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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+a. Use the free cash flow valuation model to estimate the value of Erwin’s entire Active Shoe Division.
=+b. Use your finding in part a along with the data provided to find this division’s common stock value.
=+c. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part b to calculate its value per share.
=+LG 2 E7–3 Anson Construction wants to raise $5 million for a new construction project. The company is now evaluating two issue alternatives—a new issue of preferred stock with face value of $100 that pays a $5.40 dividend per year; and an additional 1 million shares with an offering price of
=+LG 3 E7–4 The common stock of Speedy PLC closed at £2.40 per share today, down £0.20 from yesterday. If the company has 5 million shares outstanding and annual earnings of£12.5 million, what is its P/E ratio today? What was its P/E ratio yesterday?
=+LG 4 E7–5 Hills Ltd. has just announced a dividend of €2.50 per share for the year. It plans to increase this dividend by 5% next year and maintain it at the new level for the foreseeable future. If the required return on this firm’s stock is 10%, what is the value of Hills’s stock?
=+LG 6 E7–6 Martin International PLC initiated a new corporate strategy that fixes its annual dividend at £1.40 per share forever. If the risk-free rate is 3% and the risk premium on Martin International’s stock is 7%, what is the value of Martins International’s stock?
=+P7–1 Authorized and available shares Bruges Corporation’s Memorandum of Association authorizes issuance of 3,000,000 shares of common stock. Currently, Bruges has 2,200,000 million authorized and paid up shares and holds 500,000 shares as treasury stock. The firm wishes to raise £20,000,000
=+a. What is the maximum number of new shares of common stock that firm can sell without receiving further authorization from shareholders?
=+b. Judging by the data given and your findings in parta, do you think the firm will be able to raise the needed funds without receiving further authorization?
=+c. What must the firm do to obtain authorization to issue more than the number of shares found in part a?
=+LG 2 P7–2 Preferred dividends Acura Labs Inc. has an outstanding issue of preferred stock with a $40 par value and an 8% annual dividend.
=+a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter?
=+b. If the preferred stock is noncumulative and the board of directors has passed the preferred dividend for the last three quarters, how much must be paid to preferred stockholders in the current quarter before dividends are paid to common stockholders?
=+c. If the preferred stock is cumulative and the board of directors has passed the preferred dividend for the last three quarters, how much must be paid to preferred stockholders in the current quarter before dividends are paid to common stockholders?
=+LG 2 P7–3 Preferred dividends In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid?Case Type Par value Dividend per share per period Periods of dividends passed
=+LG 2 P7–4 Convertible preferred stock Stanley Industries has a fixed conversion ratio of four common shares per one share of preferred stock. The preferred stock pays a dividend of £4.00 per share per year. The common stock currently sells for £10.00 per share and pays a dividend of £1.25
=+a. Considering the conversion ratio and the price of the common shares, what is the current conversion value of each preferred share?
=+b. If the preferred shares are selling at £43.00 each, should an investor convert the preferred shares to common shares?
=+c. What factors might cause an investor not to convert from preferred to common stock?
=+LG 4 P7–5 Preferred stock valuation Segwick Manufacturing has an outstanding preferred stock issue with a par value of $50 per share. The preferred shares pay dividends annually at a rate of 5%.
=+a. What is the annual dividend on Segwick’s preferred stock?
=+b. If investors require a return of 6% on this stock and the next dividend is payable 1 year from now, what is the price of Segwick’s preferred stock?
=+c. Suppose that Segwick has not paid dividends on its preferred shares in the past 2 years, but investors believe it will start paying dividends again in 1 year. What is the value of Segwick’s preferred stock if it is cumulative and if investors require a 6% rate of return?Personal Finance
=+LG 4 P7–6 Common stock value: Zero growth Kelsey Drums Inc. is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $2.80 per share per year for the last 12 years. Management expects to
=+P7–7 Preferred stock valuation Liberia Publishing wishes to estimate the value of its outstanding preferred stock. The preferred issue has a £50 par value and pays an annual dividend of £7.50 per share. Similar-risk preferred stocks are currently earning an 8% annual rate of return.
=+a. What is the market value of the outstanding preferred stock?
=+b. If an investor purchases the preferred stock at the value calculated in parta, how much does she gain or lose per share if she sells the stock when the required return on similar-risk preferred stocks has fallen to 6%? Explain.
=+LG 4 P7–8 Common stock value: Constant growth Use the constant-growth dividend model(Gordon growth model) to find the value of each firm shown in the following table. X MyLab Year Dividend per share Growth rate 2018 $5.00 __________ 2019 5.15 __________ 2020 5.40 __________ 2021 5.62 __________
=+LG 4 P7–9 Common stock valuation: Constant growth Sweet Candy will pay a dividend of$0.72 per share next year. The CEO of the company declared that the company expects to maintain a constant growth rate of 7% per year every year from now on.
=+a. What will be the price per share if the required return is 10%?
=+b. What will be the price per share if the required return is 8%?
=+c. Based on your answer in parts a andb, give one disadvantage of the constant growth model.
=+LG 4 P7–11 Common stock value: Constant growth Christine Law is the Chief Investment Officer for Elite Investment Company. She is now calculating the equity value of Rays Food Company. She compiled the following dividend information for the company.What is the growth rate for each year?
=+P7–12 Common stock value: Constant growth Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table.The firm’s dividend per share in 2020 is expected to be $3.02.
=+a. If you can earn 13% on similar-risk investments, what is the most you would be willing to pay per share in 2019, just after the $2.87 dividend?
=+b. If you can earn only 10% on similar-risk investments, what is the most you would be willing to pay per share?
=+c. Compare and contrast your findings in parts a andb, and discuss the impact of changing risk on share value.
=+LG 4 P7–13 Common stock value: Variable growth Moors Tools is considering a cash purchase of the stock of Crooks Moldings. During the year just completed, Crooks earned£4.50 per share and paid cash dividends of £2.30 per share (D0 = 2.30). Crook’s earnings and dividends are expected to grow
=+LG 4 P7–14 Common stock value: Variable growth Home Place Hotels Inc. is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when completed, it should allow the company to enjoy much improved growth in earnings
=+What is the maximum price per share that an investor who requires a return of 14% should pay for Home Place Hotels common stock?
=+LG 4 P7–15 Common stock value: Variable growth Bach Music’s most recent annual dividend was $1.50 per share (D0 = 1.50), and the firm’s required return is 9%. Find the market value of Bach’s shares when:
=+a. Dividends are expected to grow at 10% annually for 2 years, followed by a 5%constant annual growth rate in year 3 to infinity.
=+b. Dividends are expected to grow at 10% annually for 2 years, followed by a 0%constant annual growth rate in year 3 to infinity.
=+c. Dividends are expected to grow at 10% annually for 2 years, followed by an 8%constant annual growth rate in year 3 to infinity.
=+P7–16 Free cash flow valuation You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,500 of free cash flow (FCF0 = $42,500). On the basis of a review of similar-risk investment opportunities, you must earn an 18% rate of
=+a. What is the firm’s value if cash flows are expected to grow at an annual rate of 0% from now to infinity?
=+b. What is the firm’s value if cash flows are expected to grow at a constant annual rate of 7% from now to infinity?
=+c. What is the firm’s value if cash flows are expected to grow at an annual rate of 12% for the first 2 years, followed by a constant annual rate of 7% from year 3 to infinity?
=+LG 5 P7–17 Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm’s common
=+a. Estimate the value of Nabor Industries’ entire company by using the free cash flow valuation model.
=+b. Use your finding in parta, along with the data provided above, to find Nabor Industries’ common stock value.
=+c. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?Personal Finance Problem
=+LG 5 P7–18 Using the free cash flow valuation model to price an IPO Assume that you have an opportunity to buy the stock of CoolTech Inc., an IPO being offered for $12.50 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly
=+a. Use the free cash flow valuation model to estimate CoolTech’s common stock value per share.
=+b. Judging by your finding in part a and the stock’s offering price, should you buy the stock?
=+c. On further analysis, you find that the growth rate of FCF beyond 2023 will be 3% rather than 2%. What effect would this finding have on your responses in parts a and b?
=+LG 5 P7–19 Book and liquidation value The balance sheet for Gallinas Industries is as follows.Additional information with respect to the firm is available:(1) Preferred stock can be liquidated at book value.(2) Accounts receivable and inventories can be liquidated at 90% of book value.(3) The
=+a. What is Gallinas Industries’ book value per share?
=+b. What is its liquidation value per share?
=+c. Compare, contrast, and discuss the values found in parts a and b.
=+P7–20 Valuation with price/earnings multiples For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E) multiples.Firm Expected EPS Price/earnings multiple A £3.00 6.3 B 0.75 15.2 C 1.80 5.7 D 2.50 11.20 E 3.2 8.40
=+LG 6 P7–21 Management action and stock value Barnes Limited’s most recent dividend was€2.20 per share, its expected annual rate of dividend growth is 5%, and the required return is 12%. Its management is considering a variety of proposals to redirect the firm’s activities. Determine the
=+a. Do nothing, which will leave the key financial variables unchanged.
=+b. Acquire a subsidiary operation from another manufacturer in Thailand. The acquisition should increase the dividend growth rate to 8% and increase the required return to 15%.
=+c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 7% and raise the required return to 14%.
=+d. Invest in a new technology that will increase the dividend growth rate to 8% and lower the required return to 10%.
=+e. Merge with another firm, which will decrease the dividend growth rate to 4% and decrease the required return to 8%.
=+LG 4 LG 6 P7–22 Integrative: Risk and valuation The Best Equipment Company just released a successful new and innovative product. It is expected that the product will bring huge profits to the company, and its dividend will grow at 7% every year from now on.The last annual dividend of the
=+LG 4 LG 6 P7–23 Integrative: Risk and valuation Giant Enterprises’ stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced
=+a. If the risk-free rate is 4%, what is the risk premium on Giant’s stock?
=+b. Using the constant-growth dividend model, estimate the value of Giant’s stock.
=+c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant’s stock.
=+LG 4 LG 6 P7–24 Integrative: Risk and valuation Manchester Hospitality owns a range of restaurants in Yorkshire, England. It wishes to determine the value of McDermot Limited, a firm that is considering acquiring for cash. Manchester Hospitality wishes to determine the applicable discount rate
=+a. Given that McDermot is expected to pay a dividend of £5.90 next year, determine the maximum cash price that Manchester Hospitality should pay for each share of McDermot.
=+b. How will the following changes affect the resulting value of McDermot?(1) A decrease in its dividend growth by 2% from that exhibited over 2015–2019 period.(2) An increase in its risk premium to 12%.
=+LG 4 P7–25 ETHICS PROBLEM Melissa is trying to value the stock of Generic Utility Inc., which is clearly not growing at all. Generic declared and paid a $5 dividend last year. The required return for utility stocks is 11%, but Melissa is unsure about the financial reporting integrity of
=+a. What is the value of Generic’s stock, assuming that the financials are trustworthy?
=+b. What is the value of Generic’s stock, assuming that Melissa includes the extra 1% “credibility” risk premium?
=+c. What is the difference between the values found in parts a andb, and how might one interpret that difference?
=+a. Given the data above, calculate the present value of this security. Use the constant-growth dividend model (Equation 7.4) to find the stock value.
=+b. One year later, your broker offers to sell you additional shares of Azure at $73.The most recent dividend paid was $3.21, and the expected growth rate for earnings remains at 7%. If you determine that the appropriate risk premium is 6.74%and you observe that the risk-free rate, RF, is
=+c. Applying Equation 7.4, determine the value of the stock using the new dividend and required return from part b.
=+d. Given your calculation in partc, would you buy the additional shares from your broker at $73 per share? Explain.
=+e. Given your calculation in partc, would you sell your old shares for $73?Explain.
=+a. What is the firm’s current book value per share?
=+b. What is the firm’s current P/E ratio?
=+c. (1) What is the current required return for Encore stock?
=+(2) What will be the new required return for Encore stock, assuming that the firm expands into European and Latin American markets as planned?
=+d. If the securities analysts are correct and there is no growth in future dividends, what will be the value per share of the Encore stock? (Note: Use the new required return on the company’s stock here.)
=+e. (1) If Jordan Ellis’s predictions are correct, what will be the value per share of Encore stock if the firm maintains a constant annual 6% growth rate in future dividends? (Note: Continue to use the new required return here.)(2) If Jordan Ellis’s predictions are correct, what will be the
=+f. Compare the current (2019) price of the stock and the stock values found in partsa, d, ande. Discuss why these values may differ. Which valuation method do you believe most clearly represents the true value of the Encore stock?
=+8–2 Define return, and describe how to find the total rate of return on an investment.
=+8–11 How are total risk, nondiversifiable risk, and diversifiable risk related?
=+Why is nondiversifiable risk the only relevant risk?
=+Portfolio analysis You have been asked for your advice in selecting a portfolio of assets and have been given the following data:Expected return Year Asset A Asset B Asset C 2019 12% 16% 12%2020 14 14 14 2021 16 12 16 You have been told that you can create two portfolios—one consisting of
=+a. What is the expected return for each asset over the 3-year period?
=+b. What is the standard deviation for each asset’s return?
=+c. What is the expected return for each of the two portfolios?
=+d. How would you characterize the correlations of returns of the two assets making up each of the two portfolios identified in part c?
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