You’ve worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .64 percent per month. In addition, 5 percent of the amount that you borrow must be deposited in a non-interest-bearing account. Assume that your bank uses compound interest on its line of credit loans.
a. What is the effective annual interest rate on this lending arrangement?
b. Suppose you need $15 million today and you repay it in six months. How much interest will you pay?
> The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.20 for each of the 10 million shares sold. The initial offering price was $20 per share, and the stock rose to $25.60 per share in the first few minutes of trading.
> In the previous problem, if the SEC fi ling fee and associated administrative expenses of the offering are $900,000, how many shares need to be sold?Previous problem:The Educated Horses Corporation needs to raise $60 million to finance its expansion into
> You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 10.5 percent. If your goal is to create a portfolio with an expected return of 12.4 percent, how much m
> The Educated Horses Corporation needs to raise $60 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 $21 per share and the company’s
> The Woods Co. and the Mickelson Co. have both announced IPOs at $40 per share. One of these is undervalued by $7, and the other is overvalued by $5, but you have no way of knowing which is which. You plan to buy 1,000 shares of each issue. If an issue is
> Red 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 pric
> The Clifford Corporation has announced a rights offer to raise $40 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $5,000 per page. The stock c
> Big Time, Inc., is proposing a rights offering. Presently there are 500,000 shares outstanding at $81 each. There will be 60,000 new shares offered at $70 each.a. What is the new market value of the company?b. How many rights are associated with one of t
> Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant
> For the firm in Problem 7, suppose the book value of the debt issue is $80 million. In addition, the company has a second debt issue on the market, a zero coupon bond with seven years left to maturity; the book value of this issue is $35 million, and the
> Jiminy’s Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 95 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 after tax cost of debt?c. Whi
> Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 7 percent annually. What i
> Holdup Bank has an issue of preferred stock with a $6 stated dividend that just sold for $96 per share. What is the bank’s cost of preferred stock?
> You own a portfolio that is 60 percent invested in Stock X, 25 percent in Stock Y, and 15 percent in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent, and 13 percent, respectively. What is the expected return on the portfolio
> Suppose In a Found Ltd. just issued a dividend of $1.43 per share on its common stock. The company paid dividends of $1.05, $1.12, $1.19, and $1.30 per share in the last four years. If the stock currently sells for $45, what is your best estimate of the
> Stock in Country Road Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $1.60 per share, and dividends are expected to grow at a 6 percent annual rate
> The Up and Coming Corporation’s common stock has a beta of 1.05. If the risk-free rate is 5.3 percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital?
> Given the following information for even flow Power Co., find the WACC. Assume the company’s tax rate is 35 percent.Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make se
> Jungle, Inc., has a target debtequity ratio of 1.05. Its WACC is 9.4 percent, and the tax rate is 35 percent.a. If Jungle’s cost of equity is 14 percent, what is its pretax cost of debt?b. If instead you know that the after tax cost of debt is 6.8 percen
> In Problem 12, suppose the most recent dividend was $4.10 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The
> Filer Manufacturing has 11 million shares of common stock outstanding. The current share price is $68, and the book value per share is $6. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a face value of $70 million, has
> Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix of the text to answer the following qu
> You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fi ll in the rest of the following table:,,,
> Suppose the returns on large-company stocks are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix of the text to determine the probability that in any gi
> 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 perc
> Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2007? Why do you think they were so high during this period? What relationship underlies your answer?Table 12.1:Figure 12.7:,,,
> Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?Problem 10:suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over th
> For Problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.Problem 9:You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 7 pe
> You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 7 percent, - 12 percent, 11 percent, 38 percent, and 14 percent.a. What was the arithmetic average return on Crash-n-Burn’s stock over this five year period?
> Refer to Table 12.1 in the text and look at the period from 1970 through 1975.Table 12.1:a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period.b. Calculate the standard deviation of the returns for large-compan
> Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y.,,,
> Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.9 percent. The tax rate is 35 percent. What is the company’s target debt equity ratio?
> What was the average annual return on large-company stock from 1926 through 2007:a. In nominal terms?b. In real terms?
> Suppose you bought a 7 percent coupon bond one year ago for $1,040. The bond sells for $1,070 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?b. What was your total nominal rate of return on
> Rework Problems 1 and 2 assuming the ending share price is $83.Problems 1:what was the dividend yield? The capital gains yield?Problems 2:Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had a
> In Problem 1, what was the dividend yield? The capital gains yield?Problem 1:Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an ending share price of $102. Compute the percentage total re
> Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an ending share price of $102. Compute the percentage total return
> Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 23,000 solaris, debt in the amount of 9,000 solaris, and equity of 14,000 solaris.a. If the current exchange ratio is 1.20 solaris p
> You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 24 million. The cash flows from the project would be SF 6.6 million per year for the next five years. The dollar required retu
> Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.1 million in year 1, €3.4 million in year 2, and €4.3 million in year 3. The current spot exchange rate is $1.28€; the
> The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 500 bicycles. The average cost to the shop of a bicycle is $490. The owner knows that only 96 percent of the customers
> Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The required return is .95 percent per month.,,,
> Sixx AM Manufacturing has a target debt equity ratio of .65. Its cost of equity is 15 percent, and its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company’s WACC?
> The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. The required return is 2.5 percent per period.,,,
> Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $20,000
> Bird’s Eye Tree houses, 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
> Rework Problem 15 assuming:Problem 15:Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Wildcat’s purchases from suppliers in a quarter are equal to 45 percent of the next quarter’s
> Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the year after this one are projected at $240 million. Accounts receivable at the beginning of the year were $68 million. Wildcat has a
> A bank offers your firm a revolving credit arrangement for up to $70 million at an interest rate of 2.3 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent against the unused portion of the credit line, to be d
> Fly chucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $9,000 would be spent. Current earnings are $1.30 per share, and the stock currently sells for $64 per share. There are 1,000 shares outstanding. Ignore ta
> In the previous problem, suppose you want only $750 total in dividends the first year. What will your homemade dividend be in two years?Previous problem:You own 1,000 shares of stock in Avondale Corporation. You will receive a $2.30 per share dividend in
> You own 1,000 shares of stock in Avondale Corporation. You will receive a $2.30 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $53 per share. The required return on Avondale stock is 15 percent. What is the curr
> The Down and Out Co. just issued a dividend of $2.40 per share on its common stock. The company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. If the stock sells for $52 a share, what is the company’s cost of eq
> You own a portfolio that has $2,950 invested in Stock A and $3,700 invested in Stock B. If the expected returns on these stocks are 11 percent and 15 percent, respectively, what is the expected return on the portfolio?
> The Veblen Company and the Knight Company are identical in every respect except that Veblen 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 f
> Until It Sleeps Corporation expects an EBIT of $14,000 every year forever. Until It Sleeps currently has no debt, and its cost of equity is 16 percent. The firm can borrow at 9 percent. If the corporate tax rate is 35 percent, what is the value of the fi
> Tool Manufacturing has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has $95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15 percent. What is the value of the firm acc
> Knight 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 $35. At the close of business the day before the ex-rights day, the compan
> Roth Corp. wants to raise $5.6 million via a rights offering. The company currently has 650,000 shares of common stock outstanding that sell for $50 per share. Its underwriter has set a subscription price of $23 per share and will charge the company a 6
> Show that the value of a right just prior to expiration can be written as:Value of a right = PRO – PX = (PRO – PS)/(N + 1) Where P RO , P S , and P X stand for the rights-on price, the subscription price, and the ex-rights price, respectively, and N is t
> Floyd Industries stock has a beta of 1.50. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return of the market is 12 percent, and Treasury bills are yielding 5.5 percent. The most recent stock
> Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 34 percent, what is the after tax cost of Ying’s debt?,,,
> Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $15 million, and the company paid $850,000 in flotation costs. In addition, the equity issued had a flotation cost of 7 percent of the amount raised, whereas the deb
> Scanlin, Inc., is considering a project that will result in initial after tax cash savings of $2.7 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefinitely. The firm has a target debt–equity ratio of
> Stock Y has a beta of 1.3 and an expected return of 18.5 percent. Stock Z has a beta of .70 and an expected return of 12.1 percent. If the risk-free rate is 8 percent and the market risk premium is 7.5 percent, are these stocks correctly priced?
> Assume that the historical return on large-company stocks is a predictor of the future returns. What return would you estimate for large company stocks over the next year? The next 5 years? 20 years? 30 years?
> Over a 40-year period an asset had an arithmetic return of 15.3 percent and a geometric return of 11.9 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5 years? 10 years? 20 years?
> In Problem 18, what is the probability that the return is less than -100 percent (think)? What are the implications for the distribution of returns?Problem 18:Assuming that the returns from holding small-company stocks are normally distributed, what is t
> Suppose the returns on long-term corporate bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than - 2.2 percent in a given year? What range of returns would yo
> In an effort to capture the large jet market, Airbus invested $13 billion developing its A380, which is capable of carrying 800 passengers. The plane has a list price of $280 million. In discussing the plane, Airbus stated that the company would break ev
> Hybrid cars are touted as a “green” alternative; however, the fi nancial aspects of hybrid ownership are not as clear. Consider the 2006 Honda Accord Hybrid, which had a list price of $5,450 (including tax consequences) more than a Honda Accord EX sedan.
> In the previous problem, you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of clubs are known with certainty; only the sales gained
> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $750 per set and have a variable cost of $330 per set. The company has spent $150,000 for a marketing study that determined the company will sell 51,000 sets per year for
> You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units per year; price per unit will be $18,000, variable cost
> Asset W has an expected return of 15.2 percent and a beta of 1.25. If the risk-free rate is 5.3 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portf
> In the previous problem, what is the degree of operating leverage at the given level of output? What is the degree of operating leverage at the accounting break-even level of output?Previous problem:Consider a four-year project with the following informa
> Consider a four-year project with the following information: initial fixed asset investment = $490,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; variable costs = $19; fixed costs = $210,000; quantity so
> A stock has had the following yearend prices and dividends:What are the arithmetic and geometric returns for the stock?
> A stock has had returns of 3 percent, 38 percent, 21 percent, -15 percent, 29 percent, and - 13 percent over the last six years. What are the arithmetic and geometric returns for the stock?
> You find a certain stock that had returns of 7 percent, - 12 percent, 18 percent, and 19 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
> You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $1,030. 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 7 pe
> Keira Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $71. The current price is $76 per share, and there are 19 million shares outstanding. The rights offer would raise a total of $60 million. What is the
> In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $98 per share? (Assume the PE ratio remains constant.) What is the NPV of this investment? Does any dilution take place?Previous prob
> The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent fi nancial information for the company is shown here:MHMM is considering an investment that has the same PE ratio as the fi rm. The cost of the investment
> Teardrop, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and no debt. The stock sells for $50 per share, but the book value per share is $18. Net income is currently $17 million. The new facility will cost $
> A stock has a beta of 1.35 and an expected return of 16 percent. A risk-free asset currently earns 4.8 percent.a. What is the expected return on a portfolio that is equally invested in the two assets?b. If a portfolio of the two assets has a beta of .95,
> In Problem 27, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes in the quantity supplied? What about the sensitivity of
> Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $3,200,000 investment in threading equipment to get the project started; the project will last for five years. The accoun
> Show that if we consider the effect of taxes, the degree of operating leverage can be written as: DOL = 1 + [FC × (1 - T ) - T × D ] / OCF Notice that this reduces to our previous result if T = 0. Can you interpret this in words?
> This problem concerns the effect of taxes on the various break-even measures.a. Show that, when we consider taxes, the general relationship between operating cash flow, OCF, and sales volume, Q , can be written as:b. Use the expression in part (a) to fin
> From our discussion of the Fisher effect in Chapter 7, we know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as:1 + r = (1 + R)/ (1 + h)This is the domestic Fisher effect.a. What is the n
> In the previous problem, assume the equity increases by 1,250 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet look like?Previous problem:Atreides International has oper
> In Problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same.Problem 15:Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to t
> This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a fi nancial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm tha
> Trower Corp. has a debtequity ratio of 1.20. 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
> Use the results of Problem 26 to find the degree of operating leverage for the company in Problem 27 at the base-case output level of 35,000 units. How does this number compare to the sensitivity figure you found in Problem 28? Verify that either approac
> A stock has an expected return of 14 percent, its beta is 1.45, and the expected return on the market is 11.5 percent. What must the risk-free rate be?
> Use the results of Problem 25 to find the accounting, cash, and financial break-even quantities for the company in Problem 27
> Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .25, what is the expecte
> Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?
