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fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
The next dividend payment by SAF, Inc., will be $2.50 per share. The dividends are anticipated to maintain a 5 percent growth rate, forever. If SAF stock currently sells for $48.00 per share, what is
Coca-Cola (KO) is a dividend-paying company. Recently, dividends for Coca-Cola have increased at about 5.5 percent per year. Find the most recent closing monthly stock price under the “Mthly. Adj.
Go to www.dividenddiscountmodel.com and enter ONE (for Bank One) as the ticker symbol. You can enter a required return in the Discount Rate box and the site will calculate the stock price using the
Cannone Corporation will pay a $4.00 per share dividend next year. The company pledges to increase its dividend by 4 percent per year, indefinitely. If you require a 13 percent return on your
Shocking Co. is expected to maintain a constant 7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.2 percent, what is the required return on the power
Suppose you know that a company’s stock currently sells for $60 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided
Kiessling Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this
Sowell, Inc., has an issue of preferred stock outstanding that pays an $8.50 dividend every year, in perpetuity. If this issue currently sells for $124 per share, what is the required return?
Smashed Pumpkin Farms (SPF) just paid a dividend of $3.00 on its stock. The growth rate in dividends is expected to be a constant 7.5 percent per year, indefinitely. Investors require an 18 percent
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company
Corn, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $2 per share for each of the next four years, and
South Side Corporation is expected to pay the following dividends over the next four years: $6.50, $5, $3, and $2. Afterwards, the company pledges to maintain a constant 5 percent growth rate in
Super Growth Co. is growing quickly. Dividends are expected to grow at a 32 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required
Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year,
Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return
Fernandez Corporation stock currently sells for $45 per share. The market requires a 12 percent return on the firm’s stock. If the company maintains a constant 8 percent growth rate in dividends,
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If
Bruin Bank just issued some new preferred stock. The issue will pay an $8 annual dividend in perpetuity, beginning six years from now. If the market requires a 6 percent return on this investment,
Consider four different stocks, all of which have a required return of 20 percent and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current
Tulip Mania, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should they accept either of them?
Warf Co. just paid a dividend of $4.00 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $104.05 and all the dividend information remains the same. What required return must investors be
An investment project provides cash inflows of $780 per year for eight years. What is the project payback period if the initial cost is $3,000? What if the initial cost is $5,000? What if it is
An investment project has annual cash inflows of $7,000, $7,500, $8,000, and $8,500, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost
An investment project costs $8,000 and has annual cash flows of $1,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5
The Moby Computer Corporation is trying to choose between the following two mutually exclusive design projects:a. If the required return is 9 percent and Moby Computer applies the profitability index
Bumble’s Bees, Inc., has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return was 21
Kong Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:a. If the company requires a 10 percent return on its investments, should it accept this project? Why?b.
A project that provides annual cash flows of $1,200 for nine years costs $6,000 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate
In 1996, Fuji Film, the Japanese manufacturer of photo film and related products, broke ground on a film plant in South Carolina. Fuji apparently thought that it would be better able to compete and
An investment has an installed cost of $412,670. The cash flows over the four-year life of the investment are projected to be $212,817, $153,408, $102,389, and $72,308. If the discount rate is zero,
An investment under consideration has a payback of seven years and a cost of $320,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain.
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
Cheesy Poofs, Inc., is looking at setting up a new manufacturing plant in South Park to produce Cheesy Poofs. The company bought some land six years ago for $5 million in anticipation of using it as
Winnebagel Corp. currently sells 20,000 motor homes per year at $45,000 each, and 8,000 luxury motor coaches per year at $78,000 each. The company wants to introduce a new portable camper to fill out
A proposed new investment has projected sales of $700,000. Variable costs are 60 percent of sales, and fixed costs are $175,000; depreciation is $75,000. Prepare a pro forma income statement assuming
A proposed new project has projected sales of $85,000, costs of $43,000, and depreciation of $3,000. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches
A piece of newly purchased industrial equipment costs $847,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
A major college textbook publisher has an existing finance textbook. The publisher is debating whether or not to produce an “essentialized” version, meaning a shorter (and lower-priced) book.
Last year, Ripa Pizza Corporation reported sales of $61,800 and costs of $26,300. The following information was also reported for the same period:Based on this information, what was Ripa Pizza’s
Consider an asset that costs $320,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
In evaluating the Escalade, under what circumstances might GM have concluded that erosion of the Denali line was irrelevant?
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $8,400,000 and will be sold for $1,600,000 at the end of the project. If
GM was not the only manufacturer looking at the big sport-utility category. Chrysler, however, initially decided not to go ahead with an entry (Chrysler later reversed course on this issue). Why
In evaluating the Escalade, what do you think GM needs to assume regarding the enormous profit margins that exist in this market? Is it likely they will be maintained when GM and others enter this
Bush Boomerang, Inc., is considering a new three year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over
In the previous problem, suppose the required return on the project is 15 percent. What is the project’s NPV?Data from problem 10Bush Boomerang, Inc., is considering a new three year expansion
Dog Up! Franks is looking at a new sausage system with an installed cost of $410,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the
Your firm is contemplating the purchase of a new $750,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $80,000 at
In the previous problem, suppose your required return on the project is 20 percent and your pretax cost savings are only $300,000 per year. Will you accept the project? What if the pretax cost
A five-year project has an initial fixed asset investment of $225,000, an initial NWC investment of $20,000, and an annual OCF of –$25,000. The fixed asset is fully depreciated over the life of the
Aguilera Acoustics (AAI), Inc., projects unit sales for a new 7-octave voice emulation implant as follows:Production of the implants will require $1,500,000 in net working capital to start and
You are evaluating two different silicon wafer milling machines. The Techron I costs $195,000, has a three-year life, and has pretax operating costs of $32,000 per year. The Techron II costs
Guthrie Enterprises needs someone to supply it with 170,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the
Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $450,000 is estimated to result in $150,000 in annual pretax cost savings.
Pags Industrial Systems Company (PISC) is trying to decide between two different conveyor belt systems. System A costs $405,000, has a three-year life, and requires $105,000 in pretax annual
Consider a project to supply 60 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $750,000 five years ago; if the
A proposed cost-saving device has an installed cost of $540,000. The device will be used in a five-year project, but is classified as three-year MACRS property for tax purposes. The required initial
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial
Bob’s Bikes Inc. (BBI) manufactures biotech sunglasses. The variable materials cost is $.74 per unit and the variable labor cost is $2.61 per unit.a. What is the variable cost per unit?b. Suppose
Everest Everwear Corporation can manufacture mountain climbing shoes for $10.94 per pair in variable raw material costs and $32 per pair in variable labor expense. The shoes sell for $95 per pair.
Covington Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,850 per unit; variable costs = $160 per unit; fixed costs = $7 million; quantity = 90,000
We are evaluating a project that costs $924,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at
A project has the following estimated data: price = $65 per unit; variable costs = $33 per unit; fixed costs = $4,000; required return = 16 percent; initial investment = $9,000; life = three years.
Consider a project with the following data: accounting break-even quantity = 18,000 units; cash break-even quantity = 12,000 units; life = five years; fixed costs = $110,000; variable costs = $20 per
At an output level of 30,000 units, you calculate that the degree of operating leverage is 3. If output rises to 36,000 units, what will the percentage change in operating cash flow be? Will the new
In the previous problem, suppose fixed costs are $150,000. What is the operating cash flow at 35,000 units? The degree of operating leverage?Data from Problem 11At an output level of 30,000 units,
A proposed project has fixed costs of $30,000 per year. The operating cash flow at 7,000 units is $63,000. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rises
At an output level of 10,000 units, you have calculated that the degree of operating leverage is 3.5. The operating cash flow is $9,000 in this case. Ignoring the effect of taxes, what are fixed
In the previous problem, what will be the new degree of operating leverage in each case?Data from Problem 14At an output level of 10,000 units, you have calculated that the degree of operating
Consider a three-year project with the following information: initial fixed asset investment = $420,000; straight-line depreciation to zero over the three-year life; zero salvage value; price = $26;
You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per
Go the St. Louis Federal Reserve web site at www.stls.frb.org and follow the “FRED®/Data” link and the “Interest Rates” link. You will find a list of links for different historical interest
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $600 per set and have a variable cost of $240 per set. The company has spent $150,000 for a marketing study that
Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $1,500,000 investment in threading equipment to get the project
Given that OSI Pharmaceuticals was up by over 900 percent for 2000, why didn’t all investors hold OSI Pharmaceuticals?
You want to find the current market risk premium. Go to money.cnn.com, follow the “Bonds & Rates” link, and the “Latest Rates” link. What is the shortest maturity interest rate shown?
Suppose a stock had an initial price of $62 per share, paid a dividend of $1.50 per share during the year, and had an ending share price of $51. Compute the percentage total return.
Download the historical stock prices for Duke Energy (DUK) under the “Mthly. Adj. Prices” link. Find the closing stock price for the beginning and end of the prior two years. Now use the annual
Given that Yahoo! was down by almost 90 percent for 2000, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Download the Monthly Adjusted Prices for Microsoft (MSFT). What is the return on the stock over the past 12 months? Now use the 1 Month Total Return and calculate the average monthly return. Is this
Rework Problems 1 and 2 assuming the ending share price is $81.Data from Problem 1Suppose a stock had an initial price of $62 per share, paid a dividend of $1.50 per share during the year, and had an
What are the best performing stocks over the past year? Go to finance.yahoo.com and select the “Stock Screener” link. You will see a “Performance” category and a pull-down menu labeled “1
Suppose you bought a 10 percent coupon bond one year ago for $1,080. The bond sells for $1,100 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment over the
What was the average annual return on large company stock from 1926 through 2000:a. In nominal terms?b. In real terms?
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: –8 percent, 13 percent, 5 percent, 16 percent, and 32 percent.a. What was the average return on
You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds one year ago for $1,020. These bonds make annual payments and mature six years from now. Suppose you decide to sell your
What are the portfolio weights for a portfolio that has 90 shares of Stock A that sell for $35 per share and 70 shares of Stock B that sell for $25 per share?
You can find estimates of beta for each company under the “Mthly. Val. Data” link. Locate the beta for AOL Time-Warner (AOL) and Dow Chemical (DOW). How has the beta for each of these companies
You own a portfolio that has $700 invested in Stock A and $2,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 18 percent, respectively, what is the expected return
You own a portfolio that is 50 percent invested in Stock X, 30 percent in Stock Y, and 20 percent in Stock Z. The expected returns on these three stocks are 10 percent, 18 percent, and 13 percent,
Which companies currently have the highest and lowest betas? Go to www.amex.com and follow the “Screening” link. Enter 0 as the maximum beta and enter search. How many stocks currently have a
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 10 percent. If your goal is to create a
A portfolio is invested 20 percent in Stock G, 70 percent in Stock J, and 10 percent in Stock K. The expected returns on these stocks are 5 percent, 16 percent, and 35 percent, respectively. What is
You own a stock portfolio invested 25 percent in Stock Q, 20 percent in Stock R, 15 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are .9, 1.4, 1.1, and 1.8,
You own a portfolio equally invested in a risk free asset and two stocks. If one of the stocks has a beta of .8 and the total portfolio is equally as risky as the market, what must the beta be for
A stock has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?
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