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essentials corporate finance

Corporate Finance 12th edition Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan - Solutions

Security F has an expected return of 10 percent and a standard deviation of 53 percent per year. Security G has an expected return of 13 percent and a standard deviation of 79 percent per year. a. What is the expected return on a portfolio composed of 40 percent of Security F and 60 percent
Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Return Return Probability on on State of of State of Stock Stock Economy Economy J K Bear
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 of the two stocks? Return Return on on State of
You want to create a portfolio equally as risky as the market and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A $190,000 .83 Stock В $325,000 1.19 Stock 1.45 Risk- free asset
Consider the following information about three stocks: a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The standard deviation? b. If the expected T-bill rate is 3.80 percent, what is the expected risk
Stock Y has a beta of 1.15 and an expected return of 11.8 percent. Stock Z has a beta of .85 and an expected return of 10.7 percent. If the risk-free rate is 4.5 percent and the market risk premium is 7.1 percent, are these stocks correctly priced?
Asset W has an expected return of 12.3 percent and a beta of 1.2. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected returns
A stock has a beta of 1.08 and an expected return of 11.6 percent. A risk-free asset currently earns 3.6 percent. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of .50, what are the portfolio
A stock has an expected return of 10.9 percent, its beta is .9, and the expected return on the market is 11.8 percent. What must the risk-free rate be?
A stock has an expected return of 12.7 percent, its beta is 1.20, and the risk-free rate is 4.2 percent. What must the expected return on the market be?
A stock has an expected return of 10.4 percent, the risk-free rate is 3.8 percent, and the market risk premium is 7 percent. What must the beta of this stock be?
A stock has a beta of 1.15, the expected return on the market is 11.1 percent, and the risk-free rate is 3.8 percent. What must the expected return on this stock be?
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.61 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R, 15 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .75, 1.90, 1.38, and 1.16, respectively. What is the portfolio beta?
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.1 million. The cash flows are expected to grow at 10
Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the company’s financial performance. Dan graduated from college five years ago with a finance degree, and he has been employed in the treasury department of a
You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 19 percent, 24 percent, 11 percent, −9 percent, and 13 percent. a. What was the arithmetic average return on the company’s stock over this 5-year period? b. What was the variance of
A portfolio is invested 15 percent in Stock G, 60 percent in Stock J, and 25 percent in Stock K. The expected returns on these stocks are 9 percent, 11 percent, and 14 percent, respectively. What is the portfolio’s expected return? How do you interpret your answer?
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.7 percent and Stock Y with an expected return of 9.1 percent. If your goal is to create a portfolio with an expected return of 11.2 percent, how much money will you invest in Stock X? In Stock
In Problem 9, suppose the average inflation rate over this period was 3.6 percent and the average T-bill rate over the period was 4.1 percent. a. What was the average real return on the company’s stock? b. What was the average nominal risk premium on the company’s stock? Data
A stock has had returns of 12.79, 9.21, 14.68, 21.83, and −10.34 per-cent over the past 5 years, respectively. What was the holding period return for the stock?
You own a portfolio that is 20 percent invested in Stock X, 45 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 10.5 percent, 16.1 percent, and 12.4 percent, respectively. What is the expected return on the portfolio?
You purchased a zero coupon bond 1 year ago for $273.82. The market interest rate is now 6.4 percent. If the bond had 21 years to maturity when you originally purchased it, what was your total return for the past year? Assume semiannual compounding.
You bought a share of 3.1 percent preferred stock for $94.82 last year. The market price for your stock is now $97.18. What was your total return for last year?
You bought a stock three months ago for $82.18 per share. The stock paid no dividends. The current share price is $91.45. What is the APR of your investment? The EAR?
You find a certain stock that had returns of 17, −19, 9, and 34 percent for four of the last five years. If the average return of the stock over this period was 10.1 percent, what was the stock’s return for the missing year? What is the standard deviation of the stock’s returns?
You own a portfolio that has $3,100 invested in Stock A and $4,600 invested in Stock B. If the expected returns on these stocks are 9.8 percent and 12.7 percent, respectively, what is the expected return on the portfolio?
A stock has had returns of 23, 11, 37, −3, 22, and −17 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
A stock has had the following year-end prices and dividends:? What are the arithmetic and geometric average returns for the stock? Year Price Dividend $64.12 68.13 2 1.15 61.23 1.25 1.36 4 74.27 77.38 86.19 1.47 1.60
What are the portfolio weights for a portfolio that has 145 shares of Stock A that sell for $47 per share and 130 shares of Stock B that sell for $86 per share?
You bought one of Colton Manufacturing Co.’s 5.8 percent coupon bonds one year ago for $1,027.50. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today when the required return on the bonds is 5.4 percent. If the inflation rate was 2.9 percent
Suppose you bought a bond with a 4.9 percent coupon rate one year ago for $1,010. The bond sells for $1,052 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? b. What was your total nominal rate of return on this investment
You found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?
Suppose a stock had an initial price of $76 per share, paid a dividend of $1.95 per share during the year, and had an ending share price of $84. Compute the percentage total return.
The Nearside Co. just paid a dividend of $2.07 per share on its stock. The dividends are expected to grow at a constant rate of 4.3 percent per year, indefinitely. If investors require a return of 11 percent on the stock, what is the current price? What will the price be in 3 years? In 15 years?
The next dividend payment by Skippy, Inc., will be $2.95 per share. The dividends are anticipated to maintain a growth rate of 4.8 percent, forever. If the stock currently sells for $53.10 per share, what is the required return?
Saine Corporation will pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 10.5 percent on your investment, how much will you pay for the company’s stock today?
Change, Inc., is expected to maintain a constant 4.9 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.2 percent, what is the required return on the company’s stock?
Suppose you know that a company’s stock currently sells for $74 per share and the required return on the stock is 9.9 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to maintain a
Gruber Corp. pays a constant $8.50 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this stock is 9.5 percent, what is the current share price?
Meteora, Inc., has an issue of preferred stock outstanding that pays a $3.75 dividend every year, in perpetuity. If this issue currently sells for $81 per share, what is the required return?
The newspaper reported last week that Bennington Enterprises earned $17.5 million this year. The report also stated that the firm’s return on equity is 13 percent. The firm retains 80 percent of its earnings. What is the firm’s earnings growth rate? What will next year’s earnings be?
The Rose Co. has earnings of $3.41 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
Bretton, Inc., just paid a dividend of $3.15 on its stock. The growth rate in dividends is expected to be a constant 4 percent per year, indefinitely. Investors require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and then an 11 percent
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $15.75 per share in 10 years and will increase the dividend by 4.8 percent per year
Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of $15 per share and has announced that it will increase the dividend by $3 per share for each of the next five years, and then never pay another dividend. If you require a return of 11 percent on the company’s
Upton Corporation is expected to pay the following dividends over the next four years: $9, $7, $5.75, and $2.55. Afterwards, the company pledges to maintain a constant 4.5 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price?
Fuji Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 11 percent and the company just paid a dividend of $3.24, what is the current share price?
Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 17 percent over the following year, and then 5 percent per year, indefinitely. The required return on this stock is 11 percent and the stock currently sells for $65 per
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $12, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require a return of 9 percent on this stock, what will you pay for a share today?
Cardinal Corporation stock currently sells for $74.32 per share. The market requires a return of 10.5 percent on the firm’s stock. If the company maintains a constant 4 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?
Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $4 in perpetuity, beginning five years from now. If the market requires a return of 4.3 percent on this investment, how much does a share of preferred stock cost today?
You have found the following stock quote for RWJJ Enterprises, Inc., in the financial pages of today’s newspaper. What is the annual dividend? What was the closing price for this stock that appeared in yesterday’s paper? If the company currently has 30 million shares of stock outstanding, what
Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $.85 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1 percent, forever. The appropriate rate of return on the stock is 10 percent, compounded quarterly. What is the
Newkirk, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 3.5 percent, forever. The current stock price is $59. What is next year’s dividend payment if the required rate of return is 11 percent?
Jupiter Satellite Corporation earned $29 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is
Four years ago, Bling Diamond, Inc., paid a dividend of $1.65 per share. The company paid a dividend of $2.10 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 5 percent per year. What will the
Consider Pacific Energy Company and Atlantic Energy, Inc., both of which reported earnings of $720,000. Without new projects, both firms will continue to generate earnings of $720,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a return of 11
Rise Above This Corp. currently has an EPS of $3.47 and the benchmark PE for the company is 19. Earnings are expected to grow at 6 percent per year. a. What is your estimate of the current stock price? b. What is the target stock price in one year? c. Assuming the company pays no
FFDP Corp. has yearly sales of $48 million and costs of $15 million. The company’s balance sheet shows debt of $64 million and cash of $23 million. There are 1.95 million shares outstanding and the industry EV/EBITDA multiple is 6.4. What is the company’s enterprise value? What is the stock
Full Boat Manufacturing has projected sales of $115 million next year. Costs are expected to be $67 million and net investment is expected to be $12 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate declining by 2 percent per year until the
Consider four different stocks, all of which have a required return of 15 percent and a most recent dividend of $3.25 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 7.5 percent, 0 percent, and −5 percent per year,
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current dividend once a year and then pays this dividend out in equal quarterly installments to its
Storico Co. just paid a dividend of $2.95 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend growth, after which the company will keep a
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $62.40 and all the dividend information remains the same. What required return must investors be demanding on the company’s stock? (Hint: Set up the valuation formula with all the relevant cash
Say you own an asset that had a total return last year of 12.08 percent. If the inflation rate last year was 4.6 percent, what was your real return?
An investment offers a total return of 12 percent over the coming year. Jerome Dowell thinks the total real return on this investment will be only 7 percent. What does Jerome believe the inflation rate will be over the next year?
Watters Umbrella Corp. issued 15-year bonds two years ago at a coupon rate of 6.2 percent. The bonds make semiannual payments. If these bonds currently sell for 98 percent of par value, what is the YTM?
After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $50 million in new 20-year bonds to finance new construction. Dan has entered into discussions with
What is the price of a 20-year, zero coupon bond paying $1,000 at maturity, assuming semiannual compounding, if the YTM is: a. 6 percent? b. 8 percent? c. 10 percent?
Rhiannon Corporation has bonds on the market with 11.5 years to maturity, a YTM of 6.8 percent, a par value of $1,000, and a current price of $1,055. The bonds make semiannual payments. What must the coupon rate be on these bonds?
Union Local School District has bonds outstanding with a coupon rate of 2.9 percent paid semiannually and 12 years to maturity. The yield to maturity on these bonds is 3.4 percent and the bonds have a par value of $5,000. What is the dollar price of each bond?
If Treasury bills are currently paying 4.15 percent and the inflation rate is 2.7 percent, what is the approximate real rate of interest? The exact real rate?
Suppose the real rate is 2.25 percent and the inflation rate is 3.2 percent. What rate would you expect to see on a Treasury bill?
Locate the Treasury bond in Figure 8.4 maturing in November 2028. What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume a par value of $10,000.Figure 8.4 Figure 8.4 Sample Wall Street Journal U.S. Treasury Bond Prices Asked Maturity Coupon Bid Asked Chg
Locate the Treasury bond in Figure 8.4 maturing in November 2039. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in dollars? Assume a par value of $10,000.Figure 8.4 Figure 8.4 Sample Wall Street Journal U.S. Treasury Bond
You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 5.7 percent, and 20 years to maturity. If you hold the bond for the entire year, how much in interest income will you have to declare on your tax return? Assume semiannual compounding.
Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 6.5 percent, has a YTM of 5.3 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of 5.3 percent, has a YTM of 6.5 percent,
Laurel, Inc., and Hardy Corp. both have 5.8 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 3 years to maturity, whereas the Hardy Corp. bond has 20 years to maturity. If interest rates suddenly rise by 2 percent,
The Faulk Corp. has a 7 percent coupon bond outstanding. The Yoo Company has an 11 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of these
Hacker Software has 5.9 percent coupon bonds on the market with 13 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
RAK Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 5.7 percent coupon bonds on the market that sell for $1,048, have a par value of $1,000, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new
You purchase a bond with a par value of $1,000 and an invoice price of $943. The bond has a coupon rate of 6.4 percent and there are two months to the next semiannual coupon date. What is the clean price of the bond?
You purchase a bond with a par value of $1,000, a coupon rate of 7.1 percent, and a clean price of $992. If the next semiannual coupon payment is due in four months, what is the invoice price?
Paul’s Dogs Corp. has 9 percent coupon bonds making annual payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How many years do these bonds have left until they mature?
Edison Corporation needs to raise funds to finance a plant expansion and has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 5.9 percent and the par value will be $1,000. a. What will these bonds sell for at issuance? b. Using the
Suppose your company needs to raise $50 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent and you’re evaluating two issue alternatives: a semiannual coupon bond with a 7 percent coupon rate and a zero coupon bond. Your
Bond P is a premium bond with a coupon of 8 percent. Bond D has a coupon of 5 percent and is selling at a discount. Both bonds make annual payments, have a YTM of 6.5 percent, and have 10 years to maturity. What is the current yield for Bond P? For Bond D? If interest rates remain unchanged, what
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period yield (HPY). a. Suppose that today you buy a bond with an annual coupon of 5.4 percent for
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $400 and has an existing customer base of 700. Paul plans to raise the annual fee by 6 percent every year and expects the club membership to grow at a constant rate of 3 percent for the next 5 years.
The Change Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first 6 years, then pays $800 every six months over the subsequent 8 years, and finally pays $1,000 every six months over the last 6
Sparkling Water, Inc., expects to sell 3.4 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.43 in real terms and will cost $.85 in real terms. Sales income and costs occur at year-end. Revenues will rise at a real rate of 1.3 percent annually, while
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $950 per set and have a variable cost of $415 per set. The company has spent $150,000 for a marketing study that determined the company will sell 50,000 sets per year for seven years. The marketing study also
We are examining a new project. We expect to sell 6,500 units per year at $43 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $43 × 6,500 = $279,500. The relevant discount rate is 16 percent and the initial investment required is
In the previous problem, suppose you think it is likely that expected sales will be revised upward to 9,100 units if the first year is a success and revised downward to 3,700 units if the first year is not a success.a. If success and failure are equally likely, what is the NPV of the project?
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project were a success. This implies that if the project is a success, projected sales after
Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says, “You see all those bumper stickers and T-shirts that say ‘got milk’ or ‘got surf.’ So this
Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town and tries to sell it but to no avail. Finally, ACME studios offers to buy the script for either (a)
Hickock Mining is evaluating when to open a gold mine. The mine has 33,600 ounces of gold left that can be mined and mining operations will produce 4,200 ounces per year. The required return on the gold mine is 12 percent and it will cost $17.4 million to open the mine. When the mine is opened, the
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $8.7 million for the next 10 years. The discount rate for this project is 13 percent. The initial investment is $43 million. Assume that the project has no salvage value at the end of

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