Questions and Answers of Essentials Corporate Finance

Miller Manufacturing has a target debt-equity ratio of .40. Its cost of equity is 11.8 percent and its cost of debt is 6.5 percent. If the tax rate is 21 percent, what is the company’s WACC?
Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 10.9 percent and the cost of debt is 5.7 percent. The relevant tax
For the firm in the previous problem, suppose the book value of the debt issue is $25 million. In addition, the company has a second debt issue on the market, a zero coupon bond with nine years left
Shanken Corp. issued a 30-year, 5.9 percent semiannual bond three years ago. The bond currently sells for 106 percent of its face value. The company’s tax rate is 22 percent. a. What is the
One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 17 years to maturity that is quoted at 95 percent of face value. The issue makes semiannual
What is wrong with measuring the performance of a U.S. growth stock manager against a benchmark composed of British stocks?
How can the return on a portfolio be expressed in terms of a factor model?
What is the relationship between the one factor model and the CAPM?
The Nixon Corporation’s common stock has a beta of .95. If the risk-free rate is 2.7 percent and the expected return on the market is 10 percent, what is the company’s cost of equity capital?
Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented in the following
A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by
Assume Stocks A and B have the following characteristics: The covariance between the returns on the two stocks is .001. a. Suppose an investor holds a portfolio consisting of only Stock A
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
Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Expected
Consider the following information about Stocks I and II:? The market risk premium is 7.5 percent and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more
Suppose the risk-free rate is 4.4 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0391. Portfolio Z has a correlation coefficient
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9 percent and a standard deviation of 16 percent. The risk-free rate is 4.1 percent and the expected
The market portfolio has an expected return of 11.5 percent and a standard deviation of 19 percent. The risk-free rate is 4.1 percent.a. What is the expected return on a well-diversified portfolio
You have been provided the following data about the securities of three firms, the market portfolio, and the riskfree asset: a. Fill in the missing values in the table. b. Is the stock of
Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .11, E(RB) = .13, σA = .47, and σB = .81. a. Calculate the expected return and standard deviation of a
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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,
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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

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