Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions: • The investor’s required rate of return is 12 percent. • The expected level of earnings at the end of this year (E1) is $4.00. • The firm follows a policy of retaining 30 percent of its earnings. • The return on equity (ROE) is 15 percent. • Similar shares of stock sell at multiples of 13.3325 times earnings per share. Now show that you get the same answer using the discounted dividend model.
> Tellington Inc. recently discussed issuing a 10-yearmaturity bond with the firm’s investment banker. The firm was advised that it would have to pay 8 to 9 percent on the bonds. Using Figure 14.3, what does this rate suggest to you about
> Waygone Industries is planning on issuing 30-year bonds that will be rated AA. Use Figure 14.3 to estimate the yield to maturity on the bond issue. What is the spread to Treasury for the debt issue in basis points? Figure 14.3: Rating 1 year 2 year
> In August 2015 the capital structure of the Emerson Electric Corporation (EMR) (measured in book and market values) was as follows: What weights should Emerson use when computing the firm’s weighted average cost of capital? ($ Mil
> Carson Trucking is considering whether to expand its regional service center in Moab, Utah. The expansion will require the expenditure of $10,000,000 on new service equipment and will generate annual net cash inflows by reducing operating costs $2,500,00
> Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 10 percent annual coupon rate (with interest paid semiannually) and a 10-year maturity. The investors requir
> Gillian Stationery Corporation needs to raise $600,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an 8 percent annual coupon rate (with interest paid semiannually) and a 10-year maturity. Investors require a
> The common stock of the M&M Corporation currently sells for $60, and the dividend paid last year was $2.25. Five years ago the firm paid $2.10 per share, and dividends are expected to grow at the same annual rate in the future as they did over the past f
> The common stock for the Kingsford Corporation sells for $58 a share. Last year the firm paid a $4 dividend, which is expected to continue to grow 4 percent per year into the indefinite future. If the firm’s tax rate is 22 percent, what is the firm’s cos
> The common stock for Oxford, Inc., is currently selling for $22.50, and the firm paid a dividend last year of $1.80. The dividends and earnings per share are projected to have an annual growth rate of 4 percent into the foreseeable future. What is the co
> In the spring of 2017 the Marrion Metal Shaping Company was planning on issuing preferred stock to help finance a major plant expansion. The stock is expected to sell for $98 a share and will have a $100 par value on which the firm will pay a 10 percent
> The Shiloh Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1,000 par value bonds with a 15-year maturity and a coupon interest rate of 13 percent (with interest paid semiannually) at a p
> The preferred stock of Gator Industries sells for $35 and pays $2.75 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 500,000 more preferred shares just like the ones it currently has outstanding, it could sell
> The preferred stock of Walter Industries Inc. currently sells for $36 a share and pays a 10 percent dividend on the $25 par value of the shares annually. What is the firm’s cost of capital for the preferred stock?
> Belton Distribution Company is issuing a $1,000 par value bond that pays 7 percent annual interest (with interest paid semiannually) and matures in 15 years. Investors are willing to pay $958 for the bond. The company is in the 18 percent marginal tax br
> Fijisawa, Inc., is considering a major expansion of its top-selling product line and has estimated the following cash flows associated with the expansion. The initial outlay will be $10,800,000, and the project will generate cash flows of $1,250,000 per
> Templeton Extended Care Facilities, Inc., is considering the acquisition of a chain of cemeteries owned by the Rosewood Corporation for $400 million. Because the primary asset of this business is real estate, Templeton’s managers have determined that the
> a. Calculate the missing information for each of the above projects. b. Note that Projects C and D share the same accounting break-even. If sales are above the break-even point, which project do you prefer? Explain why. c. Calculate the cash break-even f
> The Marvel Manufacturing Company is considering whether to construct a new robotic production facility. The cost of this new facility is $600,000, and it will have a six-year life with annual depreciation expense of $100,000 and no salvage value. Expecte
> Blindfold Technologies Inc. (BTI) is considering whether to introduce a new line of hand scanners that can be used to copy material and then download it into a computer. These scanners are expected to sell for an average price of $100 each, and the compa
> Family Security is considering introducing a tiny GPS tracker that is inserted in the sole of a child’s shoe, which would then allow for the tracking of that child if he or she was ever lost. You have prepared the following estimates fo
> Managers at the Physicians’ Bone and Joint (PB&J) Clinic are considering whether to purchase a newly developed MRI machine that the manufacturer tells them will provide the basis for better diagnoses of foot and knee problems. The n
> Floating Homes, Inc., is a manufacturer of luxury pontoon and houseboats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three categories based on selling price (high, medium
> Rao Roofing of Stillwater, Oklahoma, is also considering the acquisition of Simpkins Storage Company. Rao’s management team has analyzed the annual cash flows for Simpkins and come up with these estimates for the three states of the eco
> Koch Transportation is contemplating the acquisition of LH Transport, a competing trucking firm. Koch’s CFO estimates that during the next year LH Transport’s flows from the acquisition will vary depending on the state
> Go-Power Batteries has developed a high-voltage nickel–metal hydride battery that can be used to power hybrid automobiles, and it can sell the technology immediately to Toyota for $10 million. Alternatively, Go-Power Batteries can invest $50 million in a
> Star Industries owns and operates landfills for several municipalities throughout the U.S. Midwest. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill (required
> You are considering introducing a new Tex-Mex–Thai fusion restaurant. The initial outlay for this new restaurant is $6 million, and the present value of the free cash flows (excluding the initial outlay) is $5 million, so the project, as it is now envisi
> B&L, Inc.’s CFO anticipates that if the firm experiences a 10 percent increase in sales, its net operating profits will increase by 60 percent. If B&L’s NOI is $15 million, what level of fixed costs does the firm have?
> Last year Baker-Huggy, Inc. had sales of $500,000, fixed costs of $100,000 and net operating income (NOI) of $30,000. If sales increase by 20 percent, by how much will the firm’s NOI increase? What would happen to the firm’s NOI if sales decreased by 20
> Niece Equipment Rentals of Del Valle, Texas, has recently been approached about the prospect of purchasing a large construction crane. Owner Al Niece estimates that the crane will rent for $500 an hour, but operator, fuel, insurance, and miscellaneous e
> May born Enterprises, LLC runs a number of sporting goods businesses and is currently analyzing whether to start a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of the unit
> The cash flows for three independent projects are as follows: a. Calculate the IRR for each of the projects. b. If the discount rate for all three projects is 10 percent, which project or projects would you want to undertake? c. What is the NPV of each
> Your investment advisor has offered you an investment that will provide you with a single cash flow of $10,000 at the end of 20 years if you pay premiums of $200 per year in the interim period. Specifically, the annual premiums will begin immediately and
> Jella Cosmetics is considering a project that will cost $800,000 and is expected to last for 10 years and produce future cash flows of $175,000 per year. If the appropriate discount rate for this project is 12 percent, what is the project’s IRR?
> Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project will require an initial cash outlay of $8,000,000 and will generate annual net cash inflows of $2,000,000 per year for six years. Calculate the proje
> Walter White, Inc.’s return on equity is 13 percent, and management has plans to retain 20 percent of earnings for investment in the company. a. What will be the company’s growth rate? b. How would the growth rate change if management (i) increased retai
> Wayne, Inc.’s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent. a. What is the value of the stock to you, given a 1
> Given that a firm’s return on equity is 18 percent and management plans to retain 40 percent of earnings for investment purposes, what will be the firm’s growth rate? If the firm decides to increase its retention rate, what will happen to the value of it
> The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years. a. If your required rate of return is 10.5 percent, what is the value of the stock to you? b. Should
> J. Pinkman Motors, Inc., paid a $3.75 dividend last year. If J. Pinkman’s return on equity is 24 percent and its retention rate is 25 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
> The owner of the Petreno Pharmaceuticals Company is evaluating the expected annual sales for a new line of facial care products and estimates that there is a 60 percent chance that the product line will be extremely successful, in which case it will gene
> Header Motor, Inc., paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
> If the Stanford Corporation’s net income is $200 million, its common equity is $833 million, and management plans to retain 70 percent of the firm’s earnings to finance new investments, what will be the firm’s growth rate?
> Kendra Corporation’s preferred shares are trading for $25 in the market and pay a $4.50 annual dividend. Assume that the market’s required yield is 14 percent. a. What is the stock’s value to you, the investor? b. Should you purchase the stock?
> You own 200 shares of Somner Resources preferred stock, which currently sells for $40 per share and pays annual dividends of $3.40 per share. If the market’s required yield on similar shares is 10 percent, should you sell your shares or buy more?
> What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value and the market’s required yield on similar shares is 12 percent?
> Pioneer’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend. a. If the market’s required yield is 10 percent, what is the value of the stock to investors? b. Should investors acquire the stock?
> Assume the following: • The investor’s required rate of return is 15 percent. • The expected level of earnings at the end of this year (E1) is $5.00. • The retention ratio is 50 percent. • The return on equity (ROE) is 20 percent (that is, it can earn 20
> Assume the following: • The investor’s required rate of return is 13.5 percent. • The expected level of earnings at the end of this year (E1) is $6.00. • The retention ratio is 50 percent. • The return on equity (ROE) is 15 percent (that is, it can earn
> Dubai Metro’s stock price was at $100 per share when it announced that it would cut its dividends for next year from $10 per share to $6 per share, with the additional funds to be used for expansion. Prior to the dividend cut, Dubai Metro expected its di
> Duncan Motors is introducing a new product that it expects will increase its net operating income by $300,000. The company has a 34 percent marginal tax rate. This project will also produce $50,000 of depreciation per year. In addition, it will cause the
> Tyrion L.’s Gadgets Inc. is trying to decide whether to cut its expected dividends for next year from $8 per share to $5 per share in order to have more money to invest in new projects. If it does not cut the dividend, the firm’s expected rate of growth
> If Pepperdine, Inc.’s return on equity is 16 percent and the management plans to retain 60 percent of earnings for investment purposes, what will be the firm’s growth rate?
> A 20-year Fitzgerald bond pays 9 percent interest annually on a $1,000 par value. If the bond sells at $945, what is the bond’s yield to maturity? What would be the yield to maturity if the bond paid interest semiannually? Explain the difference.
> A bond’s market price is $750. It has a $1,000 par value, will mature in 8 years, and has a coupon interest rate of 9 percent annual interest but makes its interest payments semiannually. What is the bond’s yield to maturity? What happens to the bond’s y
> The market price is $900 for a 10-year bond ($1,000 par value) that pays 8 percent annual interest but makes interest payments on a semiannual basis (4 percent semiannually). What is the bond’s yield to maturity?
> Pybus, Inc., is considering issuing bonds that will mature in 20 years with an 8 percent annual coupon rate. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get an AA rating on its bonds but is not sure whet
> Enterprise, Inc., bonds have a 9 percent annual coupon rate. The interest is paid semiannually, and the bonds mature in eight years. Their par value is $1,000. If the market’s required yield to maturity on a comparable-risk bond is 8 percent, what is the
> Calculate the value of a bond that matures in 10 years and has a $1,000 par value. The annual coupon interest rate is 9 percent, and the market’s required yield to maturity on a comparable-risk bond is 15 percent. What would be the value of this bond if
> Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The coupon interest rate is 8 percent, and the market’s required yield to maturity on a comparable-risk bond is 12 percent.
> What would you expect the nominal rate of interest to be if the real rate of interest is 5 percent and the expected inflation rate is 3 percent?
> Tetious Dimensions is introducing a new product that it expects will increase its net operating income by $475,000. The company has a 30 percent marginal tax rate. This project will also produce $200,000 of depreciation per year. In addition, it will cau
> Assume the expected inflation rate is 3.8 percent. If the current real rate of interest is 6.4 percent, what should the nominal rate of interest be?
> What would you expect the nominal rate of interest to be if the real rate is 4.5 percent and the expected inflation rate is 7.3 percent?
> Stanley, Inc., issues a 15-year $1,000 bond that pays $85 annually. The market price for the bond is $960. The market’s required yield to maturity on a comparable-risk bond is 9 percent. a. What is the value of the bond to you? b. What happens to the val
> A bond of the Visador Corporation pays $70 in annual interest, with a $1,000 par value. The bond matures in 17 years. The market’s required yield to maturity on a comparable-risk bond is 8.5 percent. a. Calculate the value of the bond. b. How does the va
> A bond of the Telink Corporation pays $110 in annual interest, with a $1,000 par value. The bond matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 9 percent. a. Calculate the value of the bond. b. How does the valu
> After looking at a fixed-rate loan, Ace-Campbell Manufacturing entered into a floating-rate loan agreement. This loan is set at 40 basis points (or .40 percent) over an index based on LIBOR. Ace-Campbell is concerned that the LIBOR index may go up, causi
> Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 7 percent. a. Calculate the value of the bond. b. How does the value c
> You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The market’s required yield to maturity on a comparable-risk bond is 12 percent. a. Calculate the value of the bond. b. How does the value change if the yi
> The 15-year, $1,000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is $1,085, and the market’s required yield to maturity on a comparable-risk bond is 10 percent. a. Compute the bond’s yield to maturity.
> The Saleemi Corporation’s $1,000 bonds pay 5 percent interest annually and have 12 years until maturity. You can purchase a bond for $915. a. What is the yield to maturity on this bond? b. Should you purchase the bond if the yield to maturity on a compar
> Fruity Stones is considering introducing a variation of its current breakfast cereal, Jolt ’n Stones. This new cereal will be similar to the old with the exception that it will contain more sugar in the form of small pebbles. The new cereal will be calle
> The seven-year $1,000 par bonds of Vail Inc. pay 9 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,100. a. Determine the yield to maturity. b. What is the value
> Corporation’s bonds mature in 15 years and pay 9 percent interest annually. If you purchase the bonds for $1,250, what is your yield to maturity?
> A 14-year, $1,000 par value Fingen bond pays 9 percent interest annually. The market price of the bond is $1,100, and the market’s required yield to maturity on a comparable-risk bond is 10 percent. a. Compute the bond’s yield to maturity. b. Determine t
> Hoyden Company’s bonds mature in 15 years and pay 8 percent interest annually. If you purchase the bonds for $1,175, what is their yield to maturity?
> Five years ago XYZ International issued some 30-year zero-coupon bonds that were priced with a market’s required yield to maturity of 8 percent. What did these bonds sell for when they were issued? Now that five years have passed and the market’s require
> Doisneau 20-year bonds have a 10 percent annual coupon interest, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a 12 percent market’s required yield to maturity, are these premium or discount bond
> The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating interest rate that was 30 basis points (.30 percent) over an index b
> The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends: a. Calculate the annual rate of return for each year from this information. b. What is the arithmetic average
> Marsh Inc. had the following end-of-year stock prices over the last five years and paid no cash dividends: a. Calculate the annual rates of return for each year from this information. b. What is the arithmetic average rate of return earned by investing
> Syntex, Inc., is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return? Common Stock A Common Stock B Probability Retur
> Captain’s Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cere
> The Dunder Muffin Company is considering purchasing a new commercial oven that costs $350,000. This new oven will produce cash inflows of $125,000 at the end of Years 1 through 10. In addition to the cash inflows, at the end of Year 5 there will be a net
> B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.9 percent. Calculate the following investment’s expected return and its standard deviation. Should Gautney invest in this security?
> From the following price data, compute the annual rates of return for Asman and Salinas. How would you interpret the relationship between the annual rates of return of these companies? Time Asman Salinas 1 $10 $30 2 12 28 3 11 32 13 35 44
> Blaxo Balloons manufactures and distributes birthday balloons. At the beginning of the year, Blaxo’s common stock was selling for $20, but by year end, it was only $18. If the firm paid a total cash dividend of $2 during the year, what rate of return wou
> The common stock of Placo Enterprises had a market price of $12 on the day you purchased it just one year ago. During the past year, the stock paid a $1 dividend and closed at a price of $14. What rate of return did you earn on your investment in Placo’s
> The S&P 500 Index represents a portfolio comprised of 500 large publicly traded companies. On December 24, 2007, the index had a value of 1,410, and on December 23, 2008, the index was approximately 890. If the average dividend paid on the stocks in the
> Use the following end-of-year price data to answer the following questions for the Harris and Pinwheel companies. a. Compute the annual rates of return for each time period and for both firms. b. Calculate both the arithmetic and the geometric mean rat
> On December 24, 2007, the common stock of Google Inc. (GOOG) was trading for $700.73. One year later the shares sold for only $298.02. Google has never paid a common stock dividend. What rate of return would you have earned on your investment had you pur
> You plan to retire in 10 years and buy a house in Oviedo, Florida. The house you are looking at currently costs $100,000 and is expected to increase in value each year at a rate of 5 percent. Assuming you can earn 10 percent annually on your investments
> To pay for your education, you’ve taken out $25,000 in student loans. If you make monthly payments over 15 years at 7 percent compounded monthly, how much are your monthly student loan payments?
> Emily Morrison purchased a new house for $150,000. She paid $30,000 up front and agreed to pay the rest over the next 25 years in 25 equal annual payments that include both principal and 10 percent compound interest on the unpaid balance. What will these
> Aero Manufacturing Company is working on a new version of its tried-and-true wind-powered water pump. For 15 years, the firm had manufactured replacement parts for older-style windmills used on farms and ranches throughout the U.S. Southwest. However, th
> You have an opportunity to make an investment that will pay $100 at the end of the first year, $400 at the end of the second year, $400 at the end of the third year, $400 at the end of the fourth year, and $300 at the end of the fifth year. a. Find the p
> You are given three investment alternatives to analyze. The cash flows from these three investments are as follows: What is the present value of each of these three investments if the appropriate discount rate is 10 percent? End of Year A B C 1 $2,
> Your firm has taken cost-saving measures that will provide a benefit of $10,000 in the first year. These cost savings will decrease each year at a rate of 3 percent forever. If the appropriate interest rate is 6 percent, what is the present value of thes
> As a result of winning the Gates Energy Innovation Award, you have been awarded a growing perpetuity. The first payment will occur in a year and will be for $20,000. You will continue receiving annual monetary awards forever, with each award increasing b
