You are evaluating a project that costs $75,000 today. The project has an inflow of $155,000 in one year and an outflow of $65,000 in two years. What are the IRRs for the project? What discount rate results in the maximum NPV for this project? How can you determine that this is the maximum NPV?
> An election is being held to fill three seats on the board of directors of a firm in which you hold stock. The company has 17,400 shares outstanding. If the election is conducted under cumulative voting and you own 300 shares, how many more shares must y
> Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than 23.7 percent in a given year? What range of returns would yo
> Erna Corp. has 9 percent coupon bonds making annual payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How many years do these bonds have left until they mature?
> Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 15 units per year at $275,000 net cash flow per unit for the next five years. The enginee
> Four years ago, Bling Diamond, Inc., paid a dividend of $1.51 per share. The company paid a dividend of $1.87 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends wil
> Suppose the market is semistrong form efficient. Can you expect to earn excess returns if you make trades based on: a. Your broker’s information about record earnings for a stock? b. Rumors about a merger of a firm? c. Yesterday’s announcement of a succe
> You are determining whether your company should undertake a new project and have calculated the NPV of the project using the WACC method when the CFO, a former accountant, notices that you did not use the interest payments in calculating the cash flows o
> The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of $315,000 for the firm during the first year, and the c
> With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they decided to focus on surf print table and floor lamps
> Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $25,000 that matures in one year. The current market value of the firm’s assets is $27,200. The standard deviation of the return on the firm’s assets is 53 percent per ye
> Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstandin
> Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that will cost $145 million to build. When the company issues new equity, it incurs a flotation cost of 8 percent. The flotation cost on new debt is 3.5 percent. What is
> Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 95 percent of face value. The issue makes semiannual payments and has a coupon rate of 7 percent. What is the compan
> You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A $180,000 .75 Stock B $290,000 1.25 Stock C 1.45 Risk-fre
> You bought one of Bergen Manufacturing Co.’s 6.4 percent coupon bonds one year ago for $1,032.50. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 5.5 per
> You purchase a bond with a coupon rate of 5.9 percent and a clean price of $984. If the next semiannual coupon payment is due in four months, what is the invoice price?
> Allied Products, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $13.5 million for the next 10 years. Allied Products uses a discount rate of 13 percent for new product launches. The initial investment
> What is the quirk in the tax code that makes a levered firm more valuable than an otherwise identical unlevered firm?
> Juggernaut Satellite Corporation earned $23 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year divide
> Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4 percent, forever. The current stock price is $53. What is next year’s dividend payment if the req
> A famous economist just announced in The Wall Street Journal his findings that the recession is over and the economy is again entering an expansion. Assume market efficiency. Can you profit from investing in the stock market after you read this announcem
> This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? (Hint: Search between 20 percent and 70 percent.) When should we take this project?
> Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,200, and Project B has an NPV of $1,600. As a result of taking Project A, the standard deviation of the return on the firm’s assets wil
> The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. The market value of Knight Company’s 6 percent bonds is $1.4 million. Financial information for the two firms appears here. All
> Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: a. What is the systematic risk of the stock return? b. Suppose unexpected bad news about the firm
> Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of .55. It’s considering building a new $50 million manufacturing facility. This new plant is expected to generate aftertax
> Consider the following information about three stocks: a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The standard deviation? b. If the expected T-bill rate is 3.80
> Refer to Table 10.1 in the text and look at the period from 1973 through 1980. a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. b. Calculate the standard deviation of Treasur
> True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.
> You purchase a bond with an invoice price of $950. The bond has a coupon rate of 5.2 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?
> Hickock Mining is evaluating when to open a gold mine. The mine has 44,000 ounces of gold left that can be mined, and mining operations will produce 5,500 ounces per year. The required return on the gold mine is 12 percent, and it will cost $29 million t
> Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $750,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven years. Op
> Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $.90 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1 percent, forever. The appropriate rate of return on the stock is 10 per
> Your broker commented that well-managed firms are better investments than poorly managed firms. As evidence your broker cited a recent study examining 100 small manufacturing firms that eight years earlier had been listed in an industry magazine as the b
> An investment under consideration has a payback of six years and a cost of $573,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash flows are conventional.
> Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firm’s assets is $21,700. The standard deviation of the return on the firm’s assets is 38 percent per year, and
> You own a portfolio that has $2,700 invested in Stock A and $3,800 invested in Stock B. If the expected returns on these stocks are 9.5 percent and 14 percent, respectively, what is the expected return on the portfolio?
> Acetate, Inc., has equity with a market value of $29.5 million and debt with a market value of $8 million. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the com
> Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding
> Critically evaluate the following statement: Playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.
> Using the CAPM, show that the ratio of the risk premiums on two assets is equal to the ratio of their betas.
> A stock has had the following year-end prices and dividends: What are the arithmetic and geometric returns for the stock? Year Price Dividend $73.18 2 77.98 $ 1.15 3 69.13 1.25 4 84.65 1.36 91.37 1.47 6 103.66 1.60
> RAK Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6.4 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. What coupon rate should the company
> Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town and tries to sell it but to no avail. Finally, ACME stu
> A firm is considering an investment in a new machine with a price of $15.6 million to replace its existing machine. The current machine has a book value of $5.4 million and a market value of $4.1 million. The new machine is expected to have a four-year l
> The Durkin Investing Agency has been the best stock picker in the country for the past two years. Before this rise to fame occurred, the Durkin newsletter had 200 subscribers. Those subscribers beat the market consistently, earning substantially higher r
> Empirical research has found that there have been significant increases in stock price on the day an initial dividend (i.e., the first time a firm pays a cash dividend) is announced. What does this finding imply about the information content of initial d
> A stock is currently priced at $35. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 7 percent per year, compounded continuously, and the standard deviation of the stock’s return is infinitely large. What i
> In Problem 1, what was the dividend yield? The capital gains yield?
> Treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.
> Dream, Inc., has debt outstanding with a face value of $5 million. The value of the firm if it were entirely financed by equity would be $18.65 million. The company also has 360,000 shares of stock outstanding that sell at a price of $41 per share. The c
> RightPrice Investors, Inc., is considering the purchase of a $415,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $50,000 in
> 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 8 percent or paying the cash out to investors who would invest in the
> Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 18,000 shares of stock outstanding, currently worth $35 per share. Beta Corporation uses leverage in its capital
> Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $6.8 million.
> A stock has had returns of 24 percent, 12 percent, 38 percent, 22 percent, 21 percent, and 216 percent over the last six years. What are the arithmetic and geometric returns for the stock?
> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says, “You see all those bumper stickers and T-shirts that say ‘got m
> You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What is the annual dividend? What was the closing price for this stock that appeared in yesterday’s paper
> TransTrust Corp. has changed how it accounts for inventory. Taxes are unaffected, although the resulting earnings report released this quarter is 20 percent higher than what it would have been under the old accounting system. There is no other surprise i
> Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 20 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c. 5 percent
> An investment project costs $17,500 and has annual cash flows of $4,300 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10 percent? If it is 17 percent?
> Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent. Project A: Nagano NP-30. Professional clubs that will take an initial investment of $660,000 at Time 0.
> In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project were a success. This implies that if the proj
> Bridgton Golf Academy is evaluating new golf practice equipment. The “Dimple-Max” equipment costs $64,000, has a three-year life, and costs $7,500 per year to operate. The relevant discount rate is 12 percent. Assume that the straight-line depreciation m
> National Business Machine Co. (NBM) has $4.5 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
> The Dart Company is financed entirely with equity. The company is considering a loan of $2.6 million. The loan will be repaid in equal installments over the next two years, and it has an interest rate of 8 percent. The company’s tax rate is 35 percent. A
> Floyd Industries stock has a beta of 1.15. The company just paid a dividend of $.85, and the dividends are expected to grow at 4.5 percent per year. The expected return on the market is 11 percent, and Treasury bills are yielding 3.9 percent. The most re
> In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?
> You find a certain stock that had returns of 12 percent, 215 percent, 13 percent, and 27 percent for four of the last five years. If the average return of the stock over this period was 10.5 percent, what was the stock’s return for the missing year? What
> The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what
> Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $5 in perpetuity, beginning five years from now. If the market requires a return of 4.7 percent on this investment, how much does a share of preferred stoc
> Suppose the president of the company in the previous problem stated that the company should increase the amount of debt in its capital structure because of the tax-advantaged status of its interest payments. His argument is that this action would increas
> In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within 610 percent. Calculate the best-case and worst-case NPV figures.
> In spite of the theoretical argument that dividend policy should be irrelevant, the fact remains that many investors like high dividends. If this preference exists, a firm can boost its share price by increasing its dividend payout ratio. Explain the fal
> Newtech Corp. is going to adopt a new chip-testing device that can greatly improve its production efficiency. Do you think the lead engineer can profit from purchasing the firm’s stock before the news release on the device? After reading the announcement
> One thing put–call parity tells us is that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three. For example, how can we replicate a share of stock using a call, a put, and a T-bill?
> A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded continuously. If the exercise price is $0, what is the pr
> Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 8 percent. a. Based on the payback period, which project should be taken? b. Based on the NPV, which project sh
> In the previous problem, suppose you think it is likely that expected sales will be revised upward to 9,500 units if the first year is a success and revised downward to 3,800 units if the first year is not a success. a. If success and failure are equally
> Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $235,000. The company is an ongoing operation, but it expects competitive pressures to erode its real net cash flows at 3 percent per year i
> High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments wi
> Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $30. At the close of business the day before the ex-rights day, the company
> Franklin Corporation 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 315,000 shares of stock outstanding. Under Plan II, there would be 225,000 shares of stock
> 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
> The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid
> Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is .35. The industry average beta is 1.2. The market risk
> Cavo Corporation expects an EBIT of $26,850 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The tax rate is 35 percent. a. What is the current value of the company? b. Suppose the company can borrow at 8 perce
> Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $19 million, and the company paid $1,150,000 in flotation costs. In addition, the equity issued had a flotation cost of 7 percent of the amount raised, whereas the d
> Stock Y has a beta of 1.20 and an expected return of 12.7 percent. Stock Z has a beta of .90 and an expected return of 11.1 percent. If the risk-free rate is 4.5 percent and the market risk premium is 7.1 percent, are these stocks correctly priced?
> Refer back to Table 10.2(given below). What range of returns would you expect to see 68 percent of the time for large-company stocks? What about 95Â percent of the time? Table 10.2 Total Annual Returns, U.S. Securities Markets, 1926-2014
> Laurel, Inc., and Hardy Corp. both have 6.5 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 3 years to maturity, whereas the Hardy Corp. bond has 20 years to maturity. If i
> Mau Corporation stock currently sells for $64.87 per share. The market requires a return of 10.5 percent on the firm’s stock. If the company maintains a constant 5 percent growth rate in dividends, what was the most recent dividend per share paid on the
> If the market places the same value on $1 of dividends as on $1 of capital gains, then firms with different payout ratios will appeal to different clienteles of investors. One clientele is as good as another; therefore, a firm cannot increase its value b
> Flatte Restaurant is considering the purchase of a $7,500 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine will produce 1,300 soufflés per year, with each costing $
> All else being the same, which has more interest rate risk, a long-term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon bond compared to a short-term, low coupon bond?
> Your aunt is in a high tax bracket and would like to minimize the tax burden of her investment portfolio. She is willing to buy and sell to maximize her aftertax returns, and she has asked for your advice. What would you suggest she do?
> Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $475,000, his three-year contract states that his compensation will include 20,000 at-the-money European call options on
> The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows: Suppose the relevant discount rate is 12 percent per year. a. Compute the profitability index for each of the three projects. b. Compute the NP
> Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8.5 percent, has a YTM of 7 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon
