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essentials corporate finance
Essentials Of Corporate Finance 7th Edition Stephen Ross, Randolph Westerfield, Bradford Jordan - Solutions
What was the arithmetic average annual return on large company stocks from 1926 through 2008:1. In nominal terms?2. In real terms?
Production of the implants will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,350,000 per year, variable production costs are $225 per
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $730 per set and have a variable cost of $360 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
You are considering a new product launch. The project will cost $950,000, have a four-year life, and have no salvage value; depreciation is straight line to zero. Sales are projected at 220 units per year; price per unit will be $18,400, variable cost per unit will be $14,900, and fixed costs will
Consider a three-year project with the following information: Initial fixed asset investment = $840,000; straight-line depreciation to zero over the five-year life; zero salvage value; price = $32.85; variable costs = $21.95; fixed costs = $204,000; quantity sold = 90,000 units; tax rate = 34
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $485,000 is estimated to result in $184,000 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
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 $575,000 per year. The fixed costs associated with this
Suppose you bought a 7 percent coupon bond one year ago for $893. The bond sells for $918 today.1. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?2. What was your total nominal rate of return on this investment over the past year?3. If the
You purchased 250 shares of a particular stock at the beginning of the year at a price of $75.13. The stock paid a dividend of $0.85 per share, and the stock price at the end of the year was $81.64. What was your dollar return on this investment?
Rework Problem 1 assuming the ending share price is $71.Data From Problem 1Suppose a stock had an initial price of $83 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $96. Compute the percentage total return. What was the dividend yield? The capital
Suppose a stock had an initial price of $83 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $96. Compute the percentage total return. What was the dividend yield? The capital gains yield?
Given that Fannie Mae was down by 98 percent for 2008, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Given that Emergent BioSolutions was up by 461 percent for 2008, why didn’t all investors hold Emergent BioSolutions?
1. What is the payback period of the project?2. What is the profitability index of the project?3. What is the IRR of the project?4. What is the NPV of the project?5. How sensitive is the NPV to changes in the price of the new PDA?6. How sensitive is the NPV to changes in the quantity sold?7.
Your firm is contemplating the purchase of a new $520,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $40,000 at the end of that time. You will save $160,000 before taxes per year in order processing costs, and
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $625,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $95,000. The sausage system will save the firm $183,000 per
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate
Herrera Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $25,500, and the company expects to sell 1,400 per year. The company currently sells 1,900 units of its existing model per year. If the new model is introduced, sales of the
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,750,000 at the end of the project. If the tax rate is 34 percent, what is the after tax salvage value of the asset?
Consider an asset that costs $780,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $135,000. If the relevant tax rate is 35 percent, what is the after tax cash flow from
A piece of newly purchased industrial equipment costs $960,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment.
Consider the following income statement:Fill in the missing numbers and then calculate the OCF. What is the depreciation tax shield? Sales $643,800 Costs 345,300 Depreciation 96,000 EBIT Taxes (35%) Net income
A proposed new investment has projected sales of $825,000. Variable costs are 55 percent of sales, and fixed costs are $187,150; depreciation is $91,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net income?
Winnebagel Corp. currently sells 28,000 motor homes per year at $73,000 each and 7,000 luxury motor coaches per year at $115,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 23,000 of these campers per year at $19,000 each. An independent
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $9.8 million
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:After
You are looking at a one-year loan of $10,000. The interest rate is quoted as 10 percent plus two points. A point on a loan is simply 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
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 has already 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 $15,000 for one year. The interest rate is 16 percent. You and the lender agree that the interest on the loan will be .16 × $15,000 = $2,400. So,
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $20,000 every year instead of equal annual payments.Data From Problem 55Prepare an amortization schedule for a three-year loan of $60,000. The interest rate is 9 percent per year, and the loan calls for equal
Prepare an amortization schedule for a three-year loan of $60,000. The interest rate is 9 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? Year Cash Flow $1,900 2,300 4,500 5,100 1
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 7.8 percent per year. Year Cash Flow $21,000 3 39,000 57,000 Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
A local finance company quotes a 17 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $3,400. Because you must repay a total of $23,400 in one year, the finance company requires you to pay $23,400/12, or $1,950 per month over the next 12 months.
Given an interest rate of 6.35 percent per year, what is the value at year t = 7 of a perpetual stream of $3,100 payments that begin at year t = 20? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
You have your choice of two investment accounts. Investment A is a 10-year annuity that features end-of-month $1,680 payments and has an interest rate of 8 percent compounded monthly. Investment B is a 10 percent annually compounded lump-sum investment, also good for 10 years. How much money would
A 10-year annuity pays $2,500 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 present value of the annuity? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
What is the present value of $1,625 per year, at a discount rate of 7 percent, if the first payment is received 6 years from now and the last payment is received 20 years from now? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
A 5-year annuity of 10 $7,800 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 $8,500. Nancy is going to receive a perpetuity of $8,500. If the appropriate interest rate is 8 percent, how much more is Nancy’s cash flow worth? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
Suppose you are going to receive $12,000 per year for five years. The appropriate interest rate is 9 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 $34,000, and the monthly payments are $645. If the loan will be paid off over the next 60 months, what is the APR of the loan? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
You are planning your retirement in 10 years. You currently have $160,000 in a bond account and $600,000 in a stock account. You plan to add $8,000 per year at the end of each of the next 10 years to your bond account. The stock account will earn a 10.5 percent return and the bond account will earn
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 $3,200,000 purchase price. The monthly payment on this loan will be $15,300. What is the APR on this loan? The EAR? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
A project has the following cash flows:What is the IRR for this project? If the required return is 6 percent, should the firm accept the project? What is the NPV of this project? What is the NPV of the project if the required return is 0 percent? 24 percent? What is going on here? Sketch the NPV
Inc., has the following two mutually exclusive projects available.What is the crossover rate for these two projects? What is the NPV of each project at the crossover rate? Project R Year Project S -$75,000 -$96,000 1 26,000 24,000 24,000 25,000 23,000 39,000 17,000 34,000 12,000 13,000 345
Lifeline Corp. is evaluating a project with the following cash flows:The company uses a 10 percent interest rate on all of its projects. Calculate the MIRR of the project using all three methods. Cash Flow Year -$15,000 6,100 7,300 6,900 4 5,700 -3,100 ఇ 9
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.a. Calculate the payback period for both projects.b. Calculate the NPV for both projects.c. Which project, if
An investment has an installed cost of $561,382. The cash flows over the four-year life of the investment are projected to be $190,584, $234,318, $182,674, and $150,313. If the discount rate is zero, what is the NPV? If the discount rate is infinite, what is the NPV? At what discount rate is the
J. Marcel Enterprises has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required return is above this interest rate? Why? Project M Year Project N -$145,000 -$350,000 63,000 155,000 2
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Cash Flow Year -$28,000 15,700 13,200 4 9,600
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:a. If the company requires a 10 percent return on its investments, should it accept this project? Why?b. Compute the IRR for this project. How many IRRs are there? If you apply the IRR decision rule,
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects? Cash Flow (X) Cash Flow (Y) Year -$15,000 -$15,000 6,800 7,470 7,380 7,640 4,900 3 3,810
Framing Hanley, LLC, has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct?b. If the required return is 11 percent, what is the NPV
What is the IRR of the following set of cash flows? Cash Flow Year -$32,000 13,200 2 18,500 3 10,600
A project that provides annual cash flows of $2,150 for nine years costs $8,900 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate would you be indifferent between accepting the project and rejecting it?
A firm evaluates all of its projects by applying the IRR rule. If the required return is 13 percent, should the firm accept the following project? Year Cash Flow -$145,000 71,000 68,000 3 52,000
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $17 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,735,000, $2,105,000,
What is the payback period for the following set of cash flows? Cash Flow Year -$4,500 1 1,300 2,400 3 1,100 4 800
In a previous chapter, we discussed the yield to maturity (YTM) of a bond. In what ways are the IRR and the YTM similar? How are they different?
Using the dividend yield, calculate the closing price for Tootsie Roll on this day. The actual closing 2009 price for Tootsie Roll was $21.02. Why is your closing price different? The Value Line Investment Survey projects a 4 percent dividend growth rate for Tootsie Roll. What is the required
According to the 2009 Value Line Investment Survey, the growth rate in dividends for IBM for the next five years is expected to be 19.5 percent. Suppose IBM meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5 percent indefinitely. Assume
Gontier Corporation stock currently sells for $64.13 per share. The market requires an 11 percent return on the firm’s stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?
Antiques 'R' Us is a mature manufacturing firm. The company just paid a $10.50 dividend, but management expects to reduce the payout by 4.5 percent per year, indefinitely. If you require a 10 percent return on this stock, what will you pay for a share today?
Apocalyptica Corporation is expected to pay the following dividends over the next four years: $5, $16, $21, and $2.80. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends, forever. If the required return on the stock is 11 percent, what is the current share
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a $12 per share dividend in year 10 and will increase the dividend by 5 percent per year
Alexander Corp. will pay a dividend of $2.60 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 15 percent rate of return, how much will you pay for the stock? What if you want a 10 percent rate of return? What does this tell
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 7 percent return on this stock, how much should you pay today?
The stock price of Jenkins Co. is $53. Investors require a 12 percent rate of return on similar stocks. If the company plans to pay a dividend of $3.15 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 Schenkel has 400,000 shares outstanding and the stock currently sells for
Gesto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $79.85 per share, what is the required return?
Bowman Corp. pays a constant $13 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this stock is 9 percent, what is the current share price?
Suppose you know that a company’s stock currently sells for $65 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield. If it’s the company’s policy to always maintain a
Bruer, Inc., is expected to maintain a constant 5.8 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the company’s stock?
Ziggs Corporation will pay a $3.85 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a 12 percent return on your investment, how much will you pay for the company’s stock today?
The 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 for $48.50 per share, what is the required return?
Patience, Inc., just paid a dividend of $2.35 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what is the current price? What will the price be in three years? In 15 years?
Is it possible for a company to pay dividends when it has a negative net income for the year? Could this happen for longer periods?
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 8 percent annual coupon bond for $875. The bond has
Bond P is a premium bond with an 8 percent coupon. Bond D is a 4 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6 percent, and have five years to maturity. What is the current yield for bond P? For bond D? If interest rates remain unchanged, what
Suppose your company needs to raise $45 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 7.5 percent, and you’re evaluating two issue alternatives: a 7.5 percent annual coupon bond and a zero coupon bond. Your company’s tax rate
You purchase a bond with a coupon rate of 7.5 percent, semiannual coupons, and a clean price of $915. If the next coupon payment is due in two months, what is the invoice price?
You purchase a bond with an invoice price of $1,060. The bond has a coupon rate of 9.2 percent, semiannual coupons, and there are five months to the next coupon date. What is the clean price of the bond?
BDJ Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent coupon bonds on the market that sell for $1,125, make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to
Software has 7.5 percent coupon bonds on the market with 22 years to maturity. The bonds make semiannual payments and currently sell for 108 percent of par. What is the current yield on PK’s bonds? The YTM? The effective annual yield?
Bond J is a 4 percent coupon bond. Bond S is a 14 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? What if rates suddenly fall by 2
Locate the Treasury bond in Figure 6.3 maturing in February 2027. 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?Figure 6.3 Asked Maturity Coupon Bid Asked Chg Yield unch. 2009 May 15 5.500 101:01 101:02 0.0832 2009 May 31
Locate the Treasury issue in Figure 6.3 maturing in August 2023. What is its coupon rate? What is its bid price? What was the previous day's asked price?Figure 6.3 Asked Maturity Coupon Bid Asked Chg Yield unch. 2009 May 15 5.500 101:01 101:02 0.0832 2009 May 31 4.875 101:03 101:03 0.2224 -1 101:08
Say you own an asset that had a total return last year of 17 percent. If the inflation rate last year was 3.2 percent, what was your real return?
Suppose the real rate is 3.2 percent and the inflation rate is 2.6 percent. What rate would you expect to see on a Treasury bill?
If Treasury bills are currently paying 5.7 percent and the inflation rate is 2.9 percent, what is the approximate real rate of interest? The exact real rate?
Osbourne Corporation has bonds on the market with 10.5 years to maturity, a YTM of 9.4 percent, and a current price of $945. The bonds make semiannual payments. What must the coupon rate be on the bonds?
Night Hawk Co. issued 15-year bonds two years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?
App Store Co. issued 15-year bonds one year ago at a coupon rate of 6.1 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.3 percent, what is the current bond price?
Merton Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What must the coupon rate be on Merton’s bonds?
The Timberlake-Jackson Wardrobe Co. has 10 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,145.70, what is its YTM?
Lycan, Inc., has 7 percent coupon bonds on the market that have 8 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price?
1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage?2. Prepare an amortization table for the first six months of the traditional 30-year mortgage. How much of the first payment goes toward principal?3. How long would it take
If the appropriate discount rate for the following cash flows is 8.4 percent, what is the present value of the cash flows? Cash Flow Year $1,200 1,100 2 3 800 4 600
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 four years. If the account pays .65 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs
You are to make monthly deposits of $400 into a retirement account that pays 10.5 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 30 years?
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