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essentials corporate finance
Essentials Of Corporate Finance 7th Edition Stephen Ross, Randolph Westerfield, Bradford Jordan - Solutions
A firm offers terms of 2/15, net 40. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if:a. The discount is changed to 3 percent.b. The credit period is increased to 60
Two Doors Down, Inc., has weekly credit sales of $38,600, and the average collection period is 34 days. What is TDD’s average accounts receivable figure?
Miyagi Data, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 1/10, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average collection period?b. If the company sells 1,200 forecasts every month at a price of $2,300 each,
The Johnson Corporation has annual credit sales of $31 million. The average collection period is 33 days. What is the average investment in accounts receivable as shown on the balance sheet?
Essence of Skunk Fragrances, Ltd., sells 5,000 units of its perfume collection each year at a price per unit of $380. All sales are on credit with terms of 1/10, net 30. The discount is taken by 35 percent of the customers. What is the amount of the company’s accounts receivable? In reaction to
Each business day, on average, a company writes checks totaling $32,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $43,000. The cash from the payments is
In a typical month, the Tanner Corporation receives 100 checks totaling $78,000. These are delayed three days on average. What is the average daily float? Assume 30 days in a month.
You place an order for 900 units of Good X at a unit price of $46. The supplier offers terms of 1/20, net 35.a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit?b. What is the discount being offered? How quickly must you pay to get
Kings of Leon, Inc., has a book value of equity of $62,000. Longterm debt is $55,000. Net working capital, other than cash, is $21,800. Fixed assets are $91,600. How much cash does the company have? If current liabilities are $6,800, what are current assets?
We are evaluating a project that costs $1,350,000, 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 87,000 units per year. Price per unit is $34.25, variable cost per unit is $20.50, and fixed costs
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,070 per unit; variable cost = $290 per unit; fixed costs = $4.8 million; quantity = 70,000 units. Suppose the company believes all of its estimates are accurate only to within ±15
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $190,000 per year. Will you accept the project? What if the pretax cost savings are only $130,000 per year?Data From Problem 14Your firm is contemplating the purchase of a new
A major college textbook publisher has an existing finance textbook. The publisher is debating whether or not to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are some of the considerations that should come into play? To answer the next three questions,
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 Mosby, Inc., will be $2.45 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells
In 2007, baseball player Alex Rodriguez signed a contract reported to be worth $275 million. The contract called for $2 million immediately and $27 million in 2008. The remaining $246 million was to be paid as $33 million in 2009, $33 million in 2010, $32 million in 2011, $30 million in 2012, $32
You want to borrow $58,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,200, 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 $175, beginning at the end of this month, into an account that pays 10 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 $15,000 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?
You’re trying to choose between two different investments, both of which have up-front costs of $85,000. Investment G returns $150,000 in six years. Investment H returns $270,000 in 13 years. Which of these investments has the higher return?
Peter Lynchpin wants to sell you an investment contract that pays equal $12,000 amounts at the end of each of the next 20 years. If you require an effective annual return of 9 percent on this investment, how much will you pay for the contract today?
You have an investment that will pay you 1.27 percent per month. How much will you have per dollar invested in one year? In two years?
You are saving to buy a $175,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 6 percent. How long will it take your initial $92,000 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 2.1 percent per year, compounded monthly for the first six months, increasing thereafter to 17 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 $43,000. The contract is in the form of a 60-month annuity due at a 6.25 percent APR. What will your monthly payment be?
If the appropriate discount rate for the following cash flows is 9.29 percent per year, what is the present value of the cash flows? Cash Flow Year $1,900 2,300 4,500 5,100 3
If you put up $25,000 today in exchange for a 7.9 percent, 12-year annuity, what will the annual cash flow be?
You have $35,400 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $4,700 and then deposit a check for $6,300. What are your disbursement, collection, and net floats?
You have $13,200 on deposit with no outstanding checks or uncleared deposits. If you deposit a check for $4,800, does this create a disbursement float or a collection float? What is your available balance? Book balance?
You have $145,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $39,000. Does this create a disbursement float or a collection float? What is your available balance? Book balance?
In the chapter opening, we discussed the cash positions of several companies. Automobile manufacturers also have enormous cash reserves. At the beginning of 2009, Ford Motor Co. had $28.2 billion in cash, General Motors had $14 billion, and Toyota had about $30.3 billion. Why would firms such as
Come and Go Bank offers your firm an 8 percent discount interest loan for up to $20 million, and in addition requires you to maintain a 3 percent compensating balance against the face amount borrowed. What is the effective annual interest rate on this lending arrangement?
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.8 percent per quarter on any funds actually borrowed.2. Maintain a 4 percent compensating balance on any funds actually borrowed.3. Pay an up-front commitment fee of .25 percent of the
Piano Man, Inc., has a 40-day average collection period and wants to maintain a minimum cash balance of $25 million, which is what the company currently has on hand. The company currently has a receivables balance of $182 million and has developed the following sales and cash disbursement budgets
A bank offers your firm a revolving credit arrangement for up to $75 million at an interest rate of 1.34 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account.
You’ve worked out a line of credit arrangement that allows you to borrow up to $60 million at any time. The interest rate is .573 percent per month.In addition, 4 percent of the amount that you borrow must be deposited in a non-interest-bearing account. Assume that your bank uses compound
The Coba Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $3,700. The company has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following:b. Rework (a)
Here are some important figures from the budget of Red Barchetta, Inc., for the second quarter of 2010:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale, and the remaining 60 percent will be collected
The Bruin Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 30 percent of sales, and interest and dividends are $110 per quarter. No capital expenditures are
Confusion Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers assuming that the company places orders during each quarter equal to 30 percent of projected sales
Your firm has an average collection period of 47 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely.
Consider the following financial statement information for the Keenan Corporation:Assume all sales are on credit. Calculate the operating and cash cycles. How do you interpret your answer? Ending Item Beginning $9,582 4,851 5,152 Inventory Accounts receivable Accounts payable $10,380 5,381 5,493
The Maynard Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $240. Maynard has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following:b. Rework (a)
Kane Manufacturing, Inc., has recently installed a justin- time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating cycle.
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,320 would be spent. Current earnings are $3.10 per share, and the stock currently sells for $85 per share. There are 3,400 shares outstanding. Ignore taxes and other imperfections in answering the
In the previous problem, suppose the company instead decides on a two for-one stock split. The firm’s 42-cent-per-share cash dividend on the new (postsplit) shares represents an increase of 10 percent over last year’s dividend on the presplit stock. What effect does this have on the equity
The company with the common equity accounts shown here has declared a 10 percent stock dividend at a time when the market value of its stock is $64 per share. What effects on the equity accounts will the distribution of the stock dividend have? Common stock ($1 par value) Capital surplus Retained
The market value balance sheet for Tidwell Manufacturing is shown here. Tidwell has declared a 20 percent stock dividend. The stock goes ex-dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 16,000 shares of stock outstanding. What will the
In the previous problem, suppose the company has announced it is going to repurchase $30,000 worth of stock instead of paying a dividend. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase?
The balance sheet for Price Cut, Inc., is shown here in market value terms. There are 25,000 shares of stock outstanding.The company has declared a dividend of $1.20 per share. The stock goes ex-dividend tomorrow. Ignoring any tax effects, what is the stock selling for today? What will it sell for
Bermuda Triangle Corporation (BTC) currently has 500,000 shares of stock outstanding that sell for $83 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. BTC has a five-for-three stock split?b. BTC has a 15 percent stock dividend?c. BTC has a
The owners' equity accounts for Trans World International are shown here:a. If Trans World stock currently sells for $42 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.b. If Trans World declared a 25 percent
Palmer, Inc., has declared a $5.80 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Palmer sells for $109 per share, and the stock is about to go ex-dividend. What do
Your portfolio is 180 shares of Sunny Morning, Inc. The stock currently sells for $88 per share. The company has announced a dividend of $1.90 per share with an ex-dividend date of April 19. Assuming no taxes, how much will your stock be worth on April 19?
During 2008, only 21 companies went public with common stock offerings, raising a combined total of $22.8 billion. Relatively few of these 21 companies involved paid cash dividends. Why do you think most chose not to pay dividends?
Explain the life-cycle theory of dividend payments. How does it explain corporate dividend payments that are seen in the stock market?
Baker Corporation expects an EBIT of $43,000 every year forever. Baker currently has no debt, and its cost of equity is 13 percent. The company can borrow at 8 percent. If the corporate tax rate is 38 percent, what is the value of the firm? What will the value be if the company converts to 50
Kunitz Co. has no debt. Its cost of capital is 9.3 percent. Suppose Kunitz converts to a debt-equity ratio of 1.0. The interest rate on the debt is 6.4 percent. Ignoring taxes, what is the company’s new cost of equity? What is its new WACC?
M&M. Guerin Enterprises has no debt. Its current total value is $70 million. Ignoring taxes, what will the company’s value be if it sells $32 million in debt? Suppose now that the company’s tax rate is 40 percent. What will its overall value be if it sells $32 million in debt? Assume debt
Fleury Co. has a 38 percent tax rate. Its total interest payment for the year just ended was $32 million. What is the interest tax shield? How do you interpret this amount?
Cede & Co. can borrow at 9 percent. Cede currently has no debt, and the cost of equity is 15 percent. The current value of the firm is $625,000. What will the value be if Cede borrows $210,000 and uses the proceeds to repurchase shares? The corporate tax rate is 35 percent.
Malkin Corp. has no debt but can borrow at 7 percent. The firm’s WACC is currently 12 percent, and there is no corporate tax.a. What is Malkin’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, what will
Staal Enterprises is considering a change from its current capital structure. Staal currently has an all-equity capital structure and is considering a capital structure with 25 percent debt. There are currently 4,500 shares outstanding at a price per share of $60. EBIT is expected to remain
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 6,100 shares outstanding and the price per share is $55. EBIT is expected to remain at $19,500 per year forever. The interest rate
Blue Stripes Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $313,500 in debt. Plan II would result in 12,000 shares of stock and $198,000 in debt. The interest rate on the debt is 10 percent.a. Ignoring taxes, compare both of these plans to an
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 .25, what is the expected market risk premium? Return if State Occurs Probability of State State
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 10.5 percent. If D has an expected return of 14 percent, F has an expected return of 9.9 percent, and the risk-free
You have a portfolio with the following:What is the expected return of your portfolio? Number of Expected Return Price Stock Shares 700 600 $45 12% 22 16 350 14 58 43 575 15
Stock J has a beta of 1.20 and an expected return of 13.16 percent, while Stock K has a beta of .75 and an expected return of 10.10 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?
You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14 percent, and Stock L, with an expected return of 10.1 percent. If your goal is to create a portfolio with an expected return of 12 percent, how much money will you invest in Stock H? In
Stock Y has a beta of 1.30 and an expected return of 13 percent. Stock Z has a beta of .75 and an expected return of 10.5 percent. If the risk free rate is 4.5 percent and the market risk premium is 7 percent, are these stocks correctly priced?
Asset W has an expected return of 13 percent and a beta of 1.25. If the risk-free rate is 4.5 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 1.2 and an expected return of 11.8 percent. A risk-free asset currently earns 3.8 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 .8, what are the portfolio weights?c. If a
A stock has an expected return of 11.90 percent and a beta of 1.15, and the expected return on the market is 10.90 percent. What must the risk-free rate be?
A stock has an expected return of 11 percent, its beta is .85, and the risk-free rate is 5.5 percent. What must the expected return on the market be?
A stock has an expected return of 14.2 percent, the risk-free rate is 5.5 percent, and the market risk premium is 6.9 percent. What must the beta of this stock be?
A stock has a beta of 1.25, the expected return on the market is 11.7 percent, and the risk-free rate is 4.5 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 1.31 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 25 percent in Stock Q, 20 percent in Stock R, 45 percent in Stock S, and 10 percent in Stock T. The betas for these four stocks are .85, .91, 1.31, and 1.76, respectively. What is the portfolio beta?
Consider the following information:a. Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio?b. What is the variance of this portfolio? The standard deviation? Rate of Return if State Occurs Probability of State of Economy State of
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 State of Probability of State of Economy Stock B
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 8.5 percent, 11 percent, and 16.4 percent, respectively. What is the portfolio’s expected return? How do you interpret your answer?
Based on the following information, calculate the expected return and standard deviation for the two stocks. Rate of Return if State Occurs Stock B Probability of State of Economy State of Economy Stock A Recession .20 .55 .01 -.25 Normal .09 .15 Boom .25 .14 .38
Based on the following information, calculate the expected return. Rate of Return if State Occurs State of Economy Probability of State of Economy .25 Recession Normal -.09 .45 .11 .30 Boom .30
Based on the following information, calculate the expected return. Rate of Return Probability of State State of if State Occurs of Economy Economy Recession .35 -.09 Boom .65 .21
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 10 percent. If your goal is to create a portfolio with an expected return of 12.25 percent, how much money will you invest in Stock X? In Stock Y?
You own a portfolio that is 25 percent invested in Stock X, 40 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent, respectively. What is the expected return on the portfolio?
You own a portfolio that has $1,500 invested in Stock A and $2,600 invested in Stock B. If the expected returns on these stocks are 10 percent and 16 percent, respectively, what is the expected return on the portfolio?
What are the portfolio weights for a portfolio that has 110 shares of Stock A that sell for $79 per share and 85 shares of Stock B that sell for $62 per share?
1. What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?2. Notice that, for every dollar you invest, S&S Air also invests a dollar. What return on your investment does this represent? What does your answer suggest about matching
You bought one of Rocky Mountain Manufacturing Co.’s 8 percent coupon bonds one year ago for $1,045.30. 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 7.5 percent. If the inflation rate was 3.5
A stock has had the following year-end prices and dividends:What are the arithmetic and geometric returns for the stock? Price Year Dividend $64.18 $0.57 71.05 76.85 0.62 4 63.12 0.68 72.81 0.77 78.25 0.84
A stock has had returns of −18 percent, 28 percent, 12 percent, −9 percent, 34 percent, and 26 percent over the last six years. What are the arithmetic and geometric returns for the stock?
You find a certain stock that had returns of 12 percent, −21 percent, 27 percent, and 18 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
You bought a stock three months ago for $73.82 per share. The stock paid no dividends. The current share price is $76.09. What is the APR of your investment? The EAR?
You bought a share of 5.5 percent preferred stock for $92.18 last year. The market price for your stock is now $94.17. What is your total return for last year?
You purchased a zero-coupon bond one year ago for $275.83. The market interest rate is now 9 percent. If the bond had 15 years to maturity when you originally purchased it, what was your total return for the past year?
Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2008? Why do you think they were so high during this period? What relationship underlies your answer?Figure 10.7 Long-term government bonds 50 40 30 10 -10 1925 1935 1945 1955
You’ve observed the following returns on Staverosky Corporation’s stock over the past five years: −24 percent, 13 percent, 29 percent, 2 percent, and 21 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
Refer to Table 10.1 in the text and look at the period from 1973 through 1978.a. Calculate the arithmetic average returns for large-company stocks and T-bills over this time period.b. Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period.c.
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