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Entrepreneurial Finance 4th edition J . chris leach, Ronald w. melicher - Solutions
A bank customer will be going to London in June to purchase ₤100,000 in new inventory. The current spot and futures exchange rates are as follows: Exchange Rates (Dollars/Pound)Period RateSpot ............ 1.5342March .......... 1.6212June ........... 1.6901September .......... 1.7549December
Consider a put contract on a T-bond with an exercise price of 101 12/32. The contract represents $100,000 of bond principal and had a premium of $750. The actual T-bond price falls to 98 16/32 at the expiration. What is the gain or loss on the position?
Consider a put contract on a T-bond with an exercise price of 101 12/32. The contract represents $100,000 of bond principal and has a premium of $750. The actual T-bond price is currently 100 1/32. How can you arbitrage this situation?
A banker commits to a two-year $5,000,000 commercial loan and expects to fulfill the agreement in 30 days. The interest rate will be determined at that time. Currently, rates are 7.5% for such loans. To hedge against rates falling, the banker buys a 30-day interest-rate floor with a floor rate of
A trust manager for a $100,000,000 stock portfolio wants to minimize short-term downside risk using Dow put options. The options expire in 60 days, have a strike price of 9,700, and a premium of $50. The Dow is currently at 10,100. How many options should she use? Long or short? How much will this
A swap agreement calls for Durbin Industries to pay interest annually based on a rate of 1.5% over the one-year T-bill rate, currently 6%. In return, Durbin receives interest at a rate of 6% on a fixed-rate basis. The notional principal for the swap is $50,000. What is Durbin’s net interest for
North-Northwest Bank (NNWB) has a differential advantage in issuing variable-rate mortgages, but does not want the interest income risk associated with such loans. The bank currently has a portfolio of $25,000,000 in mortgages with an APR of prime +150 basis points, reset monthly. Prime is
A stock has an expected return of 16.2%, a beta of 1.75, and the expected return on the market is 11 percent. What must the risk-free rate be?
Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the covariance and correlation between the returns on the twostocks?
Is the beta of a stock static or dynamic? What could affect the beta of a stock?
(Multiple Choice)1. Reed Company had $375,000 of current assets and $150,000 of current liabilities before borrowing $75,000 from the bank with a 3-month note payable. What effect did the borrowing transaction have on the amount of Reed Company's working capital? Question 34 options:a) No
Rae Corporation has $100,000,000 in invested capital. The income (NOPAT) is $12,000,000. Sales were $240,000,000. The required return is 10%.1. Calculate the ROI for Rae Corporation.2. Calculate the profit margin for Rae Corporation.3. Calculate the investment turnover for Rae Corporation.4.
Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their price at the end of the year. His projections are showbelow.
(Multiple choice)1) Which of the following is not an advantage of the corporate form of business organization?a. Sell debt or equity in public capital marketsb. Owners have limited liabilityc. Owners are subject to double taxationd. May continue in business in perpetuity2) Working capital
1) Owners Equity consists of all the following except:a. Additional paid in capital.b. Par value stockc. Debentures outstandingd. Retained earnings2) On the statement of cash flows an increase in accounts receivables is considered:a. A cash inflowb. A use of cashc. A source of cashd. None of the
(Multiple Choice)1) Holding all other variables constant, an increase in the interest rate will cause ________ to decrease.a. Future valuesb. Annuity paymentsc. Present valuesd. Growth rates2) You have just calculated the present value of the expected cash flows of a potential investment.Management
1) The expected return on KarolCo. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market assuming CAPM is true?a. 2.5%b. 5.0%c. 7.5%d. 10.0%2) Using the above information, what is the rate of return on the market?a.
The Tubby Ball 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?
Using the Gordon Growth Model, the CAPM and assuming equilibrium in the equity market, express Beta as a function of the other variables. If a firm targets a B = 1.25, what must it do to achieve this objective? If it is not possible to do so, demonstrate why it is not feasible, Provide quantitative
Suppose the following conditions hold. The risk free rate is 4% and the market risk premium is 6%. We have a portfolio containing three stocks and a risk-free asset. We have $50 of the risk-free asset, $100 of A (B = 1.2), -$200 of B (B = 1.10) and $150 of C (B = 0.9). Find the net dollar
There are two securities "A" and "8", with rA = 4%, rB = 6%, OA = 3%, std B = 9% and std AB = -0.30. Find the portfolio return (rp) and standard deviation std dev if the portfolio consists of $100 of "A" and $300 of "8". Find the weights that produce the portfolio with the lowest risk and its
Mr. Katz is the widget business. He currently sells 2 million widgets a year at $4 each. His variable cost to produce the widgets is $3 per unit, and he has $1,500,000 in fixed costs. His sales-to-assets ratio is four times, and 40 percent of his assets are financed with 9 percent debt, with the
For Bobby Company, sales is $1,000,000 (5,000 units), fixed expenses are $300,000, and the contribution margin per unit is $80. What is the margin of safety in dollars?A) $50,000B) $250,000C) $450,000D) $700,000
The financial statements of Lioi Steel Fabricators are shown below – both the actual results for 2010 and the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The weighted average cost of capital is 11%.Income Statements for the Year Ending December
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.38 and the total portfolio is equally as risky as the market (i.e. βp = 1), what is the beta for the other stock in your portfolio?
Northern States Power has a projected dividend of $3.60 next year. The current stock price is $50.50 per share. If the dividend is projected to grow at 3.5% annually, what is the expected return on Northern States stock?
What is the beta of a stock whose covariance with the market portfolio return is 0.0045 if the variance of the return on the market portfolio is 0.002?
Assume that CAPM holds, i.e. ri = r0 + βi(rm-r0), where βi = σim/σm2. The goal is to create a portfolio of stocks X, Y, and the risk-free asset. The beta of the portfolio is βP = 0.70. X has a beta of 1.5 and Y has a beta of 2.0. Expected return of Y is 10% more than the expected return of
A firm's stock has a beta of 0.9; the expected return on the market is 10%; and the risk-free rate is 5%. What is the expected rate of return on this stock?
On January 1, 2010 Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop’s assets, liabilities, and stockholder’s equity accounts:Kaltop earned net
The authorized share capital of the Alfred Cake Company is 100,000 shares. The equity is currently shown in the company’s books as follows:Common Stock ($.50 par value) ..... $40,000Additional paid – in capital ...... $10,000Retained Earnings ......... $30,000Common equity ..........
Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an expected of 18% and a standard deviation of 60%. The correlation coefficient between Stocks A and B is 0.2. What are the expected returns and the standard deviation of a portfolio invested 30% in Stock A and 70%
Suppose you are given the following information. The beta of company i, b (i), is 1.1, the risk free rate, r(rf), is 7 percent, and the expected market premium, r(m) - r(rf), is 6.5 percent. (Assume that a(i) = 0.0)a. Use the Security Market Line (SML) or CAPM to find the required return for this
Given a risk free rate of 5%, a market return of 15%, and the information for stocks A and B in the following table, determine if stock A and stock B are undervalued or overvalued if they are valued by the security marketline
El Capitan Foods has a capital structure of 40% debt and 60% equity, its tax rate is 35%, and its beta (leveraged) is 1.25. Based on the Hamada equation, what would the firm's beta be if it used no debt, i.e., what is its unlevered beta?
Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to
Beranek Corp has $665,000 of assets, and it uses no debt--it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the
Royce Corp's sales last year were $260,000, and its net income was $23,000. What was its profit margin?a. 7.61%b. 7.25%c. 8.85%d. 8.58%e. 10.97%
Meyer Inc's assets are $745,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?a. $168,563b. $224,750c. $191,038d. $211,265e.
Helmuth Inc's latest net income was $1,210,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?a. $2.49b. $2.06c. $2.11d. $2.69e. $2.42
In accounting for a defined-benefit pension plan a. An appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised. b. The employer's responsibility is simply to make a contribution each year based on the formula
Glassware Corp. is the main supplier of glass in a given country, although it faces competition from smaller glass producers. Glassware offers a quantity discount to Windoze Inc., a giant windows producer, if and only if Windoze Inc. agrees to not buy glass from other glass producers. Glassware
ELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary that collects and disposes of residential garbage. Information related to the two subsidiaries follows:a. Calculate ROI for both subsidiaries.b. Calculate EVA for both subsidiaries. Note that since no
Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock? A. 6.47 percentB. 7.03 percentC. 7.68 percentD. 8.99 percentE. 9.80 percent
What is the standard deviation of the returns on a stock given the following information?A. 1.57 percentB. 2.03 percentC. 2.89 percentD. 3.42 percentE. 4.01percent
The outstanding bonds of Tech Express are priced at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay interest annually. The firm's tax rate is 39 percent. What is the firm's after-tax cost of debt? A. 3.01 percentB. 3.22 percentC. 3.35 percentD. 3.77
Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The
On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred
The following data is given:InstructionsCompute the following ratios:(a) Acid-test ratio at 12/31/11.(b) Receivables turnover in 2011.(c) Inventory turnover in 2011.(d) Profit margin on sales in 2011.(e) Rate of return on common stock equity in 2011.(f) Book value per share of common stock
At year-end 2007, total assets for Bertin Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2007 were $2.5 million, are expected to increase by 25% in 2008. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Bertin
Edwards Construction currently has debt outstanding with a market value of $70,000 and a cost of 8%. The company has EBIT of $5600 that is expected to continue in perpetuity. Assume there are no taxes.a. What is the value of the company's equity? What is the debt to value ratio?b. What are the
The Thompson Corporation projects an increase in sales from $18 million to $25 million, but it needs an additional $500,000 of current assets to support this expansion. Thompson purchases under terms of 2/10, net 60 and currently pays on the 10th day, taking discounts. The CFO is considering using
The Mountain Top Shoppe has sales of $512,000, average accounts receivable of $31,400 and average accounts payable of $24,800. The cost of goods sold is equivalent to 71 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers?
Ralite Company had net income for the year of $20 Million. It had 2 Million sharees of comon stock outstanding, with a year-end market price of $82 a share. Dividends during the year were $5.74 a share.Required:Calculate the following ratios:(a) Price Earning Ratio(b) dividend yield(c) dividend
Unisonic Company had sales recenues for the year of $1,750. Average working capital; property, plant, and equipment; and shareholders' equity were $250, $525, and $1,500, respectively. (All figures are millions.)Required:(a) Working capital turnocver(b) Capital asset intensity(c) Equity turnover
You are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 14% with a volatility of 20%. Currently, the risk-free rate of interest is 3.8%. Your broker suggests that you add Hannah Corporation to your portfolio. Hannah Corporation has an
A company's current assets are $150 and its’ current liabilities are $100. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio and return on assets ratio?A) Current Ratio: Increase; Return on Assets: IncreaseB)
Effect of transactions on various financial ratios. Include the effect that each transaction/event listed here will have on the financial ratio listed opposite it, and provide an explanation for your answer. Use + for increase, - for decrease, and (NE) for no effect. Assume that current
Juggernaut Satellite Corporation earned $ 10 million for the fiscal year ending yesterday. The firm also paid out 20% of its earnings as dividends yesterday. The firm will continue to pay out 20% of its earnings as annual, end-of year dividends. The remaining 80 percent of earnings is retained by
This year Andrews achieved an ROE of 5.6%. Suppose the Board of Directors of Andrews mandates that management take measures to increase financial Leverage (=Assets/Equity) next year. Assuming Sales, Profits, and Assets remain the same next year, what effect would you expect this new Leverage policy
Analytical case-complete an income statement and balance sheet using financial ratio data.Partially completed financial statements for Whittaker, Inc., follows:Whitaker, Inc.Income StatementFor the year ended December 31, 2011Sales......................$ ?Cost of goods sold...............$ ?Gross
Last year Ann Arbor Corp had $160,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be
Last year Jandik Corp. had $365,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO
Last year Kruse Corp had $360,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income
You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80. What will the portfolio's new beta be?a. 1.286b. 1.255c. 1.224d. 1.194e. 1.165
A firm’s balance sheet contains $320 of cash, $2,000 of fixed assets, $1,380 of accounts receivable, $780 of accounts payable, $500 of inventory, and $1,000 on a revolving line of credit. Assuming that list contains all of the company’s assets and liabilities. How much are current assets? What
Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2009. Janex's reported earnings for 2009 totaled $432,000 and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not
Using figures from the income statement and balance sheet, answer the following questions:a. What was the company’s inventory turnover for the most recent year reported?b. Using your answer from part a, what was the average number of days that merchandise remained in inventory before it was
Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in fixed assets. Assume a tax rate of 40 percent.a. Construct two alternative financing plans for the firm. One
Corpus Christie Inc has $10 million face value zero-coupon bonds due in 6 years, and its σ is 0.4. The total market value of Corpus Christie is $25 million and the riskless rate is 4%. The company has 3 million shares outstanding. Find its price per share.
The Koski Company has established standards as follows:Direct material: ………… 3 lbs. @ $4/lb. = $12 per unitDirect labor: ……………. 2 hrs. @ $8/hr. = $16 per unitActual production figures for the past year were as follows:Units produced: 500Direct material used: 1,600 lbs.Direct
Discuss the two major types of leases
The following data applies to Saunders Corporation's convertible bonds:Maturity............. 10 Stock price ............ $30.00Par value.............$1,000.00 Conversion price.......... $35.00Annual coupon........... 5.00% Straight-debt yield......... 8.00%What is the bond's
The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $8, and the other is overvalued by $5, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only
On January 1, Lake Corporation increased its management salaries. All other costs and revenues were unchanged. How did this increase affect Lake's break-even point and margin of safety?Break-even point Margin of safetya. Increase Increaseb. Increase Decreasec. Decrease Decreased. Decrease Increase
A Firm consists of 250 grocery stores throughout the Midwest. At the beginning of 2010 its statement of net worth showed the following information: Common Stock ($2 par) $800,000; Capital paid in excess of par $1,400,000 and retained earnings $500,000. During the year, net income equaled $160,000.
You are given the following data on two companies, M and N (figures are millions):Particulars M NSales: $ 1,080 $ 1,215Net income: $ 54 $ 122Investment: $ 180 $ 405Requireda. Which company has the higher profit.b. Which company has the
Venture Corporations total assets are 3 times greater than total equity; total equity is 50% of total liabilities. The total debt to total assets ratio isA) .67B) .75C) .87D) Undeterminable with the information given.
Elston Company estimates the following cash flows and depreciation on a project that will cost $200,000 and will last 10 years with no salvage value:RevenuesSales$70,000Operating expensesRent expense$26,000Depreciation expense20,000Miscellaneous expenses8,00054,000Net Income$16,000Instructions(a)
Besides the cash budget, what additional financial statements are projected monthly in conjunction with short-term financial planning?
An analogy used in relation to venture opportunity screening makes reference to "caterpillars" and "butterflies." Briefly describe the use of this analogy.
Define the term EBITDA.
Define the term EBDAT.
Describe the meaning of EBDAT breakeven and survival revenues.
What is a bond rating?
Describe the differences between senior debt and subordinated debt.
Refer to Problem 7. Show how your answer to Part A of Problem 7 would change if Jerry were willing to pay 16 percent annual interest and a principal payment of $100,000 at the end of three years.
What is the purpose of the SEC’s Reg D?
Briefly describe the purpose of Rule 144 of Reg D.
Briefly describe Rule 508 of Reg D.
What is a venture’s reversion value?
Describe the equity valuation method.
What is net operating working capital?
What is the relationship between equity valuation cash flows and dividends?
What is meant by “finding the value of a venture’s assets is the same as finding the value of a venture’s debt plus equity”?
Describe the basic venture capital (VC) method for estimating a venture’s value.
How does a present value venture valuation pie differ from a future value venture valuation pie?
What is meant by pre-money valuation? What is post-money valuation?
What are the common ways to estimate a terminal value for a venture?
What is the difference between discounting expected cash flows from multiple scenarios at a constant rate and averaging the scenarios’ PVs calculated with that single discount rate?
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