The St. Anger Corporation needs to raise $55 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $32 per share and the company’s underwriters charge a spread of 7 percent, how many shares need to be sold?
> Siblings, Inc., is expected to maintain a constant 5.7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.6 percent, what is the required return on the company’s stock?
> What was the arithmetic average annual return on large-company stocks from 1926 through 2014? a. In nominal terms? b. In real terms?
> Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 11.5 percent, and the cost of debt is 5.9 percent. The relevant tax rate is 35 percent. What is the company’s WACC?
> Shiller Corporation will pay a $2.75 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock t
> You own a portfolio that is 20 percent invested in Stock X, 45 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 11 percent, 17 percent, and 14 percent, respectively. What is the expected return on the portfoli
> A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 3.6 percent, and the interest rate is expected to be 3.1
> Suppose the returns on large-company stocks are normally distributed. Based on the historical record, use the NORMDIST function in Excel ® to determine the probability that in any given year you will lose money by investing in common stock.
> Using information from the previous chapter about capital market history, determine the return on a portfolio that is equally invested in large-company stocks and long-term government bonds. What is the return on a portfolio that is equally invested in s
> What is the historical real return on long-term government bonds? On long-term corporate bonds?
> A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent
> A stock has an expected return of 11.2 percent, a beta of 1.15, and the expected return on the market is 10.4 percent. What must the risk-free rate be?
> A stock has an expected return of 13.4 percent, its beta is 1.20, and the risk-free rate is 4.4 percent. What must the expected return on the market be?
> Bruce & Co. expects its EBIT to be $145,000 every year forever. The company can borrow at 8 percent. The company currently has no debt, and its cost of equity is 14 percent. If the tax rate is 35 percent, what is the value of the company? What will the v
> Say you own an asset that had a total return last year of 11.6 percent. If the inflation rate last year was 5.3 percent, what was your real return?
> An investment offers a total return of 13 percent over the coming year. Alan Wingspan thinks the total real return on this investment will be only 8 percent. What does Alan believe the inflation rate will be over the next year?
> A stock has a beta of 1.15, the expected return on the market is 10.6 percent, and the risk-free rate is 4.5 percent. What must the expected return on this stock be?
> Lee Ann, Inc., has declared a $7.50 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld when the dividend is paid. The company’s stock sells for $93 per share,
> Suppose the real rate is 2.4 percent and the inflation rate is 3.7 percent. What rate would you expect to see on a Treasury bill?
> Scarlett Corp. uses no debt. The weighted average cost of capital is 8.4 percent. If the current market value of the equity is $43 million and there are no taxes, what is EBIT?
> The Dybvig Corporation’s common stock has a beta of 1.17. If the risk-free rate is 3.8 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital?
> In March 2014, BMW announced plans to spend $1 billion to expand production at its South Carolina plant. The plant produced the second-generation BMW X3 as well as the company’s X5 and X6 models. The new investment would allow BMW to build the new, large
> Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common?
> Look at Table 10.1 and Figure 10.7(Given Below) in the text. When were T-bill rates at their highest over the period from 1926 through 2014? Why do you think they were so high during this period? What relationship underlies your answer? Long-Term Go
> Your company owns a vacant lot in a suburban area. What is the advantage of waiting to develop the lot?
> You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you can take advantage of this mispricing if the option expire
> Zipcar, the car sharing company, went public in April 2011. Assisted by the investment bank Goldman Sachs, Zipcar sold 9.68 million shares at $18 each, thereby raising a total of $174.24 million. By the end of the first day of trading, the stock had zipp
> Some corporations, like one British company that offers its large shareholders free crematorium use, pay dividends in kind (i.e., offer their services to shareholders at below-market cost). Should mutual funds invest in stocks that pay these dividends in
> A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?
> What are the differences between a k-factor model and the market model?
> What are the portfolio weights for a portfolio that has 165 shares of Stock A that sell for $43 per share and 120 shares of Stock B that sell for $74 per share?
> We have seen that over long periods stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding their investments entirely in bonds. Are such investors irr
> If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?
> Vital Silence, Inc., has a project with the following cash flows: The company evaluates all projects by applying the IRR rule. If the appropriate interest rate is 9 percent, should the company accept the project? Year Cash Flows ($) -$24,000 9,700
> The balance sheet for Levy Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding. The company has declared a dividend of $1.60 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock
> North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.10 if both were all equity financed. The market value information for each company is shown here: The expected return on the ma
> Edwards Construction currently has debt outstanding with a market value of $75,000 and a cost of 9 percent. The company has EBIT of $6,750 that is expected to continue in perpetuity. Assume there are no taxes. a. What is the value of the company’s equity
> In Problem 4, use MM 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: Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and
> Kiedis, Corp., has interest-bearing debt with a market value of $65 million. The company also has 2 million shares that sell for $25 per share. What is the debt–equity ratio for this company based on market values?
> Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all stocks are independent. The following table shows the information for two diversified portfolios: If the risk-free rate is 4 percent, what are the risk premiu
> Based on the following information, calculate the expected return and standard deviation for the two stocks: Probability of State of Economy State of Rate of Return if State Occurs Economy Stock A Stock B Recession .30 .06 -.20 Normal .55 .07 .13 Boo
> 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, 15 years to maturity, and a coupon rate
> With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?
> Suppose a stock had an initial price of $64 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $73. Compute the percentage total return.
> Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $530,000 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will
> In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?
> A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $64 per share. The current market price of the stock is $68. What is the minimum value of the warrant?
> Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current market price of crude oil is $103 per barrel, and the
> The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price of the stock is $62. What is the value of the call op
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye
> What is dilution, and why does it occur when warrants are exercised?
> Discuss the accounting criteria for determining whether a lease must be reported on the balance sheet. In each case give a rationale for the criterion.
> An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost is $8,000? What if the initial cost is $12,000? What if
> What are the two types of risk that are measured by a levered beta?
> The following figures present the results of four cumulative abnormal returns (CAR) studies. Indicate whether the results of each study support, reject, or are inconclusive about the semistrong form of the efficient market hypothesis. In each figure, Tim
> Shanken Corp. issued a 30-year, 5.9 percent semiannual bond 6 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the aftertax cost of debt? c. Which
> Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented in the following chart: a. What is the systematic risk of the stock return?
> Rework Problems 1 and 2 assuming the ending share price is $57.
> Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 5.9 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
> In each of the following cases, find the unknown variable. Ignore taxes. Accounting Break-Even Unit Variable Unit Price Cost Fixed Costs Depreciation 86,300 $ 42 $30 $ 820,000 143,806 81 2,750,000 $1,150,000 7,835 97 235,000 105,000
> Down Under Boomerang, Inc., is considering a new three- year expansion project that requires an initial fixed asset investment of $1.65 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will b
> Eckely, Inc., recently issued bonds with a conversion ratio of 14.5. If the stock price at the time of the bond issue was $53.16, what was the conversion premium?
> Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $2.65 per gallon. Gasoline is currently selling on the wholesale market at $2.34 per gallon and has a standard deviation of 62 percent. If the r
> Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114. a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring commissions? b. In part (a), supp
> What is the price of a 15-year, zero coupon bond paying $1,000 at maturity, assuming semiannual compounding, if the YTM is: a. 6 percent? b. 8 percent? c. 10 percent?
> What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye
> Stone Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share pr
> For the company in Problem 2, show how the equity accounts will change if: a. The company declares a four-for-one stock split. How many shares are outstanding now? What is the new par value per share? b. The company declares a one-for-five reverse stock
> For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?
> Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. a. Payback period. b. Internal rate of return. c. Profi
> What is the difference between an American option and a European option?
> What are some of the potential problems with looking at IRRs when evaluating a leasing decision?
> It is sometimes suggested that firms should follow a “residual” dividend policy. With such a policy, the main idea is that a firm should focus on meeting its investment needs and maintaining its desired debt−equity ratio. Having done so, a firm pays out
> Due to large losses incurred in the past several years, a firm has $2 billion in tax loss carryforwards. This means that the next $2 billion of the firm’s income will be free from corporate income taxes. Security analysts estimate that it will take many
> How does the existence of financial distress costs and agency costs affect Modigliani and Miller’s theory in a world where corporations pay taxes?
> In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? Moderate borrowing will not increase the required return on a firm’s equity. Explain.
> What are the key differences between leasing and borrowing? Are they perfect substitutes?
> Preferred stock doesn’t offer a corporate tax shield on the dividends paid. Why do we still observe some firms issuing preferred stock?
> Which of the following statements are true about the efficient market hypothesis? a. It implies perfect forecasting ability. b. It implies that prices reflect all available information. c. It implies an irrational market. d. It implies that prices do not
> David McClemore, the CFO of Ultra Bread, has decided to use an APT model to estimate the required return on the company’s stock. The risk factors he plans to use are the risk premium on the stock market, the inflation rate, and the price of wheat. Becaus
> Your company currently produces and sells steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of the following costs are not relevant? a. Land you alread
> Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? It’s IRR? Explain.
> A substantial percentage of the companies listed on the NYSE and the NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to the previous question?
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye
> A convertible bond with a par value of $1,000 has a conversion price of $72.45. What is the conversion ratio of the bond?
> Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain.
> What is the essential difference between sensitivity analysis and scenario analysis?
> What are the two options that many businesses have?
> In the aggregate, debt offerings are much more common than equity offerings and typically much larger as well. Why?
> Taxes are an important consideration in the leasing decision. Which is more likely to lease: A profitable corporation in a high tax bracket or a less profitable one in a low tax bracket? Why?
> A corollary to the Rule of 72 is the Rule of 69.3. The Rule of 69.3 is exactly correct except for rounding when interest rates are compounded continuously. Prove the Rule of 69.3 for continuously compounded interest.
> A useful rule of thumb for the time it takes an investment to double with discrete compounding is the “Rule of 72.” To use the Rule of 72, you simply divide 72 by the interest rate to determine the number of periods it takes for a value today to double.
> What is the equation for the present value of a growing perpetuity with a payment of C one period from today if the payments grow by C each period?
> A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 6.5 percent interest per week. a. What APR must the store report to its customers? What is the EAR that the customers are actua
> As discussed in the text, an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period and not at the end of the period. Show that the relationship between the value of an ordinary annuity and
> What is the value of an investment that pays $50,000 every other year forever, if the first payment occurs one year from today and the discount rate is 13 percent compounded daily? What is the value today if the first payment occurs four years from today
> What are the main differences between corporate debt and equity? Why do some firms try to issue equity in the guise of debt?
> Your financial planner offers you two different investment plans. Plan X is a $20,000 annual perpetuity. Plan Y is a 10-year, $34,000 annual annuity. Both plans will make their first payment one year from today. At what discount rate would you be indiffe
> J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,100, including a set of eight chairs. The company feels that sales will be 1,900, 2,250, 2,700, 2,45
> You purchase one call and sell one put with the same strike price and expiration date. What is the delta of your portfolio? Why?
