- Heath Foods’ bonds have 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8 percent. They pay interest annually and have a 9 percent coupon rate. What
- Nungesser Corporation has issued bonds that have a 9 percent coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5 percent. What
- The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.a. What will be
- The Heymann Company’s bonds have 4 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9 percent.a. What is the yield to
- Six years ago, The Singleton Company sold a 20-year bond issue with a 14 percent annual coupon rate and a 9 percent call premium. Today, Singleton called the bonds. The bonds originally were sold at
- A 10-year, 12 percent semiannual coupon bond, with a par value of $1,000, may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been
- You just purchased a bond which matures in 5 years. The bond has a face value of $1,000, and has an 8 percent annual coupon. The bond has a current yield of 8.21 percent. What is the bond’s yield
- A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883 percent. The bond pays coupons semiannually. What is the bond’s current
- Lloyd Corporation’s 14 percent coupon rate, semiannual payment, $1,000 par value bonds, that mature in 30 years, are callable 5 years from now at a price of $1,050. The bonds sell at a price of
- Suppose Ford Motor Company sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10 percent coupon rate, and semiannual interest payments.a. Two years after the bonds were issued, the
- A bond trader purchased each of the following bonds at a yield to maturity of 8 percent. Immediately after she purchased the bonds, interest rates fell to 7 percent. What is the percentage change in
- An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6 percent. One bond, Bond C, pays an annual coupon of 10
- Define each of the following terms:a. Proxy; proxy fight; takeover; preemptive right; classified stock; founders’ sharesb. Closely held corporation; publicly owned corporationc. Secondary market;
- Two investors are evaluating AT&T’s stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the
- A bond that pays interest forever and has no maturity date is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock, and to a share of preferred stock?
- War Corporation just paid a dividend of $1.50 a share (i.e., D0 = $1.50). The dividend is expected to grow 5 percent a year for the next 3 years, and then 10 percent a year thereafter. What is the
- Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (i.e., D1 = $0.50). The dividend is expected to grow at a constant rate of 7 percent a year. The required rate of
- Harrison Clothiers’ stock currently sells for $20 a share. The stock just paid a dividend of $1.00 a share (i.e., D0 = $1.00). The dividend is expected to grow at a constant rate of 10 percent a
- Fee Founders has preferred stock outstanding which pays a dividend of $5 at the end of each year. The preferred stock sells for $60 a share. What is the preferred stock’s required rate of return?
- A company currently pays a dividend of $2 per share, D0 = 2. It is estimated that the company’s dividend will grow at a rate of 20 percent per year for the next 2 years, then the dividend will grow
- A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1 = 4), which is expected to grow at some constant rate g throughout time. The stock’s
- You are considering an investment in the common stock of Keller Corp. The stock is expected to pay a dividend of $2 a share at the end of the year (D1 = $2.00). The stock has a beta equal to 0.9. The
- What will be the nominal rate of return on a preferred stock with a $100 par value, a stated dividend of 8 percent of par, and a current market price of?(a) $60,(b) $80,(c) $100, and(d) $140?
- Martell Mining Company’s ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company’s earnings and
- Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6 percent and its dividend yield is 7 percent. Your company is about as risky as the average firm
- Ezzell Corporation issued preferred stock with a stated dividend of 10 percent of par. Preferred stock of this type currently yields 8 percent, and the par value is $100. Assume dividends are paid
- Your broker offers to sell you some shares of Bahnsen & Co. common stock that paid a dividend of $2 yesterday. You expect the dividend to grow at the rate of 5 percent per year for the next 3
- Investors require a 15 percent rate of return on Levine Company’s stock (rs =15%).a. What will be Levine’s stock value if the previous dividend was D0 = $2 and if investors expect dividends to
- Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200 percent more electricity than any solar panel currently on the market. As a result, WME is expected to
- Tausig Technologies Corporation (TTC) has been growing at a rate of 20 percent per year in recent years. This same growth rate is expected to last for another 2 years.a. If D0 = $1.60, rs = 10%, and
- The risk-free rate of return, rRF, is 11 percent; the required rate of return on the market, rM, 14 percent; and Upton Company’s stock has a beta coefficient of 1.5. a. If the dividend expected
- Define each of the following terms:a. Option; call option; put optionb. Exercise value; strike pricec. Black-Scholes Option Pricing Model
- Why do options sell at prices higher than their exercise values?
- Describe the effect on a call option’s price caused by an increase in each of the following factors:(1) Stock price,(2) Exercise price,(3) Time to expiration,(4) Risk-free rate, and(5) Variance of
- Assume you have been given the following information on Purcell Industries:Current stock price = $15........................,,,,,..Exercise price of option = $15Time to maturity of option = 6
- The exercise price on one of Flanagan Company’s options is $15, its exercise value is $22, and its premium is $5. What are the option’s market value and the price of the stock?
- Use the Black-Scholes model to find the price for a call option with the following inputs: (1) current stock price is $30, (2) exercise price is $35, (3) time to expiration is 4 months, (4)
- The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5 percent. Find the price of a call option on the stock that has an exercise price of
- The current price of a stock is $15. In 6 months, the price will be either $18 or $13. The annual risk-free rate is 6 percent. Find the price of a call option on the stock that has an exercise price
- The current price of a stock is $33, and the annual risk-free rate is 6 percent. A call option with an exercise price of $32 and 1 year until expiration has a current value of $6.56. What is the
- Define each of the following terms:a. Weighted average cost of capital, WACC; after-tax cost of debt, rd (1 = T)b. Cost of preferred stock, rps; cost of common equity or cost of common stock, rsc.
- In what sense is the WACC an average cost A marginal cost?
- How would each of the following affect a firm's cost of debt, rd(1 = T); its cost of equity, rs; and its weighted average cost of capital, WACC? Indicate by a plus (+) a minus (_), or a zero (0) if
- Distinguish between beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a potential project. Of the three measures, which is theoretically the most relevant, and why?
- Suppose a firm estimates its cost of capital for the coming year to be 10 percent. What might be reasonable costs of capital for average-risk, high-risk, and low-risk projects?
- David Ortiz Motors has a target capital structure of 40 percent debt and 60 percent equity. The yield to maturity on the company’s outstanding bonds is 9 percent, and the company’s tax rate is
- Tunney Industries can issue perpetual preferred stock at a price of $50 a share. The issue is expected to pay a constant annual dividend of $3.80 a share. The flotation cost on the issue is estimated
- Javits & Sons’ common stock is currently trading at $30 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 = $3.00), and the dividend is expected to
- Calculate the after-tax cost of debt under each of the following conditions:a. Interest rate, 13 percent; tax rate, 0 percent.b. Interest rate, 13 percent; tax rate, 20 percent.c. Interest rate, 13
- Trivoli Industries plans to issue some $100 par preferred stock with an 11 percent dividend. The stock is selling on the market for $97.00, and Trivoli must pay flotation costs of 5 percent of the
- A company’s 6 percent coupon rate, semiannual payment, $1,000 par value bond which matures in 30 years sells at a price of $515.16. The company’s federal-plus state tax rate is 40 percent. What
- The earnings, dividends, and stock price of Carpet to Technologies Inc. are expected to grow at 7 percent per year in the future. Carpetto’s common stock sells for $23 per share, its last dividend
- The Bouchard Company’s current EPS is $6.50. It was $4.42 5 years ago. The company pays out 40 percent of its earnings as dividends, and the stock sells for $36.a. Calculate the past growth rate in
- Sidman Products’ stock is currently selling for $60 a share. The firm is expected to earn $5.40 per share this year and to pay a year-end dividend of $3.60.a. If investors require a 9 percent
- On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm’s present market value
- Suppose the School Company has this book value balance sheet: The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 10 percent, the same as the
- A summary of the balance sheet of Travelers Inn Inc. (TII), a company which was formed by merging a number of regional motel chains and which hopes to rival Holiday Inn on the national scene, is
- Rework Problem 9-3, assuming that new stock will be issued. The stock will be issued for $30 and the flotation cost is 10 percent of the issue proceeds. The expected dividend and growth remain at
- Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9 percent, paid annually. The tax rate is 40 percent. If the flotation cost is 2 percent of the issue
- Define each of the following terms:a. Capital budgeting; regular payback period; discounted payback periodb. Independent projects; mutually exclusive projectsc. DCF techniques; net present value
- How is a project classification scheme (for example, replacement, expansion into new markets, and so forth) used in the capital budgeting process?
- Explain why the NPV of a relatively long-term project, defined as one for which a high percentage of its cash flows are expected in the distant future, is more sensitive to changes in the cost of
- Explain why, if two mutually exclusive projects are being compared, the short-term project might have the higher ranking under the NPV criterion if the cost of capital is high, but the long-term
- In what sense is a reinvestment rate assumption embodied in the NPV, IRR, and MIRR methods? What is the assumed reinvestment rate of each method?
- Suppose a firm is considering two mutually exclusive projects. One has a life of 6 years and the other a life of 10 years. Would the failure to employ some type of replacement chain analysis bias an
- Your division is considering two investment projects, each of which requires an up-front expenditure of $15 million. You estimate that the investments will produce the following net cash flows:What
- Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck
- Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose
- Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5
- Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below:The projects are equally risky, and their cost of capital is 12 percent. You must
- After discovering a new gold vein in the Colorado Mountains CTC Mining Corporation must decide whether to mine the deposit. The most cost-effective method of mining gold is sulfuric acid extraction,
- Cummings Products Company is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:a. Construct NPV profiles for Projects A and B.b. What is each
- The Ewert Exploration Company is considering two mutually exclusive plans for extracting oil on property for which it has mineral rights. Both plans call for the expenditure of $10,000,000 to drill
- The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant which will provide an
- The Ulmer Uranium Company is deciding whether or not it should open a strip mine, the net cost of which is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of
- The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost,
- Your division is considering two investment projects, each of which requires an up-front expenditure of $25 million. You estimate that the cost of capital is 10 percent and that the investments
- Shao Airlines is considering two alternative planes. Plane A has an expected life of 5 years, will cost $100 million, and will produce net cash flows of $30 million per year. Plane B has a life of 10
- The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $10 million but realizes
- Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting machine. Two new models are available: Machine 190-3, which has a cost of $190,000, a 3-year expected
- The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500, and it is expected to generate net after-tax operating cash flows, including depreciation, of $6,250
- Define each of the following terms:a. Cash flow; accounting incomeb. Incremental cash flow; sunk cost; opportunity costc. Net operating working capital changes; salvage valued. Real rate of return,
- Operating cash flows, rather than accounting profits, are listed in Table 11-4.What is the basis for this emphasis on cash flows as opposed to net income?
- Why is it true, in general, that a failure to adjust expected cash flows for expected inflation biases the calculated NPV downward?
- Explain why sunk costs should not be included in a capital budgeting analysis, but opportunity costs and externalities should be included.
- Define (a) simulation analysis, (b) scenario analysis, and (c) sensitivity analysis.
- Johnson Industries is considering an expansion project. The necessary equipment could be purchased for $9 million, and the project would also require an initial $3 million investment in net operating
- Carter Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80 percent has been depreciated. Carter can sell the used equipment today to another
- The Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it would cost another $12,500 to modify it for special use by your
- You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm’s R&D department. The equipment’s basic price is $70,000, and it
- The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $150,000. The project will produce 1,000 cases of mineral water per year
- Shao Industries is considering a proposed project for its capital budget. The company estimates that the project's NPV is $12 million. This estimate assumes that the economy and market conditions
- BPC has decided to evaluate the riskier project at a 12 percent rate and the less risky project at a 10 percent rate.a. What is the expected value of the annual net cash flows from each project? What
- Singleton Supplies Corporation (SSC) manufactures medical products for hospitals, clinics, and nursing homes. SSC may introduce a new type of X-ray scanner designed to identify certain types of
- Microtech Corporation is expanding rapidly, and it currently needs to retain all of its earnings, hence it does not pay any dividends. However, investors expect Microtech to begin paying dividends,
- Explain how net operating working capital is recovered at the end of a project’s life, and why it is included in a capital budgeting analysis.
- The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the “winged” keels first introduced on the 12-meter yachts that raced for the
- Project K has a cost of $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its cost of capital is 12 percent. (Hint: Begin by constructing a time line.)a. What is the
- Nixon Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information:Projected sales $10
- You buy a share of The Ludwig Corporation stock for $21.40. You expect it to pay dividends of $1.07 $1.1449, and $1.2250 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of