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essentials corporate finance
Essentials of Corporate Finance 10th edition Stephen Ross, Randolph Westerfield, Bradford Jordan - Solutions
Your firm is contemplating the purchase of a new $395,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $125,000 before taxes per year in order processing costs, and
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $135,000 per year. Will you accept the project? What if the pretax cost savings are only $95,000 per year?Previous problemYour firm is contemplating the purchase of a new $395,000
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $940 per unit; variable cost = $340 per unit; fixed costs = $3.4 million; quantity = 53,000 units. Suppose the company believes all of its estimates are accurate only to within ±15 percent. What
We are evaluating a project that costs $1.68 million, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $37.95, variable cost per unit is $23.20, and fixed
In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV figures.Previous problemWe are evaluating a project that costs $1.68 million, has a six-year life, and has
In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3? What is the new NPV?Previous problemH. Cochran, Inc., is considering a new three-year expansion
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $835,000 per year. The fixed costs associated with this
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $144,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the
In the previous problem, suppose the required return on the project is 14 percent. What is the project’s NPV?Previous problemH. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Previous problemCSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for
Consider a three-year project with the following information: initial fixed asset investment = $665,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $39.20; variable costs = $29.85; fixed costs = $315,000; quantity sold = 85,000 units; tax rate = 23
You are considering a new product launch. The project will cost $780,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per year, price per unit will be $16,300, variable cost per unit will be $11,100, and fixed costs will
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $925 per set and have a variable cost of $480 per set. The company has spent $150,000 for a marketing study that determined the company will sell 75,000 sets per year for seven years. The marketing study also
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year......................Unit Sales1 ................................71,5002 ................................87,8003 ..............................104,3004
A proposed cost-saving device has an installed cost of $565,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial net working capital investment is $40,000, the tax rate is 23 percent, and the project discount rate
Given that Madrigal Pharmaceuticals was up by 516 percent for 2017, why didn’t all investors hold Madrigal?
Suppose a stock had an initial price of $87 per share, paid a dividend of $2.15 per share during the year, and had an ending share price of $98. Compute the percentage total return. What was the dividend yield? The capital gains yield?
Given that Sears Holdings was down by 61 percent for 2017, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Rework Problem 1 assuming the ending share price is $78.Problem 1Suppose a stock had an initial price of $87 per share, paid a dividend of $2.15 per share during the year, and had an ending share price of $98. Compute the percentage total return. What was the dividend yield? The capital gains yield?
You purchased 250 shares of a particular stock at the beginning of the year at a price of $104.32. The stock paid a dividend of $2.34 per share, and the stock price at the end of the year was $113.65. What was your dollar return on this investment?
Asset W has an expected return of 11.6 percent and a beta of 1.23. If the risk-free rate is 3.15 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
Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1,041 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 over
What was the arithmetic average annual return on large-company stocks from 1926 through 2017:a. In nominal terms?b. In real terms?
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year 14% 41% -13 2 3 23 11 18 -13 4 42 5
You’ve observed the following returns on Yamauchi Corporation’s stock over the past five years: -10 percent, 24 percent, 21 percent, 11 percent, and 8 percent.a. What was the arithmetic average return on the stock over this five-year period?b. What was the variance of the returns over this
For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 4.1 percent.a. What was the average real return on the stock?b. What was the average nominal risk premium on the stock?Problem 9You’ve observed the following returns
You purchased a zero-coupon bond one year ago for $267.35. The market interest rate is now 5.3 percent. If the bond had 25 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 4.5 percent preferred stock for $105.35 last year. The market price for your stock is now $103.18. What is your total return for last year?
You bought a stock three months ago for $51.27 per share. The stock paid no dividends. The current share price is $55.36. What is the APR of your investment? The EAR?
You find a certain stock that had returns of 15 percent, −17 percent, 23 percent, and 11 percent for four of the last five years. If the average return of the stock over this period was 10 percent, what was the stock’s return for the missing year? What is the standard deviation of the stock’s
A stock has had returns of −26 percent, 12 percent, 34 percent, −8 percent, 27 percent, and 23 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? Price Year Dividend $64.10 $1.10 74.05 2 1.25 67.61 4 76.25 1.45 82.70 1.60 1.75 93.15
You bought one of Rocky Mountain Manufacturing Co.’s 5.7 percent coupon bonds one year ago for $1,032.15. These bonds make annual payments and mature nine years from now. Suppose you decide to sell your bonds today, when the required return on the bonds is 5.1 percent. If the inflation rate was
Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than -3.9 percent in a given year? What range of returns would you expect to see 95 percent of the time? What
What are the portfolio weights for a portfolio that has 185 shares of Stock A that sell for $64 per share and 115 shares of Stock B that sell for $49 per share?
You own a portfolio that has $3,140 invested in Stock A and $4,300 invested in Stock B. If the expected returns on these stocks are 9 percent and 14 percent, respectively, what is the expected return on the portfolio?
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.5 percent and Stock Y with an expected return of 9.5 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
Based on the following information, calculate the expected return. Rate of Return if Probability of State of State of Economy Economy State Occurs Recession .30 -13 .21 Boom .70
Based on the following information, calculate the expected return. Probability of State of Economy Rate of Return if State of Economy State Occurs Recession .15 -.12 Normal .60 .10 .25 .27 Boom
Based on the following information, calculate the expected returns and standard deviations for the two stocks. Rate of Return if State Occurs Probability of State of State of Economy Economy Stock A Stock B -.30 Recession .10 .02 Normal .50 .10 .18 .40 .31 Boom .15
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta $85,000 Stock A .80 165,000 Stock B 1.15 Stock C 1.40 Risk-free asset
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .35. It’s considering building a new $37 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $5.1 million in perpetuity.
A portfolio is invested 20 percent in Stock G, 35 percent in Stock J, and 45 percent in Stock K. The expected returns on these stocks are 9.6 percent, 10.9 percent, and 14.3 percent, respectively. What is the portfolio’s expected return? How do you interpret your answer?
Consider the following information: a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C? Rate of Return if State Occurs Probability of State of Economy State of Economy
You own a stock portfolio invested 15 percent in Stock Q, 25 percent in Stock R, 40 percent in Stock S, and 20 percent in Stock T. The betas for these four stocks are .78, .87, 1.13, and 1.45, respectively. What is the portfolio beta?
You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.29 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
A stock has a beta of 1.14, the expected return on the market is 10.9 percent, and the risk-free rate is 3.6 percent. What must the expectedreturn on this stock be?
A stock has an expected return of 11.4 percent, the risk-free rate is 3.7 percent, and the market risk premium is 6.8 percent. What must the beta of this stock be?
A stock has an expected return of 10.9 percent, its beta is .90, and the risk-free rate is 2.8 percent. What must the expected return on the market be?
A stock has an expected return of 10.2 percent and a beta of .91, and the expected return on the market is 10.8 percent. What must the risk-free rate be?
Stock Y has a beta of 1.20 and an expected return of 11.4 percent. Stock Z has a beta of .80 and an expected return of 8 percent. If the risk-free rate is 2.5 percent and the market risk premium is 7 percent, are these stocks correctly priced?
You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 13.4 percent, and Stock L, with an expected return of 10.2 percent. If your goal is to create a portfolio with an expected return of 11.3 percent, how much money will you invest in Stock H? In
Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of .84 and an expected return of 10.60 percent. You want a portfolio with the same risk as the market. How much will you invest in each stock? What is the expected return of your portfolio?
Consider the following information on a portfolio of three stocks: a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio?s expected return? The variance? The standard deviation?b. If the expected T-bill rate is 3.75 percent, what is the expected
You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11.4 percent. If D has an expected return of 13.6 percent, F has an expected return of 9.7 percent, the risk-free
Suppose you observe the following situation: a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A?s beta is greater than Stock B?s beta by .30, what is the expected market risk premium? Return if State Occurs State of Probability Economy
Consider the following information on Stocks I and II: The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more unsystematic risk? Which stock is ?riskier?? Explain. Rate of Return if State Occurs Stock II Probability of
The Pierce Co. just issued a dividend of $2.35 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $44 a share, what is the company’s cost of equity?
Hoolahan Corporation’s common stock has a beta of .87. If the risk-free rate is 3.6 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?
Suppose Potter Ltd. just issued a dividend of $1.82 per share on its common stock. The company paid dividends of $1.36, $1.46, $1.53, and $1.68 per share in the last four years, respectively. If the stock currently sells for $55, what is your best estimate of the company’s cost of equity
Sixth Fourth Bank has an issue of preferred stock with a $3.80 stated dividend that just sold for $89 per share. What is the bank’s cost of preferred stock?
You are given the following information concerning Parrothead Enterprises: Calculate the company?s WACC. Debt: 13,000 6.4 percent coupon bonds outstanding, with 15 years to maturity and a quoted price of 107. These bonds pay interest semiannually. 345,000 shares of common stock selling for $76.50
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 103 percent of face value. The issue makes semiannual payments and has an embedded cost of 5.1 percent annually. What is the company’s pretax cost of
Jiminy’s Cricket Farm issued a 30-year, 6.3 percent semiannual bond eight years ago. The bond currently sells for 110 percent of its face value. The company’s tax rate is 22 percent.a. What is the pretax cost of debt?b. What is the aftertax cost of debt?c. Which is more relevant, the pretax or
For the firm in Problem 6, suppose the book value of the debt issue is $135 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $65 million, and it sells for 64.3 percent of par. What is the total book value
Baron Corporation has a target capital structure of 75 percent common stock, 5 percent preferred stock, and 20 percent debt. Its cost of equity is 11.3 percent, the cost of preferred stock is 4.9 percent, and the pretax cost of debt is 5.8 percent. The relevant tax rate is 23 percent.a. What
Caddie Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 10.3 percent, and its pretax cost of debt is 6.4 percent. If the tax rate is 21 percent, what is the company’s WACC?
Fama’s Llamas has a WACC of 8.95 percent. The company’s cost of equity is 10.4 percent, and its pretax cost of debt is 5.3 percent. The tax rate is 21 percent. What is the company’s target debt-equity ratio?
Masterson, Inc., has 4.1 million shares of common stock outstanding. The current share price is $84, and the book value per share is $11. The company also has two bond issues outstanding. The first bond issue has a face value of $70 million, has a coupon rate of 5.1 percent, and sells for 98
In Problem 11, suppose the most recent dividend was $3.95 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 21 percent. What is the
Clifford, Inc., has a target debt-equity ratio of .65. Its WACC is 8.1 percent, and the tax rate is 23 percent.a. If the company’s cost of equity is 11 percent, what is its pretax cost of debt?b. If the aftertax cost of debt is 3.8 percent, what is the cost of equity?
Hankins Corporation has 5.4 million shares of common stock outstanding; 290,000 shares of 5.2 percent preferred stock outstanding, par value of $100; and 125,000 5.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $72 per share and has a beta of
Given the following information for Lightning Power Co., find the WACC. Assume the company?s tax rate is 21 percent. 16,000 6.2 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Debt: 535,000 shares
An all-equity firm is considering the following projects: The T-bill rate is 4 percent, and the expected return on the market is 12 percent.a. Which projects have a higher expected return than the firm?s 12 percent cost of capital?b. Which projects should be accepted?c. Which projects will be
Stock in CDB Industries has a beta of 1.10. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.1 percent. The most recent dividend was $2.56 per share, and dividends are expected to grow at an annual rate of 5 percent indefinitely. If the stock sells for $45 per share,
Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $4.3 million at the end of the first year, and these savings will grow at a rate of 1.9 percent per year indefinitely. The firm has a target debt-equity ratio of .40, a cost of equity of 10.8 percent, and
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below. If the corporate tax rate is 24 percent, what is the aftertax cost of the company?s debt? Maturity Bond Coupon Rate Price Quote Face Value 5 years 8 years 152 years 25
Gabriel Industries stock has a beta of 1.12. The company just paid a dividend of $1.15, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.4 percent, and Treasury bills are yielding 3.8 percent. The most recent stock price is $85.a. Calculate the cost of
Dewey Corp. is expected to have an EBIT of $2.45 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $180,000, $85,000, and $185,000, respectively. All are expected to grow at 18 percent per year for four years. The company currently has $13
In the previous problem, instead of a perpetual growth rate in adjusted cash flow from assets, you decide to calculate the terminal value of the company with the price-sales ratio. You believe that Year 5 sales will be $27.4 million and the appropriate price-sales ratio is 1.9. What is your new
You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3.25 million this year. Depreciation, the increase in net working capital, and capital spending were $245,000, $115,000, and $495,000, respectively. You expect that over the next five years, EBIT
Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest and taxes, EBIT, are projected to be $14,300 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT
Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent.Problem 1a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a
Trapper Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 320,000 shares of stock outstanding. Under Plan II, there would be 240,000 shares of stock outstanding and $2,272,000 in debt
Honeycutt Co. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt. The interest rate on the debt is 10 percent.a. Ignoring taxes, compare both of these plans to an
FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 7,400 shares outstanding and the price per share is $55. EBIT is expected to remain at $20,900 per year forever. The interest
Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 25 percent debt. There are currently 8,100 shares outstanding at a price per share of $50. EBIT is expected to
Brown Industries has a debt-equity ratio of 1.5. Its WACC is 9.6 percent, and its cost of debt is 5.7 percent. There is no corporate tax.a. What is the company’s cost of equity capital?b. What would the cost of equity be if the debt-equity ratio were 2.0? What if it were .5? What if it were
Irving Corp. has no debt but can borrow at 6.4 percent. The firm’s WACC is currently 10.9 percent, and there is no corporate tax.a. What is the company’s cost of equity?b. If the firm converts to 30 percent debt, what will its cost of equity be?c. If the firm converts to 60 percent debt,
Hayward Co. has a 22 percent tax rate. Its total interest payment for the year just ended was $14.3 million. What is the interest tax shield? How do you interpret this amount?
Horford Co. has no debt. Its cost of capital is 8.9 percent. Suppose the company converts to a debt-equity ratio of 1.0. The interest rate on the debt is 5.7 percent. Ignoring taxes, what is the company’s new cost of equity? What is its new WACC?
Calvert Corporation expects an EBIT of $22,300 every year forever. The company currently has no debt, and its cost of equity is 15 percent.a. What is the current value of the company?b. Suppose the company can borrow at 10 percent. If the corporate tax rate is 21 percent, what will the value of
Union Local School District has bonds outstanding with a coupon rate of 3.2 percent paid semiannually and 16 years to maturity. The yield to maturity on these bonds is 3.7 percent and the bonds have a par value of $5,000. What is the dollar price of the bonds?
Sunset Corp. currently has an EPS of $3.85, 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 dividends, what is the
Using the dividend yield, calculate the closing price for Walt Disney on this day. The actual closing price for Walt Disney was $108.85. Why is your closing price different? The Value Line Investment Survey projects a 4 percent dividend growth rate for Walt Disney. What is the required return for
According to the 2018 Value Line Investment Survey, the growth rate in dividends for Abbott Laboratories for the previous five years has been negative 11.5 percent. If investors feel this growth rate will continue, what is the required return for the company?s stock? Does this number make sense?
According to the 2018 Value Line Investment Survey, the growth rate in dividends for Ralph Lauren for the next five years will be .5 percent. If investors feel this growth rate will continue, what is the required return for the company?s stock? You?ve collected the following information from your
According to the 2018 Value Line Investment Survey, the growth rate in dividends for IBM for the next five years is expected to be 5 percent. Suppose IBM meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 3.5 percent indefinitely. Assume investors
Find the quote for Duke Energy. Assume that the dividend is constant. What was the highest dividend yield over the past year? What was the lowest dividend yield over the past year? You?ve collected the following information from your favorite financial website. 52-Week Price Div PE Close Net Stock
Dropshot Corporation stock currently sells for $68.98 per share. The market requires a return of 10.3 percent on the firm’s stock. If the company maintains a constant 4.9 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?
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