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essentials corporate finance
Essentials of Corporate Finance 10th edition Stephen Ross, Randolph Westerfield, Bradford Jordan - Solutions
Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $16.30, but management expects to reduce the payout by 3.5 percent per year, indefinitely. If you require a return of 8 percent on this stock, what will you pay for a share today?
Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is 10.5 percent and the company just paid a dividend of $2.85, what is the current share
Synovec Corporation is expected to pay the following dividends over the next four years: $7, $13, $18, and $3.25. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.4 percent, what is the current share price?
Bon Chance, Inc., has an odd dividend policy. The company has just paid a dividend of $3 per share and has announced that it will increase the dividend by $5 per share for each of the next four years, and then never pay another dividend. If you require a return of 9.7 percent on the company’s
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 then pay a dividend of $23 per share 10 years from today and will increase the dividend by 5 percent
TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1.45 million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 3.9, what is your estimate of an appropriate stock price? What if the price sales ratio were 3.2?
The Blooming Flower Co. has earnings of $3.68 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
Cape Corp. will pay a dividend of $2.64 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a return of 12 percent, how much will you pay for the stock? What if you want a return of 8 percent? What does this tell you about the
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a return of 7.3 percent on this stock, how much should you pay today?
The stock price of Alps Co. is $67. Investors require a return of 10.5 percent on similar stocks. If the company plans to pay a dividend of $4.25 next year, what growth rate is expected for the company’s stock price?
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only individual voting for you. If the company has 525,000 shares outstanding and the stock currently sells for
Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $2.85 dividend every year, in perpetuity. If this issue currently sells for $77.32 per share, what is the required return?
Burkhardt Corp. pays a constant $15.25 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. If the required return on this stock is 9.2 percent, what is the current share price?
Redan, Inc., is expected to maintain a constant 4.3 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the company’s stock?
Poulter Corporation will pay a dividend of $3.25 per share next year. The company pledges to increase its dividend by 5.1 percent per year, indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company’s stock today?
For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?Previous problemThe next dividend payment by Hoffman, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently
The next dividend payment by Hoffman, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $43.15 per share, what is the required return?
Fowler, Inc., just paid a dividend of $2.55 per share on its stock. The dividends are expected to grow at a constant rate of 3.9 percent per year, indefinitely. If investors require a return of 10.4 percent on this stock, what is the current price? What will the price be in 3 years? In 15 years?
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 an annual coupon bond with a coupon rate of 6 percent
Bond P is a premium bond with a coupon rate of 8.2 percent. Bond D is a discount bond with a coupon rate of 5.9 percent. Both bonds make annual payments and have a YTM of 7 percent, a par value of $1,000, and five years to maturity. What is the current yield for Bond P? For Bond D? If interest
What is the coupon rate for the Williams Co. bond? To calculate the number of years until maturity, assume that it is currently January 15, 2019. All of the bonds have a $2,000 par value and pay semiannual coupons. EST $ Vol (000's) Company (Ticker) Coupon Last Yield Maturity Last Price Jan 15,
What price would you expect to pay for the Kenny Corp. bond? What is the bond?s current yield? To calculate the number of years until maturity, assume that it is currently January 15, 2019. All of the bonds have a $2,000 par value and pay semiannual coupons. EST $ Vol (000's) Company (Ticker)
What is the yield to maturity for the bond issued by Xenon, Inc.? To calculate the number of years until maturity, assume that it is currently January 15, 2019. All of the bonds have a $2,000 par value and pay semiannual coupons. EST $ Vol (000's) Company (Ticker) Coupon Last Yield Maturity Last
Find the Treasury bond that matures in May 2025. What is the coupon rate for this bond? To calculate the number of years until maturity, assume that it is currently May 2019. All of the bonds have a $1,000 par value and pay semiannual coupons. Ask Maturity Rate Mo/Yr Bid Asked Chg Yld 103.5362
In the table, find the Treasury bond that matures in May 2036. What is the asked price of this bond in dollars? If the bid-ask spread for this bond is .0628, what is the bid price in dollars? To calculate the number of years until maturity, assume that it is currently May 2019. All of the bonds
In the table, find the Treasury bond that matures in May 2027. What is your yield to maturity if you buy this bond? To calculate the number of years until maturity, assume that it is currently May 2019. All of the bonds have a $1,000 par value and pay semiannual coupons. Ask Maturity Rate Mo/Yr
Suppose your company needs to raise $40 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 5.7 percent, and you’re evaluating two issue alternatives: a 5.7 percent semiannual coupon bond and a zero coupon bond.Your company’s tax
Suppose the following bond quote for IOU Corporation appears in the financial page of today?s newspaper. Assume the bond has a face value of $1,000, and the current date is April 15, 2019. What is the yield to maturity of the bond? What is the current yield? Company (Ticker) EST Vol (000s) Last
You purchase a bond with a coupon rate of 5.2 percent, semiannual coupons, and a clean price of $993. If the next coupon payment is due in two months, what is the invoice price?
You purchase a bond with an invoice price of $1,043. The bond has a coupon rate of 4.7 percent, semiannual coupons, and a $1,000 par value, and there are five months to the next coupon date. What is the clean price of the bond?
Both Bond Bill and Bond Ted have 5.8 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 25 years to maturity. If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Bill? Of Bond
Bond X is a premium bond making semiannual payments. The bond has a coupon rate of 7.5 percent, a YTM of 6 percent, and 13 years to maturity. Bond Y is a discount bond making semiannual payments. This bond has a coupon rate of 6 percent, a YTM of 7.5 percent, and also 13 years to maturity. What are
Lion Corp. has a $2,000 par value bond outstanding with a coupon rate of 3.8 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 4.9 percent. What is the dollar price of the bond?
You find a zero coupon bond with a par value of $10,000 and 13 years to maturity. If the yield to maturity on this bond is 4.7 percent, what is the price of the bond? Assume semiannual compounding periods.
Locate the Treasury bond in Figure 6.3 maturing in May 2037. 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 for a $1,000 par value bond? Asked Maturity Coupon Bid Asked Chg Yield 1/31/2019 1.500 99.5469 99.5625 -0.0078
Locate the Treasury issue in Figure 6.3 maturing in February 2029. What is its coupon rate? What is the dollar bid price for a $1,000 par value bond? What was the previous day?s asked price for a $1,000 par value bond? Asked Maturity Coupon Bid Asked Chg Yield 1/31/2019 1.500 99.5469 99.5625
BDJ Co. wants to issue new 25-year bonds for some much-needed expansion projects. The company currently has 4.8 percent coupon bonds on the market that sell for $1,028, make semiannual payments, have a $1,000 par value, and mature in 25 years. What coupon rate should the company set on its new
Bart Software has 5.7 percent coupon bonds on the market with 22 years to maturity. The bonds make semiannual payments and currently sell for 97 percent of par. What is the current yield? The YTM? The effective annual yield?
Bond J has a coupon rate of 4 percent. Bond K has a coupon rate of 14 percent. Both bonds have 17 years to maturity, a par value of $1,000, and a YTM of 8 percent, and both make semiannual payments. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds?
Say you own an asset that had a total return last year of 12.1 percent. If the inflation rate last year was 3.4 percent, what was your real return?
An investment offers a total return of 12 percent over the coming year. Alex Hamilton thinks the total real return on this investment will be only 9 percent. What does Alex believe the inflation rate will be over the next year?
Suppose the real rate is 1.8 percent and the inflation rate is 3.7 percent. What rate would you expect to see on a Treasury bill?
If Treasury bills are currently paying 4.7 percent and the inflation rate is 1.9 percent, what is the approximate real rate of interest? The exact real rate?
Henley Corporation has bonds on the market with 10.5 years to maturity, a YTM of 5.7 percent, a par value of $1,000, and a current price of $945. The bonds make semiannual payments. What must the coupon rate be on the bonds?
Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 5.4 percent. The bonds make semiannual payments. If these bonds currently sell for 106 percent of par value, what is the YTM?
Dufner Co. issued 15-year bonds one year ago at a coupon rate of 4.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.3 percent, what is the current dollar price assuming a $1,000 par value?
Big Canyon Enterprises has bonds on the market making annual payments, with 12 years to maturity, a par value of $1,000, and a price of $1,030. At this price, the bonds yield 6.14 percent. What must the coupon rate be on the bonds?
The Petit Chef Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments and have a par value of $1,000. If the bonds currently sell for $1,038.50, what is the YTM?
Vulcan, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments and have a par value of $1,000. If the YTM on these bonds is 8.4 percent, what is the current bond price?
An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company:First
You are looking at a one-year loan of $15,000. The interest rate is quoted as 12 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street-sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury already has decided in favor of the plaintiff. You are the
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $18,000 for one year. The interest rate is 14.6 percent. You and the lender agree that the interest on the loan will be .146 × $18,000 = $2,628.
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $19,000 every year instead of equal annual payments.Problem 55 Prepare an amortization schedule for a three-year loan of $57,000. The interest rate is 8 percent per year, and the loan calls for equal annual
Prepare an amortization schedule for a three-year loan of $57,000. The interest rate is 8 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? How much total interest is paid over the life of the loan?
If today is Year 0, what is the future value of the following cash flows five years from now? What is the future value 10 years from now? Assume an interest rate of 6.1 percent per year.Year ..........................Cash Flow2 ...................................$15,0003
A local finance company quotes an interest rate of 16.7 percent on one-year loans. So, if you borrow $25,000, the interest for the year will be $4,175. Because you must repay a total of $29,175 in one year, the finance company requires you to pay $29,175/12, or $2,431.25 per month over the next 12
Given an interest rate of 6.35 percent per year, what is the value at Year 7 of a perpetual stream of $7,000 payments that begin at Year 20?
A 10-year annuity pays $1,725 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded monthly thereafter, what is the value of the annuity today?
What is the present value of $2,625 per year, at a discount rate of 6.9 percent, if the first payment is received six years from now and the last payment is received 20 years from now?
A 6-year annuity of twelve $7,375 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 9 percent compounded semiannually, what is the value of this annuity five years from now? What is the value three years from now? What is the
Mary is going to receive a 30-year annuity of $9,500. Nancy is going to receive a perpetuity of $9,500. If the appropriate discount rate is 5.4 percent, how much more is Nancy’s cash flow worth?
Suppose you are going to receive $7,800 per year for five years. The appropriate discount rate is 7.5 percent.a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an annuity due?b. Suppose you plan to invest the
You have arranged for a loan on your new car that will require the first payment today. The loan is for $28,500, and the monthly payments are $525. If the loan will be paid off over the next 60 months, what is the APR of the loan?
You are planning your retirement in 10 years. You currently have $50,000 in a bond account and $250,000 in a stock account. You plan to add $9,000 per year at the end of each of the next 10 years to your bond account. The stock account will earn a return of 10.5 percent and the bond account will
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $3,500,000 purchase price. The monthly payment on this loan will be $15,100. What is the APR on this loan? The EAR?
The contract signed in February 2018 by Jimmy Garoppolo that we discussed at the beginning of the chapter was actually paid as a $35 million signing bonus to be paid immediately and a $7.6 million salary for 2018. The remaining salary was $18.6 million in 2019, $25.2 million in 2020, $25.5 million
In March 2018, the Buffalo Bills signed Star Lotulelei to a contract reportedly worth $50 million. Lotulelei’s salary (including bonuses) was to be paid as $17.1 million in 2018, $8.9 million in 2019, $7.5 million in 2020, and $8.25 million in 2021 and 2022. If the appropriate interest rate is 11
You want to borrow $75,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,475, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?
You’re prepared to make monthly payments of $250, beginning at the end of this month, into an account that pays 8 percent interest compounded monthly. How many payments will you have made when your account balance reaches $50,000?
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 10-year annuity of $5,200 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if interest rates suddenly drop to 5 percent? What
You’re trying to choose between two different investments, both of which have up-front costs of $30,000. Investment G returns $65,000 in six years. Investment H returns $98,000 in nine years. Which of these investments has the higher return
Peter Lynchpin wants to sell you an investment contract that pays equal $22,500 amounts at the end of each year for the next 20 years. If you require an effective annual return of 8 percent on this investment, how much will you pay for the contract today?
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $6,100 per month for the next two years, or you can have $5,100 per month for the next two years, along with a $25,000 signing bonus today. If the
You have an investment that will pay you 1.38 percent per month. How much will you have per dollar invested in one year? In two years?
You are saving to buy a $255,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 4.8 percent. How long will it take your initial $95,000 investment to reach the desired level at First Bank, which pays simple interest? How long at Second Bank, which
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of .9 percent per year, compounded monthly for the first six months, increasing thereafter to 18.5 percent compounded monthly. Assuming you transfer the $10,000 balance from your existing credit
You want to buy a new sports car from Muscle Motors for $68,500. The contract is in the form of a 60-month annuity due at an APR of 4.5 percent. What will your monthly payment be?
First Simple Bank pays 6.3 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 years?
If the appropriate discount rate for the following cash flows is 4.78 percent per year, what is the present value of the cash flows?Year ..........................Cash Flow1 ...................................$1,4002 .....................................1,9003
If the appropriate discount rate for the following cash flows is 8.15 percent, what is the present value of the cash flows?Year ................Cash Flow1 .......................$1,2002 .........................1,1003 ............................8004 ............................600
Beginning three months from now, you want to be able to withdraw $2,500 each quarter from your bank account to cover college expenses over the next 4 years. If the account pays .47 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over
In the previous problem, suppose you make $6,000 annual deposits into the same retirement account. How large will your account balance be in 35 years?Previous ProblemYou are to make monthly deposits of $500 into a retirement account that earns an APR of 9.5 percent compounded monthly. If your first
You are to make monthly deposits of $500 into a retirement account that earns an APR of 9.5 percent compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 35 years?
Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $2,750 monthly. The contract currently sells for $400,000. What is the monthly return on this investment vehicle? What is the APR? The effective annual return?
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $400 per month. You will charge 1.4 percent per month interest on the overdue balance. If the current balance is $17,320, how long will it take for the account to be paid off?
You want to buy a new sports coupe for $78,500, and the finance office at the dealership has quoted you a loan with an APR of 4.9 percent for 60 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?
Ricky Ripov’s Pawn Shop charges an interest rate of 12.1 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers. What rate should the shop report? What is the effective annual rate?
An investment will pay you $100,000 in 9 years. If the appropriate discount rate is 5.5 percent compounded daily, what is the present value?
At 5.3 percent interest, how long does it take to double your money? To quadruple it?
Bello, Inc., has a total debt ratio of .43. What is its debt-equity ratio? What is its equity multiplier?
During the year, Belyk Paving Co. had sales of $2,275,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,285,000, $535,000, and $420,000, respectively. In addition, the company had an interest expense of $245,000 and a tax rate of 21 percent. (Ignore any
Streamsong Credit Bank is offering 4.7 percent compounded daily on its savings accounts. If you deposit $4,750 today, how much will you have in the account in 5 years? In 10 years? In 20 years?
Vandermark Credit Corp. wants to earn an effective annual return on its consumer loans of 13.9 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed
First National Bank charges 14.3 percent compounded monthly on its business loans. First United Bank charges 14.7 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?
Find the APR, or stated rate, in each of the following cases. Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) Semiannually Monthly Weekly 15.3% 8.7 9.4 Daily 14.9
Find the EAR in each of the following cases. Effective Rate (EAR) Stated Rate (APR) Number of Times Compounded 10.2% Quarterly Monthly Daily Semiannually 18.0 13.5 9.5
In the previous problem, suppose Larry’s told you the policy costs $645,000. At what interest rate would this be a fair deal?Previous ProblemLarry’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on
Larry’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 4 percent, how much will you pay for the policy?
If you deposit $5,000 at the end of each year for the next 20 years into an account paying 10.1 percent interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?
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