30 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the
> The owners’ equity accounts for Vidi International are shown here:Common stock ($.50 par value) ……………………………………………………… $ 25,000Capital surplus ………………………………………………………………………………. 215,000Retained earnings …………………………………………………………………………… 642,700Total owners’ equi
> The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are perpetuities, and neither firm pays taxes. Both firms d
> Change Corporation expects an EBIT of $31,200 every year forever. The company currently has no debt, and its cost of equity is 11 percent.a. What is the current value of the company?b. Suppose the company can borrow at 6 percent. If the corporate tax rat
> An investment offers $4,350 per year for 15 years, with the first payment occurring one year from now. If the required return is 6 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years?
> After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 3 percent or paying the cash out to investors who would invest in the
> National Business Machine Co. (NBM) has $4 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a sp
> What are the portfolio weights for a portfolio that has 115 shares of Stock A that sell for $43 per share and 180 shares of Stock B that sell for $19 per share?
> As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not n
> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $375,000 per year. Thus, in one year, you receive $1.375 million. In two years, you get $1.75 million, and so on. If the appropriate interest
> The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whe
> In Problem 10, suppose you want only $1,500 total in dividends the first year. What will your homemade dividend be in two years?Problem 10:You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.15 per share dividend in one year. In
> You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.15 per share dividend in one year. In two years, the company will pay a liquidating dividend of $57 per share. The required return on the company’s stock is 15 percent. What is
> ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $720,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $360,000 and the interest rate on its debt is 7 perc
> Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?Problem 6:Bellwood Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock
> First Simple Bank pays 6.4 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10
> Bellwood Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt.The interest rate on the debt is 10 percent.a. Ignoring t
> In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Problem 4:Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered
> Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstand
> The present value of the following cash flow stream is $7,500 when discounted at 9 percent annually. What is the value of the missing cash flow? Year …………………………………………………………………….. Cash Flow1 ………………………………………………………………………………. $1,7002 ………………………………………………………………
> Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.(a) and (b) in Problem 1:a. Calculate earnings per share (EPS) under each of the three economic s
> Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21 percent. The firm has $126,000 in outstanding debt at an interest rate of 5.35 percent, and its unlevered cost of capital is 9.6 percent. What is the value of the firm
> In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision?Problem 14:Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 per
> Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. If the tax rate is 24 percent, what is the value of the firm? What will the value be
> You have just won the lottery and will receive $1,500,000 in one year. You will receive payments for 30 years, and the payments will increase by 2.7 percent per year. If the appropriate discount rate is 6.8 percent, what is the present value of your winn
> You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 8 percent, −15 percent, 19 percent, 31 percent, and 21 percent.a. What was the arithmetic average return on the company’s stock over this five-year period?b.
> Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4.3 million investment in threading equipment to get the project started; the project will last for five years. The acco
> 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
> You have found the following historical information for the Daniela Company over the past four years:
> Domergue Corp. currently has an EPS of $3.76, and the benchmark PE for the company is 21. Earnings are expected to grow at 5.1 percent per year.a. What is your estimate of the current stock price?b. What is the target stock price in one year?c. Assuming
> 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 10 percent. If t
> A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 21 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 of the s
> 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
> In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes option pricing model with dividends is:All of the variables are the same as the Black-Scholes model without dividends except for the
> Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.80, 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 t
> The next dividend payment by Savitz, Inc., will be $2.34 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share, what is the required return?
> Mobray 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, a
> Elliott Credit Corp. wants to earn an effective annual return on its consumer loans of 17.1 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this
> 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 11 percent, and the company just paid a divide
> Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 p
> Maurer, Inc., has an odd dividend policy. The company has just paid a dividend of $2.75 per share and has announced that it will increase the dividend by $4.50 per share for each of the next five years and then never pay another dividend. If you require
> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $17 per share 10 years from today a
> Moody Farms just paid a dividend of $2.65 on its stock. The growth rate in dividends is expected to be a constant 3.8 percent per year indefinitely. Investors require a return of 15 percent for the first three years, a return of 13 percent for the next t
> TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $2.1 million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what is your estimate of an appropriate stock price? What if
> The Perfect Rose Co. has earnings of $3.18 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
> Colosseum Corp. has a zero coupon bond that matures in five years with a face value of $65,000. The current value of the company’s assets is $62,000, and the standard deviation of its return on assets is 34 percent per year. The risk-free rate is 7 perce
> In the previous problem, assume that the company uses cumulative voting, and there are four seats in the current election. How much will it cost you to buy a seat now?Previous problem:After successfully completing your corporate finance class, you feel t
> After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person voting for you. If the company has 650,000 shares outs
> First National Bank charges 13.1 percent compounded monthly on its business loans. First United Bank charges 13.4 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?
> The Jackson-Timberlake Wardrobe Co. just paid a dividend of $2.15 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
> You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.2 percent, what is the price of the bond? Assume semiannual compounding periods.
> McConnell Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $1,045. The bonds make semiannual payments. What must the coupon rate be on these bonds?
> West Corp. issued 25-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
> Weismann Co. issued 15-year bonds a year ago at a coupon rate of 4.9 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 bond price?
> Gabriele Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $948. At this price, the bonds yield 5.1 percent. What must the coupon rate be on the bonds?
> A Japanese company has a bond outstanding that sells for 105.43 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?
> At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2017:
> Zevon Industries has a zero coupon bond issue that matures in two years with a face value of $40,000. The current value of the company’s assets is $26,700, and the standard deviation of the return on assets is 60 percent per year.a. Assume the risk-free
> Jallouk 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 finall
> Find the APR, or stated rate, in each of the following cases:
> 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 with
> 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 YTM of 7 percent, and have 10 years to maturity. What is the current yield for
> 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 10.3 percent and the inflation rate is 3.7 percent. What real amount must you deposit each year to achieve your goal?
> You are looking at an investment that has an effective annual rate of 11.6 percent. What is the effective semiannual return? The effective quarterly return? The effective monthly return?
> 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, 23 years to maturity, and a coupon rate
> Suppose your company needs to raise $53 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 5.3 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 ona. the bonds will be 4.9 percent. Assume se
> If the appropriate discount rate for the following cash flows is 9 percent compounded quarterly, what is the present value of the cash flows? Year …………………………….……………………. Cash Flow1 …….……………………………………………..…………. $ 8152 ………………………………………………………………… 9903………………………
> 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, 2018. What is the yield to maturity of the bond? What
> A company has a single zero coupon bond outstanding that matures in five years with a face value of $17.5 million. The current value of the company’s assets is $15.9 million, and the standard deviation of the return on the firm’s assets is 41 percent per
> Find the EAR in each of the following cases:
> Excey 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 5.3 percent and a clean price of $951. If the next semiannual coupon payment is due in two months, what is the invoice price?
> Calculate the internal growth rate for the company in Problem 22. Now calculate the internal growth rate using ROA × b for both beginning of period and end of period total assets. What do you observe?Data from Problem 22:Gilmore, Inc., had equity of $145
