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Practical financial management 5th Edition William r. Lasher - Solutions
Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet.The firm is interested in acquiring a fleet of 10 company cars for its sales staff. The cars have an economic life of seven years, but Caruthers plans to keep them for only three because it
Henderson Engineering Ltd. just leased a computer-aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Henderson to purchase the machine at its fair market value as used equipment when the lease expires.
Taunton Manufacturing Inc. is a machine shop in Taunton, Massachusetts. The firm recently leased a drill press for a 20-year term at payments of $9,000 per year payable at year end. No residual value was assumed in the lease which is clearly a financing lease. Taunton can borrow at 8% and will
Wings Inc. is a commuter airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is 15 years, and no residual value is expected at its end.a. What monthly lease payment must Nantucket charge to earn a 12% return on its investment if the
Suppose Wings and Nantucket of the previous problem agreed to assume a $300,000 residual value for the plane at the end of the lease. How much will Wings have to pay monthly to give Nantucket its 12% return?
Paxton Sheet Metal Works Inc. is about to acquire a new stamping press that costs $400,000. It is considering purchasing the asset with money it can borrow at 10% repayable in annual, year-end installments over six years. It has also been offered an opportunity to lease the machine for payments of
What, in general, is meant by off balance sheet financing?
Describe the feature of financial reporting that made leasing popular before FASB 13.
There’s a fundamental difference between rules one, two, and four for qualifying as an operating lease and rule three. What is it?
Just what is placed on the balance sheet in a financing lease?
In leases with no residuals, lessors calculate the lease payments they must charge as if the lease was a loan. How does the presence of a residual change the calculation?
Why are residuals important in negotiations between lessees and lessors?
Leasing is generally more expensive than borrowing to buy, and FASB 13 has reduced the availability of off balance sheet financing. Why then is leasing popular?
Leveraged leases offer tax advantages to unprofitable companies.a. Why are they called leveraged?b. Briefly, how do they work?
You’re an analyst in the finance department of Flyover Corp., a new firm in a profitable but risky high-tech business. Several growth opportunities have come along recently, but the company doesn’t have enough capital to undertake them. Stock prices are down, so it doesn’t make sense to try
The Everglo Corp., a manufacturer of cosmetics, is financed with a 50–50 mix of debt and equity. The debt is in the form of debentures that have a relatively weak indenture. Susan Moremoney, the firm’s president and principal stockholder, has proposed doubling the firm’s debt by issuing new
You’re the CFO of Nildorf Inc., a maker of luxury consumer goods that, because of its product, is especially sensitive to economic ups and downs (people cut back drastically on luxury items during recessionary times). In an executive staff meeting this morning, Charlie Suave, the president,
Paliflex Corp. needs new capital, but is having difficulty raising it. The firm’s stock price is at a 10-year low, so selling new equity means giving up an interest in the company for a very low price. The debt market is tight and interest rates are unusually high, making borrowing difficult and
The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate.a. What is the bond’s price today if the interest rate on comparable new issues is 12%?b. What is the price today if the interest rate is 8%?c. Explain the
Calculate the market price of a $1,000 face value bond under the followingConditions
What is the current yield on each of the bonds in the previous problem?
The Sampson Company issued a $1,000 bond 5 years ago with an initial term of 25 years and a coupon rate of 6%. Today’s interest rate is 10%. a. What is the bond’s current price if interest is paid semiannually as it is on most bonds?b. What is the price if the bond’s interest is paid
Fix-It Inc. recently issued 10-year, $1,000 par value bonds at an 8% coupon rate.a. Two years later, similar bonds are yielding investors 6%. At what price are Fix-It’s bonds selling?b. What would the bonds be selling for if yields had risen to 12%?c. Assume the conditions in part a. Further
The Mariposa Co. has two bonds outstanding. One was issued 25 years ago at a coupon rate of 9%. The other was issued 5 years ago at a coupon rate of 9%. Both bonds were originally issued with terms of 30 years and face values of $1,000. The going interest rate is 14% today. a. What are the prices
Longly Trucking is issuing a 20-year bond with a $2,000 face value tomorrow. The issue is to pay an 8% coupon rate, because that was the interest rate while it was being planned. However, rates increased suddenly and are expected to be 9% when the bond is marketed. What will Longly receive for
Daubert, Inc., planned to issue and sell at par 10-year, $1,000 face value bonds totaling $400 million next month. The bonds have been printed with a 6% coupon rate. Since that printing, however, Moody’s downgraded Daubert’s bond rating from Aaa to Aa. This means the bonds will have to be
Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute the coupon rate on this bond.
John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a seasoned issue of the Capri Fashion Company that was first sold 22 years ago at a face value of $1,000, with a 25-year term, paying 6%. The other is a new 30-year issue of the Gantry
Smithson Co.’s Class A bonds have 10 years to go until maturity. They have a $1,000 face value and carry coupon rates of 8%. Approximately what do the bonds yield at the following prices?a. $770b. $1,150c. $1,000
Pam Smith just inherited a $1,000 face value K-S Inc. bond from her grandmother. The bond clearly indicates a 12% coupon rate, but the maturity date has been smudged and can’t be read. Pam called a broker and determined that similar bonds are currently returning about 8% and that her bond is
Hoste Corp. issued a $1,000 face value 20-year bond 7 years ago with a 12% coupon rate. The bond is currently selling for $1,143.75. What is its yield to maturity (YTM)?
Ernie Griffin just purchased a five-year zero coupon corporate bond for $680.60 and plans to hold it until maturity. Assume Ernie has a marginal tax rate of 25%. a. Calculate Ernie’s after-tax cash flows from the bond for the first two years. Assume annual compounding.b. Describe in words the
Apollo’s Alpha bond was issued 10 years ago for 30 years with a face value of $1,000. Interest rates were very high at the time, and the bond’s coupon rate is 20%. The interest rate is now 10%.a. At what price should an Alpha bond sell?b. At what price would it sell without the call feature?
Apollo’s Alpha-1 bond was issued at a time when interest rates were even higher. It has a coupon rate of 22%, a $1,000 face value, an initial term of 30 years, and is now 13 years old. Calculate its price if interest rates are now 12%, compare it with the price that would exist if there were no
Apollo’s Beta bond has just reached the end of its period of call protection, has 10 years to go until maturity, and has a face value of $1,000. Its coupon rate is 16% and the interest rate is currently 10%. Should Apollo refund this issue if refunding costs a total of 8% of the value of the
Snyder Mfg. issued a $1,000 face value 30-year bond 5 years ago with an 8% coupon. The bond is subject to call after 10 years, and the current interest rate is 7%. What call premium will make a bondholder indifferent to the call?
Pacheco Inc. issued convertible bonds 10 years ago. Each bond had an initial term of 30 years, had a face value of $1,000, paid a coupon rate of 11%, and was convertible into 20 shares of Pacheco stock, which was selling for $30 per share at the time. Since then the price of Pacheco shares has
The Maritime Engineering Corp. sold 1,500 convertible bonds two years ago at their $1,000 par value. The 20-year bonds carried a coupon rate of 8% and were convertible into stock at $20 per share. At the time, the firm’s stock was selling for $15, and similar bonds without a conversion feature
Lindstrom Corp. reported earnings after tax (EAT) of $2,160,000 last year along with basic EPS of $3. All of Lindstrom’s bonds are convertible and, if converted, would increase the number of shares of the firm’s stock outstanding by 15%. Lindstrom is subject to a total effective tax rate of 40%
Your friend Marvin is excited because he believes he’s found an investment bargain. A broker at Quick Cash Investments has offered him an opportunity to buy a bond issued by Galveston Galleries Inc. at a very attractive price. The 30-year bond was issued ten years ago at a face value of $1,000,
You are a securities salesperson. Many of your clients are elderly people who want very secure investments. They remember the days when interest rates were very stable (before the 1970s) and bond prices hardly fluctuated at all regardless of their terms. You’ve had a hard time convincing
Use BONDVAL to find the YTM of the following $1,000 par valuebonds.
What is valuation, and why are we interested in the results?
Contrast real assets and financial (paper) assets. What is the basis for the value of each?
How can two knowledgeable people come to different conclusions about the value of the same security? Can this happen if they have access to the same information?
Describe the nature of a bond. Include at least the following ideas.Term/maturity ............face valueDebt versus equity .......“buying” a bondNon-amortized .....one borrower/many lendersRisk .........conflict with stockholders
What is a call provision? Why do companies put them in bonds? Define call protected period and call premium/penalty.
Two interest rates are associated with pricing a bond. Name and describe each.How are they used? Describe a third rate not used in pricing
If bonds pay fixed interest rates, how can they be sold year after year on the secondary market? Include the idea of how yields adjust to changing market interest rates.
Why do bonds have indentures?
Describe bond pricing as two time value of money problems
What is the relationship between bond prices and interest rates? Verbally describe how this relationship comes about. How can we use this relationship to estimate the value of a bond?
What is interest rate or price risk? Why is it sometimes called maturity risk? Explain fully.
What causes maturity risk? In other words, why do long-term bonds respond differently to interest rate changes than short-term bonds?
Using words only, describe the process of finding a bond’s yield at a given selling price.
Under what conditions is a bond almost certain to be called at a particular date in the future? How does this condition affect its price?
How and why do sinking funds enhance the safety of lenders?
Your cousin Charlie came into a large inheritance last year and invested the entire amount in the common stock of IBD Inc., a large computer company. Subsequently he’s been very interested in the company and watches it closely. Recently the newspaper carried a story about major strategic changes
Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below.Compute the dividend yield, capital gains yield, and total one-year return implied by Paul€™s estimates for eachstock.
The stock of Sedly Inc. is expected to pay the following dividends.At the end of the fourth year its value is expected to be $37.50. What should Sedly sell for today if the return on stocks of similar risk is12%?
Fred Tibbits has made a detailed study of the denim clothing industry. He’s particularly interested in a company called Denhart Fashions that makes stylish denimapparel for children and teenagers. Fred has done a forecast of Denhart’s earnings and looked at its dividend payment record. He’s
Mitech Corp. stock sold for $8.50 per share 20 years ago and is currently selling for $82.00. Based on past growth rate performance, what would you expect the stock’s price to be in five years?
The Spinnaker Company has paid an annual dividend of $2 per share for some time. Recently, however, the board of directors voted to grow the dividend by 6% per year from now on. What is the most you would be willing to pay for a share of Spinnaker if you expect a 10% return on your stock
The Pancake Corporation recently paid a $3 dividend and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they’ll buy stocks similar to those of Pancake.a. What is Pancake’s intrinsic value?b. Is it a bargain if it’s selling at $76 a
Tyler Inc.’s most recent annual dividend was $3.55 a share. The firm has been growing at a consistent 4% rate for several years, but analysts generally believe better times are ahead and future growth will be in the neighborhood of 5%. The stock is currently selling for $75. Stocks similar to
The Anderson Pipe Co. just paid an annual dividend of $3.75 and is expected to grow at 8% for the foreseeable future. Harley Bevins generally demands a return of 9% when he invests in companies similar to Anderson.a. What is the most Harley should be willing to pay for a share of Anderson?b. Is
Cavanaugh Construction specializes in designing and building custom homes. Business has been excellent, and Cavanaugh projects a 10% growth rate for the foreseeable future. The company just paid a $3.75 dividend. Comparable stocks are returning 11%.a. What is the intrinsic value of Cavanaugh
The Miller Milk Company has just come up with a new lactose-free dessert product for people who can’t eat or drink ordinary dairy products. Management expects the new product to fuel sales growth at 30% for about two years. After that competitors will copy the idea and produce similar products,
You are an investment analyst for a brokerage firm and have been asked to develop a recommendation about Softek for the firm’s clients. You’ve studied the fundamentals of the industry and the firm, and are now ready to determine what the stock should sell for based on the present value of
Calculate a price for Softek assuming Alpha is successful and Beta is also successful but doesn’t do quite as well as Alpha. Assume Softek grows at 25% for two years and then at 18% for two more. After that it continues to grow at 6%. A leader in the computer software field. Softek has two
How would you advise clients about Softek stock as an investment under the following conditions? Give reasons for your advice. (No calculations.)a. Softek is currently selling at a price very near that calculated in part (a) of Problem 11.b. It is selling near the price calculated in Problem 12.c.
Garrett Corp. has been going through a difficult financial period. Over the past three years, its stock price has dropped from $50 to $18 per share. Throughout this downturn, Garrett has managed to pay a $1 dividend each year. Management feels the worst is over but intends to maintain the $1
It’s early 2006 and General Motors Corporation has been going through some tough times lately. It’s been losing a great deal of money, and its annual dividend has been cut to $1. The company’s strategy is to restructure by getting smaller while working on labor and product line problems at
Sudsy Inc. recently paid an annual dividend of $1.00 per share. Analysts expect that amount to be paid for three years after which dividends will grow at a constant 5% per year indefinitely. The stock is currently trading at $20, and investors require a 15% return on similar issues. Has the stock
Blackstone Corporation’s $7 preferred was issued five years ago. The risk-appropriate interest rate for the issue is currently 11%. What is this preferred selling for today?
Fox Woodworking Inc. issued preferred shares at a face value of $50 to yield 9% 10 years ago. The shares are currently selling at $60. What return are they earning for investors who buy them today?
The following preferred stocks are returning 8.5% to their owners who purchased the shares when they were issued:Calculate the prices at which they wereissued.
Koski and Hass Inc. (K&H) just paid a $2 dividend, which is expected to grow at 5% indefinitely. The return on comparable stocks is 9%. What percent of the intrinsic value of K&H stock is attributable to dividends paid more than 20 years in the future?
Seth Harris is an avid investor who likes to speculate on stock price changes. Lately, he’s become bored with the slow movement of most stock prices and thinks options might be more exciting. He has been following the stock of Chelsea Club Inc., a women’s apparel manufacturer. Chelsea’s stock
Suppose the strategic options available to the Rollins company in the last problem result in temporarily enhanced growth. Each option can be associated with a super normal growth rate that lasts for some period after which growth returns to the firm’s normal 5%. Further suppose the duration
Discuss the nature of stock as an investment. Do most stockholders play large roles in the management of the firms in which they invest? Why or why not?
Compare and contrast the nature of cash flows stemming from an investment in stock with those coming from bonds.
Verbally rationalize the validity of a stock valuation model that doesn’t contain a selling price as a source of cash flow to the investor. Give two independent arguments.
Why are growth rate models practical and convenient ways to look at stock valuation?
What is meant by normal growth? Contrast normal and super normal growth. How long can each last? Why?
Describe the approach to valuing a stock that is expected to grow at more than one rate in the future. Can there be more than two rates? What two things have to be true of the last rate?
Discuss the accuracy of stock valuation, and compare it with that of bond valuation.
Do stocks that don’t pay dividends have value? Why?
Preferred stock is said to be a hybrid of common stock and bonds. Explain fully. Describe the cash flows associated with preferred and their valuation.
Discuss the relative riskiness of investment in bonds, common stock, and preferred stock.
Compare fundamental analysis and technical analysis. Which makes more sense to you?
What does the efficient market hypothesis say? What is its implication for stock analysis?
Options are more exciting than investing in the underlying stocks because they offer leverage. Explain this statement
Is investing in options really investing, or is it more like gambling?
You’ve just begun work at the brokerage firm of Dewey, Cheatam, and Howe as a stock analyst. This morning you read an article in the paper that said a large-scale reduction in defense spending is imminent. Fred Fastbuck, a broker at the firm, has several clients who are elderly retirees. You
The Duncan Company’s stock is currently selling for $15. People generally expect its price to rise to $18 by the end of next year. They also expect that it will pay a dividend of $.50 per share during the year.a. What is the expected return on an investment in Duncan’s stock?b. Recalculate the
The Rapscallion Company’s stock is selling for $43.75. Dave Jones has done some research on the firm and its industry, and he thinks it will pay dividends of $5 next year and $7 the following year. After those two years Dave thinks its market price will peak at $50. His strategy is to buy now,
Wayne Merritt drives from Cleveland to Chicago frequently and has noticed that traffic and weather make a big difference in the time it takes to make the trip. As a result, he has a hard time planning activities around his arrival time. To better plan his business, Wayne wants to calculate his
Suppose dice had four sides instead of six, so rolling a single die would produce equally likely numbers from 1 to 4, and rolling two dice would produce numbers from 2 to 8.a. Compute the probability distribution of outcomes from rolling two diceb. Calculate the mean, standard deviation, and
Conestoga Ltd. has the following estimated probability distribution of returns.Return Probability4% ..............0.2012 ..............0.5014 ...............0.30Calculate Conestoga’s expected return, the variance and standard deviation of its expected return, and the return’s coefficient of
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