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Financial Management Theory And Practice 12th Edition Eugene F. Brigham And Michael C. Ehrhardt - Solutions

How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the
What are financial assets? Describe some financial instruments.MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a
Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc.
List some financial intermediaries.MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a professional tennis player who
What are some different types of markets?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a professional tennis player
How are secondary markets organized?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a professional tennis player who
List some physical location markets and some computer/telephone networks.MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle
Explain the differences between open outcry auctions, dealer markets, and electronic communications networks (ECNS).MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One
What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?MINI CASE Assume that you recently graduated with a degree
What is the real risk-free rate of interest (r*) and the nominal risk-free rate (rRF)? How are these two rates measured?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc.
Define the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Which of these premiums is included when determining the interest rate on (1) short-term U.S. treasury securities, (2) long-term U.S. treasury securities, (3) short-term
What is the term structure of interest rates? What is a yield curve?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Dellatorre, a
Suppose most investors expect the inflation rate to be 5 percent next year, 6 percent the following year, and 8 percent thereafter. The real risk-free rate is 3 percent. The maturity risk premium is zero for securities that mature in 1 year or less, 0.1 percent for 2-year securities, and then the
At any given time, how would the yield curve facing an AAA-rated company compare with the yield curve for U. S. Treasury securities? At any given time, how would the yield curve facing a BB-rated company compare with the yield curve for U. S. Treasury securities? Draw a graph to illustrate your
What is the pure expectations theory? What does the pure expectations theory imply about the term structure of interest rates?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer
Finally, Dellatorre is also interested in investing in countries other than the United States. Describe the various types of risks that arise when investing overseas.MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at
Draw time lines for (a) a $100 lump sum cash flow at the end of year 2, (b) an ordinary annuity of $100 per year for 3 years, and (c) an uneven cash flow stream of -$50, $100, $75, and $50 at the end of years 0 through 3.MINI CASE Assume that you are nearing graduation and that you have
What is the future value of an initial $100 after 3 years if it is invested in an account paying 10 percent annual interest?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to
What is the present value of $100 to be received in 3 years if the appropriate interest rate is 10 percent?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an
We sometimes need to find how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company's sales are growing at a rate of 20 percent per year, how long will it take sales to double?MINI CASE Assume that you are nearing graduation and that
If you want an investment to double in three years, what interest rate must it earn?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several
What is the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change it to the other type of annuity?
What is the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10 percent?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an
What is the present value of the annuity?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several financial analysis techniques. The first
What would the future and present values be if the annuity were an annuity due?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several
What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10 percent, compounded annually.MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been
Define (a) the stated, or quoted, or nominal rate, (iNom), and (b) the periodic rate (iPer).MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers
Will the future value be larger or smaller if we compound an initial amount more often than annually, for example, every 6 months, or semiannually, holding the stated interest rate constant? Why?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local
What is the future value of $100 after 5 years under 12 percent annual compounding? Semiannual compounding Quarterly compounding Monthly compounding Daily compounding?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's
What is the effective annual rate (EAR)? What is the ear for a nominal rate of 12 percent, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the
Will the effective annual rate ever be equal to the nominal (quoted) rate?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several financial
1. Construct an amortization schedule for a $1,000, 10 percent annual rate loan with 3 equal installments.2. What is the annual interest expense for the borrower, and the annual interest income for the lender, during year 2?MINI CASE Assume that you are nearing graduation and that you have
Suppose on January 1 you deposit $100 in an account that pays a nominal, or quoted, interest rate of 11.33463 percent, with interest added (compounded) daily. How much will you have in your account on October 1, or after 9 months?MINI CASE Assume that you are nearing graduation and that you
What is the value at the end of year 3 of the following cash flow stream if the quoted interest rate is 10 percent, compounded semiannually?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have
What is the PV of the same stream?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several financial analysis techniques. The first section
Is the stream an annuity?MINI CASE Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank's evaluation process, you have been asked to take an examination which covers several financial analysis techniques. The first section of the
An important rule is that you should never show a nominal rate on a time line or use it in calculations unless what condition holds? (Hint: think of annual compounding, when iNom = EAR = iPer.) What would be wrong with your answer to questions l(1) and l(2) if you used the nominal rate (10%) rather
Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit which pays a 6.76649 percent nominal rate with daily compounding, which is a 7 percent effective annual interest rate, and
What are the key features of a bond?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client, the Northwestern Municipal Alliance, has requested that Mutual of
What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client,
How is the value of any asset whose value is based on expected future cash flows determined?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client, the
How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the
What would be the value of the bond described in part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return? Would we now have a discount or a premium bond?MINI CASE Sam Struthers and Shawna Tibbs are
What would happen to the bonds' value if inflation fell, and rd declined to 7 percent? Would we now have a premium or a discount bond?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management
What would happen to the value of the 10 year bond over time if the required rate of return remained at 13 percent, or if it remained at 7 percent? (Hint: with a financial calculator, enter PMT, I, FV, and N, and then change (override) n to see what happens to the PV as the bond approaches
What is the yield to maturity on a 10-year, 9 percent annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does the fact that a bond sells at a discount or at a premium tells you about the relationship between rd and the bond's coupon rate?MINI CASE Sam
What are the total return, the current yield, and the capital gains yield for the discount bond? (Assume the bond is held to maturity and the company does not default on the bond.)MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and
What is interest rate (or price) risk? Which bond has more interest rate risk, an annual payment 1-year bond or a 10-year bond? Why?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management
What is reinvestment rate risk? Which has more reinvestment rate risk, a 1-year bond or a 10-year bond?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client, the
How does the equation for valuing a bond change if semiannual payments are made? Find the value of a 10-year, semiannual payment, 10 percent coupon bond if nominal rd = 13%.MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of
Suppose you could buy, for $1,000, either a 10 percent, 10-year, annual payment bond or a 10 percent, 10-year, semiannual payment bond. They are equally risky. Which would you prefer? If $1,000 is the proper price for the semiannual bond, what is the equilibrium price for the annual payment
What is the bond's nominal yield to call (YTC)?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client, the Northwestern Municipal Alliance, has requested that
If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client, the
Boeing's bonds were issued with a yield to maturity of 7.5 percent. Does the yield to maturity represent the promised or expected return on the bond?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension
Boeing's bonds were rated AA- by S&P. Would you consider these bonds investment grade or junk bonds?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client,
What factors determine a company's bond rating?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the company's pension fund management division. A major new client, the Northwestern Municipal Alliance, has requested that
If this firm were to default on the bonds, would the company be immediately liquidated? Would the bondholders be assured of receiving all of their promised payments?MINI CASE Sam Struthers and Shawna Tibbs are vice-presidents of Mutual of Seattle Insurance Company and co-directors of the
Describe briefly the legal rights and privileges of common stockholders.MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income
Write out a formula that can be used to value any stock, regardless of its dividend pattern.MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having
What is a constant growth stock? How are constant growth stocks valued?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income
What happens if a company has a constant g which exceeds its rs? Will many stocks have expected g > rs in the short run (i.e., for the next few years)? In the long run (i.e. forever)MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are
Assume that temp force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 7 percent, and that the market risk premium is 5 percent. What is the required rate of return on the firm’s stock?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of
What is the firm’s expected dividend stream over the next 3 years?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income
What is the firm’s current stock price?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income securities (primarily bonds)
What is the stock’s expected value one year from now?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income securities
What are the expected dividend yield, the capital gains yield, and the total return during the first year?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers
Now assume that the stock is currently selling at $30.29. What is the expected rate of return on the stock?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers
What would the stock price be if its dividends were expected to have zero growth?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for
Now assume that Temp Force is expected to experience supernormal growth of 30 percent for the next 3 years, then to return to its long-run constant growth rate of 6 percent. What is the stock’s value under these conditions? What is its expected dividend yield and capital gains yield be in year 1
Is the stock price based more on long-term or short-term expectations? Answer this by finding the percentage of Temp Force current stock price based on dividends expected more than three years in the future.MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of
Suppose Temp Force is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 6 percent in the fourth year. What is the stock’s value now? What is its expected dividend yield and its capital gains yield in year 1 In year 4?MINI CASE Sam
Finally, assume that Temp Force’s earnings and dividends are expected to decline by a constant 6 percent per year, that is, g = -6%. Why would anyone be willing to buy such a stock, and at what price should it sell? What would be the dividend yield and capital gains yield in each year?MINI
What is market multiple analysis?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income securities (primarily bonds) and Tibbs
Why do stock prices change? Suppose the expected D1 is $2, the growth rate is 5 percent, and rs is 10 percent. Using the constant growth model, what is the impact on stock price if g is 4 percent or 6 percent if rs is 9 percent or 11 percent?MINI CASE Sam Struthers and Shawna Tibbs are senior
What does market equilibrium mean?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income securities (primarily bonds) and
If equilibrium does not exist, how will it be established?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having responsibility for fixed income securities
What is the efficient markets hypothesis, what are its three forms, and what are its implications?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are co-directors of the company’s pension fund management division, with Struthers having
Temp Force recently issued preferred stock. It pays an annual dividend of $5, and the issue price was $50 per share. What is the expected return to an investor on this preferred stock?MINI CASE Sam Struthers and Shawna Tibbs are senior vice presidents of the Mutual of Seattle. They are
What is a financial option what is the single most important characteristic of an option?MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating exotic clothing. Since no one at Triple Trice is
Options have a unique set of terminology. Define the following terms:(1) Call option;(2) Put option;(3) Exercise price;(4) Striking, or strike, price;(5) Option price;(6) Expiration date;(7) Exercise value;(8) Covered option;(9) Naked option;(10) In-the-money call;(11) Out-of-the-money call;
Consider Triple Trice's call option with a $25 strike price. The following table contains historical values for this option at different stock prices: Create a table which shows (a) Stock price, (b) Strike price, (c) Exercise value, (d) Option price, and (e) The premium of option price over
What happens to the premium of option price over exercise value as the stock price rises? Why?MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating exotic clothing. Since no one at Triple Trice is
In 1973, Fischer Black and Myron Scholes developed the Black-Scholes Option Pricing Model (OPM).MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating exotic clothing. Since no one at Triple Trice
Write out the three equations that constitute the model.MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating exotic clothing. Since no one at Triple Trice is familiar with the basics of financial
What is the value of the following call option according to the OPM?Stock Price = $27.00.Exercise Price = $25.00Time to Expiration = 6 Months.Risk-Free Rate = 6.0%.Stock Return Variance = 0.11.MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a
What impact does each of the following call option parameters have on the value of a call option?1. Current Stock Price2. Exercise Price3. Option’s Term to Maturity4. Risk-Free Rate5 .Variability of the Stock PriceMINI CASE Assume that you have just been hired as a financial analyst by
What is put-call parity?MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating exotic clothing. Since no one at Triple Trice is familiar with the basics of financial options, you have been asked to
What sources of capital should be included when you estimate Harry Davis’ weighted average cost of capital (WACC)?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital
Should the component costs be figured on a before-tax or an after-tax basis?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company
Should the costs be historical (embedded) costs or new (marginal) costs?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has
What is the market interest rate on Harry Davis’ debt and its component cost of debt?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and
Should flotation costs be included in the estimate?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look
Should you use the nominal cost of debt or the effective annual cost?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has
What is the firm's cost of preferred stock?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at
Harry Davis’ preferred stock is riskier to investors than its debt, yet the preferred's yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake?MINI CASE During the last few years, Harry Davis Industries has been too constrained by
What are the two primary ways companies raise common equity?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to
Why is there a cost associated with reinvested earnings?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look
Harry Davis doesn’t plan to issue new shares of common stock. Using the CAPM approach, what is Harry Davis’ estimated cost of equity?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments.
What is the estimated cost of equity using the discounted cash flow (DCF) approach?MINI CASE During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the
Suppose the firm has historically earned 15 percent on equity (ROE) and retained 35 percent of earnings, and investors expect this situation to continue in the future. How could you use this information to estimate the future dividend growth rate, and what growth rate would you get? Is this

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