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Financial Management Principles and Applications 12th edition Sheridan Titman, Arthur Keown, John Martin - Solutions
Your father just learned from his financial advisor that his retirement portfolio has a beta of 1.80. He has turned to you to explain to him what this means. Specifically, describe what you would expect to happen to the value of his retirement fund if the following were to occur:a. The value of the
You are considering the construction of a portfolio comprised of equal investments in each of four different stocks. The betas for each stock on next page:SecurityBetaA .........2.5B .........1.0C .........0.5D ......... –1.5a. What is the portfolio beta for your proposed investment portfolio?b.
You are putting together a portfolio made up of four different stocks. However, you are considering two possible weightings:a. What is the beta on each portfolio?b. Which portfolio is riskier?c. If the risk-free rate of interest were 4 percent and the market risk premium were 5Â percent, what
If the risk-free rate of return is 4 percent and the expected rate of return on the market portfolio is 10 percent.a. Graph the security market line (SML). Also, calculate and label the market risk premium on the graph.b. Using your graph from question a, identify the expected rates of return on a
You own a portfolio consisting of the following stocks: align="center">The risk-free rate is 4 percent. Also, the expected return on the market portfolio is 10 percent.a. Calculate the expected return of your portfolio. b. Calculate the portfolio beta.c. Given the preceding information, plot
Anita, Inc. is considering the following investments. The current rate on Treasury bills is 4.5 percent, and the expected return for the market is 11 percent. Using the CAPM, what rates of return should Anita require for each individual security?Stock BetaH .......0.75T ....... 1.4P .......0.95W
Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 9 percent.StockBetaK ..........1.12G .......... 1.3B ..........0.75U ..........1.02a. Using the CAPM, what rates of return should Grace require
The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 30 basis points (.30 percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the
After looking at a fixed-rate loan, Ace-Campbell Mfg. entered into a floating-rate loan agreement. This loan is set at 40 basis points (or .40 percent) over an index based on LIBOR. Ace-Campbell is concerned that the LIBOR index may go up, causing the loan to climb. That concern comes from the fact
Calculate the value of a bond that matures in 12 years and has a $1,000 par value. The coupon interest rate is 8 percent and the market’s required yield to maturity on a comparable-risk bond is 12 percent.
Calculate the value of a bond that matures in 10 years and has a $1,000 par value. The annual coupon interest rate is 9 percent and the market’s required yield to maturity on a comparable-risk bond is 15 percent. What would be the value of this bond if it paid interest semiannually?
Enterprise, Inc. bonds have a 9 percent annual coupon rate. The interest is paid semiannually and the bonds mature in eight years. Their par value is $1,000. If the market’s required yield to maturity on a comparable-risk bond is 8 percent, what is the value of the bond? What is its value if the
Pybus, Inc. is considering issuing bonds that will mature in 20 years with an 8 percent annual coupon rate. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get an AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is 7.5
The market price is $900 for a 10-year bond ($1,000 par value) that pays 8 percent annual interest, but makes interest payments on a semiannual basis (4 percent semiannually). What is the bond’s yield to maturity?
A bond’s market price is $750. It has a $1,000 par value, will mature in eight years, and has a coupon interest rate of 9 percent annual interest, but makes its interest payments semiannually. What is the bond’s yield to maturity? What happens to the bond’s yield to maturity if the bond
A 20-year Fitzgerald bond pays 9 percent interest annually on a $1,000 par value. If the bond sells at $945, what is the bond’s yield to maturity? What would be the yield to maturity if the bond paid interest semiannually? Explain the difference.
Doisneau 20-year bonds have a 10 percent annual coupon interest, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a 12 percent market’s required yield to maturity, are these premium or discount bonds? Explain your answer. What is the price
Five years ago, XYZ International issued some 30-year zero-coupon bonds that were priced with a market’s required yield to maturity of 8 percent. What did these bonds sell for when they were issued? Now that five years have passed and the market’s required yield to maturity on these bonds has
Hoyden Co.’s bonds mature in 15 years and pay 8 percent interest annually. If you purchase the bonds for $1,175, what is their yield to maturity?
A 14-year, $1,000 par value Fingen bond pays 9 percent interest annually. The market price of the bond is $1,100 and the market’s required yield to maturity on a comparable-risk bond is 10 percent.a. Compute the bond’s yield to maturity.b. Determine the value of the bond to you, given your
Abner Corporation’s bonds mature in 15 years and pay 9 percent interest annually. If you purchase the bonds for $1,250, what is your yield to maturity?
The seven-year $1,000 par bonds of Vail Inc. pay 9 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,100.a. Determine the yield to maturity.b. What is the value of the bond to you given the yield to
The Saleemi Corporation’s $1,000 bonds pay 5 percent interest annually and have 12 years until maturity. You can purchase a bond for $915.a. What is the yield to maturity on this bond?b. Should you purchase the bond if the yield to maturity on a comparable-risk bond is 9 percent?
The 15-year, $1,000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is $1,085, and the market’s required yield to maturity on a comparable-risk bond is 10 percent.a. Compute the bond’s yield to maturity.b. Determine the value of the bond to you
You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The market’s required yield to maturity on a comparable-risk bond is 12 percent.a. Calculate the value of the bond.b. How does the value change if the yield to maturity on a comparable-risk bond (i)
Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 7 percent.a. Calculate the value of the bond.b. How does the value change if the market’s required yield to
A bond of the Telink Corporation pays $110 in annual interest, with a $1,000 par value. The bond matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 9 percent.a. Calculate the value of the bond.b. How does the value change if (i) the market’s required yield
A bond of the Visador Corporation pays $70 in annual interest, with a $1,000 par value. The bond matures in 17 years. The market’s required yield to maturity on a comparable-risk bond is 8.5 percent.a. Calculate the value of the bond.b. How does the value change if the market’s required yield
Stanley, Inc. issues a 15-year $1,000 bond that pays $85 annually. The market price for the bond is $960. The market’s required yield to maturity on a comparable-risk bond is 9 percent.a. What is the value of the bond to you?b. What happens to the value if the market’s required yield to
What would you expect the nominal rate of interest to be if the real rate is 4.5 percent and the expected inflation rate is 7.3 percent?
Assume the expected inflation rate is 3.8 percent. If the current real rate of interest is 6.4 percent, what should the nominal rate of interest be?
What would you expect the nominal rate of interest to be if the real rate is 5 percent and the expected inflation rate is 3 percent?
If Pepperdine, Inc.’s return on equity is 16 percent and the management plans to retain 60 percent of earnings for investment purposes, what will be the firm’s growth rate?
If the Stanford Corporation’s net income is $200 million, its common equity is $833 million, and management plans to retain 70 percent of the firm’s earnings to finance new investments, what will be the firm’s growth rate?
Header Motor, Inc., paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
Gilliland Motor, Inc., paid a $3.75 dividend last year. If Gilliland’s return on equity is 24 percent, and its retention rate is 25 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.a. If your required rate of return is 10.5 percent, what is the value of the stock for you?b. Should you make the investment?
Given that a firm’s return on equity is 18 percent and management plans to retain 40 percent of earnings for investment purposes, what will be the firm’s growth rate? If the firm decides to increase its retention rate, what will happen to the value of its common stock?
Wayne, Inc.’s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent.a. What is the value of the stock to you, given a 15 percent required rate of return?b. Should
Thomas, Inc.’s return on equity is 13 percent and management has plans to retain 20 percent of earnings for investment in the company.a. What will be the company’s growth rate?b. How would the growth rate change if management (i) increased retained earnings to 35 percent or (ii) decreased
Solarpower Systems expects to earn $20 per share this year and intends to pay out $8 in dividends to shareholders and retain $12 to invest in new projects with an expected return on equity of 20 percent. In the future, Solarpower expects to retain the same dividend payout ratio, expects to earn 20
Green Gadgets Inc. is trying to decide whether to cut its expected dividends for next year from $8 per share to $5 per share in order to have more money to invest in new projects. If it does not cut the dividend, Green Gadgets’ expected rate of growth in dividends is 5 percent per year and the
Dubai Metro’s stock price was at $100 per share when it announced that it will cut its dividends for next year from $10 per share to $6 per share, with additional funds used for expansion. Prior to the dividend cut, Dubai Metro expected its dividends to grow at a 4 percent rate, but with the
Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:• The investor’s required rate of return is 12 percent,• The expected level of earnings at the end of this year (E1) is $4.00,• The firm follows a policy of retaining 30 percent
Assume the following:• The investor’s required rate of return is 13.5 percent,• The expected level of earnings at the end of this year (E1) is $6.00,• The retention ratio is 50 percent,• The return on equity (ROE) is 15 percent (that is, it can earn 15 percent on reinvested earnings),
Assume the following:• The investor’s required rate of return is 15 percent,• The expected level of earnings at the end of this year (E1) is $5.00,• The retention ratio is 50 percent,• The return on equity (ROE) is 20 percent (that is, it can earn 20 percent on reinvested earnings), and
Pioneer’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.a. If the market’s required yield is 10 percent, what is the value of the stock for that investor?b. Should the investor acquire the stock?
You own 200 shares of Somner Resources’ preferred stock, which currently sells for $40 per share and pays annual dividends of $3.40 per share. If the market’s required yield on similar shares is 10 percent, should you sell your shares or buy more?
Kendra Corporation’s preferred shares are trading for $25 in the market and pay a $4.50 annual dividend. Assume that the market’s required yield is 14 percent.a. What is the stock’s value to you, the investor?b. Should you purchase the stock?
Calculate the value of a preferred stock that pays a dividend of $6 per share when the market’s required yield on similar shares is 12 percent.
What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value, and the market’s required yield on similar shares is 12 percent?
Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $5,000,000 and would generate annual net cash inflows of $1,000,000 per year for eight years. Calculate the project’s NPV for each of the following
Carson Trucking is considering whether to expand its regional service center in Moab, Utah. The expansion requires the expenditure of $10,000,000 on new service equipment and would generate annual net cash inflows from reduced costs of operations equal to $2,500,000 per year for each of the next
Big Steve’s, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $100,000 and will generate net cash inflows of $18,000 per year for 10 years.a. What is the project’s NPV using a discount rate of 10
Barry Boswell is a financial analyst for Dossman Metal Works, Inc. and he is analyzing two alternative configurations for the firm€™s new plasma cutter shop. The two alternatives that are denoted A and B below perform the same task and although they both cost $80,000 to purchase and install
The Templeton Manufacturing and Distribution Company of Tacoma, Washington are contemplating the purchase of a new conveyor belt system for one of its regional distribution facilities. Both alternatives will accomplish the same task but the Eclipse Model is substantially more expensive than the
What are the internal rates of return for the following projects?a. An initial outlay of $10,000 resulting in a single cash inflow of $17,182 in 8 yearsb. An initial outlay of $10,000 resulting in a single cash inflow of $48,077 in 10 yearsc. An initial outlay of $10,000 resulting in a single cash
Determine the internal rate of return on the following projects:a. An initial outlay of $10,000 resulting in a cash inflow of $1,993 at the end of each year for the next 10 yearsb. An initial outlay of $10,000 resulting in a cash inflow of $2,054 at the end of each year for the next 20 yearsc.
East Coast Television is considering a project with an initial outlay of $X (you will have to determine this amount). It is expected that the project will produce a positive cash flow of $50,000 a year at the end of each year for the next 15 years. The appropriate discount rate for this project is
Determine the internal rate of return to the nearest percent on the following projects:a. An initial outlay of $10,000 resulting in a cash inflow of $2,000 at the end of Year 1, $5,000 at the end of Year 2, and $8,000 at the end of Year 3b. An initial outlay of $10,000 resulting in a cash inflow
Jella Cosmetics is considering a project that costs $800,000 and is expected to last for 10 years and produce future cash flows of $175,000 per year. If the appropriate discount rate for this project is 12 percent, what is the project’s IRR?
Your investment advisor has offered you an investment that will provide you with a single cash flow of $10,000 at the end of 20 years if you pay premiums of $200 per year in the interim period. Specifically, the annual premiums begin immediately and extend through the end of Year 19. You then
The cash flows for three independent projects are as follows:a. Calculate the IRR for each of the projects.b. If the discount rate for all three projects is 10 percent, which project or projects would you want to undertake?c. What is the net present value of each of the projects where the
Mode Publishing is considering a new printing facility that will involve a large initial outlay and then result in a series of positive cash flows for four years. The estimated cash flows associated with this project are as follows:YearProject Cash Flow0 ......... ?1 .........$800 million2
Emily’s Soccer Mania is considering building a new plant. This project would require an initial cash outlay of $10 million and would generate annual cash inflows of $3 million per year for Years 1 through 4. In Year 5 the project will require an investment outlay of $5,000,000. During Years 6
Carraway Trucking Company runs a fleet of long-haul trucks and has recently expanded into the Midwest, where it has decided to build a maintenance facility. This project would require an initial cash outlay of $20 million and would generate annual cash inflows of $4 million per year for Years 1
Microwave Oven Programming, Inc. is considering the construction of a new plant. The plant will have an initial cash outlay of $7 million (CF0 = −$7 million), and will produce cash flows of $3 million at the end of Year 1, $4 million at the end of Year 2, and $2 million at the end of Years 3
The Dunder Muffin Paper Company is considering purchasing a new stamping machine that costs $400,000. This new machine will produce cash inflows of $150,000 each year at the end of Years 1 through 10. In addition to the cash inflows, at the end of Year 5, there will be a cash outflow of $200,000.
Star Industries owns and operates landfills for several municipalities throughout the U.S. Midwest. Star typically contracts with the municipality to provide landfill services for a period of 20 years. The firm then constructs a lined landfill (required by federal law) that has capacity for five
Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,950,000, and the project would generate cash flows of $450,000 per year for six years. The appropriate discount rate is 9
Gio’s Restaurants is considering a project with the following expected cash flows:Year Project Cash Flow0 .......... $(150 million)1 .......... 90 million2 .......... 70 million3 .......... 90 million4 .......... 100 million
The Callaway Cattle Company is considering the construction of a new feed handling system for its feed lot in Abilene, Kansas. The new system will provide annual labor savings and reduced waste totaling $200,000, and the initial investment is only $500,000. Callaway’s management has used a simple
The Bar-None Manufacturing Co. manufactures fence panels used in cattle feed lots throughout the Midwest. Bar-None’s management is considering three investment projects for next year but doesn’t want to make any investment that requires more than three years to recover the
Plato Energy is an oil and gas exploration and development company located in Farmington, New Mexico. The company drills shallow wells in hopes of finding significant oil and gas deposits. The firm is considering two different drilling opportunities that have very different production potentials.
You are considering a project with an initial cash outlay of $80,000 and expected cash flows of $20,000 at the end of each year for six years. The discount rate for this project is 10 percent.a. What are the project’s payback and discounted payback periods?b. What is the project’s NPV?c. What
You have been assigned the task of evaluating two mutually exclusive projects with the following projected cash flows:If the appropriate discount rate on these projects is 10 percent, which would be chosen andwhy?
You are considering two independent projects, Project A and Project B. The initial cash outlay associated with Project A is $50,000 and the initial cash outlay associated with Project B is $70,000. The discount rate on both projects is 12 percent. The expected annual cash flows from each project
Garmen Technologies Inc. operates a small chain of specialty retail stores throughout the U.S. Southwest. The company markets technology-based consumer products both in its stores and over the Internet, with sales split roughly equally between the two channels of distribution. The company’s
Morten Food Products, Inc. is a regional manufacturer of salty food snacks. The firm competes directly with the national brands including Frito-Lay, but only in the U.S. Southeast. Last year Morten sold $300 million of its various chip products and hopes to increase its sales in the coming year by
Landcruisers plus (LP) has operated an online retail store selling off-road truck parts. As the name implies, the firm specializes in parts for the venerable Toyota FJ40 that is known throughout the world for its durability and off-road prowess. The fact that Toyota stopped building and exporting
Bangers, Inc. is a start-up manufacturer of Australian-style frozen veggie pies located in San Antonio, Texas. The company is five years old and recently installed the manufacturing capacity to quadruple its unit sales. To jump start the demand for its products, the company founders have hired a
Apple's (AAPL) iPad jump started the touchscreen computer market to levels few analysts had ever dreamed possible. Moreover, the popularity of the iPad pushed Apple's competitors to offer similar touchscreen computers. Hewlett Packard offered its Slate product and others soon followed suit. One
In 2010 the Cameron Manufacturing Company began working on a new version of its tried-and-true wind-powered water pump. For 15 years the firm had manufactured replacement parts for older-style windmills used on farms and ranches throughout the U.S. Southwest. However, the old-style pumps required
Captain's Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will be called Crunch Stuff n' Stars. It
Fruity Stones is considering introducing a variation of its current breakfast cereal, Jolt 'n Stones. This new cereal will be similar to the old with the exception that it will contain more sugar in the form of small pebbles. The new cereal will be called Stones 'n Stuff. It is estimated that the
Tetious Dimensions is introducing a new product that is expected to increase its net operating income by $775,000. Tetious Dimensions has a 34 percent marginal tax rate. This project will also produce $200,000 of depreciation per year. In addition, this project will cause the following changes:What
Duncan Motors is introducing a new product that it expects will increase its net operating income by $300,000. Duncan Motors has a 34 percent marginal tax rate. This project will also produce $50,000 of depreciation per year. In addition, this project will cause the following changes:What is the
Racin’ Scooters is introducing a new product and has an expected change in net operating income of $475,000. Racin’ Scooters has a 34 percent marginal tax rate. This project will also produce $100,000 of depreciation per year. In addition, this project will cause the following
Visible Fences is introducing a new product and has an expected change in net operating income of $900,000. Visible Fences has a 34 percent marginal tax rate. This project will also produce $300,000 of depreciation per year. In addition, this project will cause the following changes:What is the
Assume that a new project will annually generate revenues of $2,000,000 and cash expenses (including both fixed and variable costs) of $800,000, while increasing depreciation by $200,000 per year. In addition, the firm’s tax rate is 34 percent. Calculate the operating cash flows for the new
The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $3 million per year. The project will also involve annual cash expenses (including both fixed and variable costs) of $900,000, while increasing depreciation by $400,000 per year. If the
You are considering expanding your product line that currently consists of skateboards to include gas-powered skateboards, and you feel you can sell 10,000 of these per year for 10 years (after which time this project is expected to shut down, with solar-powered skateboards taking over). The gas
You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for five years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The elliptical trainers would sell for $1,000 each with variable costs of $500 for
The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $70,000 per year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 after tax
El Gato’s Motors is considering the purchase of a new production machine for $1 million. The purchase of this machine will result in an increase in earnings before interest and taxes of $400,000 per year. It would cost $50,000 after tax to install this machine; in addition, to operate this
Weir's Trucking, Inc. is considering the purchase of a new production machine for $100,000. The purchase of this new machine will result in an increase in earnings before interest and taxes of $25,000 per year. To operate this machine properly, workers would have to go through a brief training
The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it would cost an additional $5,000 after
Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would have to go through a brief training session that
Garcia’s Truckin’, Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine properly, workers would have to go through a brief training
Traid Winds Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This project is expected to last five years and then, because this is somewhat of
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