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Financial Management Theory And Practice 3rd Canadian Edition Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason - Solutions
Suppose a firm is considering two mutually exclusive projects. One has a life of 6 years and the other a life of 10 years. Would the failure to employ equivalent annual annuity analysis bias an NPV analysis against one of the projects? Explain.
A summary of the balance sheet of Travellers Inn Inc. (Til), a company that was formed by merging a number of regional motel chains and that hopes to rival Holiday Inn on the North American scene, is shown below:Travellers Inn: December 31, 2015 (Millions of Dollars)These facts are also given for
Your boss has asked you to estimate your company's WACC. You have assembled the following information:Current liabilities consist of short-term par value bank debt at 3% to finance seasonal assets. This debt is paid off in the off-season.Your company has been experiencing very rapid earnings and
Suppose a company will issue new 10-year debt with a par value of $1,000 and a coupon rate of 7.5%, paid annually. The tax rate is 30%. If the flotation cost is 2% of the issue proceeds, what is the after-tax cost of debt?
The earnings, dividends, and stock price of Motortech Inc. are expected to grow at 4% per year in the future. Motortech's common stock sells for $38 per share, its last dividend was $2.80, and the company will pay a dividend of $2.91 at the end of the current year.a. Using the discounted cash flow
A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $821.97. The company's tax rate is 30%. What is the firm's component cost of debt for purposes of calculating the WACC?
Ridgeway Motors has a target capital structure of 30% debt and 70% equity. The yield to maturity on the company's outstanding bonds is 8%, and the company's tax rate is 30%. Ridgeway's CFO has calculated the company's WACC as 9.38%. What is the company's cost of equity capital?
Burnwood Tech plans to issue some $25 par preferred stock with a 6% dividend. The stock is selling on the market for $27.00, and Burnwood must pay flotation costs of 4% of the market price. What is the cost of the preferred stock?
JR Oil Rigs' currently outstanding 13% coupon bonds have a yield to maturity of 9.5%. JR believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 30%, what is JR's after-tax cost of debt?
Calculate the after-tax cost of debt under each of the following conditions:a. Interest rate, 6%; tax rate, 0%.b. Interest rate, 6%; tax rate, 26%.c. Interest rate, 6%; tax rate, 30%.
a. Describe briefly the legal rights and privileges of common shareholders.b. 1. Write out a formula that can be used to value any stock, regardless of its dividend pattern.2. What is a constant growth stock? How are constant growth stocks valued?3. What
Assume that today is December 31, 2015, and the following information applies to Pacific Sky Airline:After-tax operating profit [EBIT(1-T), also called NO PAT] for 2016 is expected to be $500 million.The net capital expenditures for 2016 are expected to be $100 million (depreciation has already
The risk-free rate of return, rRF, is 5%; the required rate of return on the market, rM, is 8%; and Schuler Company's stock has a beta coefficient of 1.5. a. If the dividend expected during the coming year, is $2.25, and if g = a constant 5%, at what price should Schuler's stock sell?b. Now,
Simpkins Ltd. is expanding rapidly, and it currently needs to retain all of its earnings; hence it does not pay any dividends. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 80%
The beta coefficient for Stock C is bC = 0.4, whereas that for Stock D is bD = - 0.3. (Stock D's beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative beta stocks, although collection agency stocks aresometimes cited as
Rosendale Clothiers has decided to make significant reinvestments in its operations. As a result it will be suspending dividend payments for 2 years. It anticipates paying a dividend again in year 3 in the amount of $0.80 per share. The dividend will then be expected to grow by 20% per year for the
What must be a company's dividend growth rate for its stock to have an expected value of $13.25, assuming its most recently paid dividend was $0.50 and the stock's required return is 10%?
What will be the nominal rate of return on a preferred stock with a $25 par value, a stated dividend of 7% of par, and a current market price of (a) $16, (b) $21, (c) $25, and (d) $37?
A stock is trading at $28 per share. The stock is expected to have a year-end dividend of $0.84 per share, which is expected to grow at some constant rate g throughout time. The stock's required rate of return is 9%. If you are an analyst who believes in efficient markets, what is your forecast of
A stock's most recent dividend was $1.80. The dividend is expected to grow by 6% and investors require an 11% return for holding the shares. a. What is the value of the stock? b. What proportion of the stock's value is derived from the first five years of dividends?
A company currently pays a dividend of $2 per share, D0 = $2. It is estimated that the company's dividend will grow at a rate of 14% per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company's stock has a beta equal to 1.8, the risk-free rate is
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of the year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, r, is 13%. What is the value per share of the company's stock?
Rident Corp. just paid a dividend of $1.50 a share (i.e., D0 = $1.50). The dividend is expected to grow 5% a year for the next 3 years, and then 10% a year thereafter. What is the expected dividend per share for each of the next 5 years?
Start with the partial model in the file Ch07 P15 Build a Model.xls on the textbook's website. The file contains hypothetical data for working this problem. Goodman Industries's and Landry Incorporated's stock prices and dividends, along with the Market Index, are shown below. Stock prices are
You have observed the following returns over time:Assume that the risk-free rate is 4%, the market risk premium is 5%, the beta for Stock X is 1.50, and the beta for StockY is 0.46:a. What are the required rates of return for Stocks X and Y?b. What is the required rate of return for a portfolio
You are given the following information on five stocks:The risk-free rate is 4% and the market risk premium is 5%.a. Which stocks are (a) undervalued, (b) overvalued, and (c) correctly valued?b. What would be the expected return and beta of a portfolio made up of only the stocks that are correctly
Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the 5-year period.b. Assume that someone held a portfolio consisting of 50% of Stock A and 50% of Stock B. What would have been the realized rate of return on the portfolio in each
You plan to invest in a hedge fund that has total capital of $200 million invested in five stocks:The risk-free rate is 4%, and you believe that the following probability distribution for future market returns is realistic:The hedge fund receives a proposal from a company seeking new capital. The
Assume that the risk-free rate is 2%, the market risk premium is 5%, and the beta of two stocks A and Bare 1.4 and 0.8, respectively.a. Calculate both stocks' required rates of return.b. What would be the return on an "average" stock?c. Explain the significance of a security with a 0 beta. What
Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.20. Now, suppose you have decided to sell one of the stocks in your portfolio with a beta equal to 1.0 for $10,000 and to use these proceeds to buy
Based on the information in Problem 7-7, if a portfolio is made up of 40% of stock A and 60% of stock B:a. Calculate the portfolio's expected rate of return.b. Calculate the portfolio's standard deviation. Assume the correlation between the two stocks is 0.40.Problem 7-7:The following table shows
The following table shows the annual returns over time for two stocks.Calculate each stock's expected return, standard deviation, and coefficient of variation. Probability A B -10% 0.10 -3% 0.20 2 0.40 12 0.20 16 0.10 17 24
The market and Stock J have the following probability distributions:a. Calculate the expected rates of return for the market and Stock J.b. Calculate the standard deviations for the market and Stock J.c. Calculate the coefficients of variation for the market and Stock J. Probability I'M 0.3 12% 13%
A stock's return has the following distribution:Calculate the stock's expected return, standard deviation, and coefficient of variation. Probability of This Demand Occurring Rate of Return if This Demand for the Company's Products Demand Occurs 0.1 Weak (30)% Below average (5) 0.2 Average Above
Assume that the risk-free rate is 6% and that the expected return on the market is 11%. What is the required rate of return on a stock that has a beta of 0.6?
A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)a. What is the bond's yield to maturity?b. What is the bond's current yield?c. What is the bond's capital gain
Suppose that you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk-free rate, r*, will remain at 2% and that maturity risk premiums on government securities rise
Arnot International's bonds have a current market price of $1,150. The bonds have a 7% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5 years at 107% of face value (call price = $1,070).a. What is the yield to maturity?b. What is the yield
Suppose Level10 Systems sold an issue of bonds with a 15-year maturity, a $1,000 par value, a 6% coupon rate, and semiannual interest payments. a. Six years after the bonds were issued, the going rate of interest on bonds such as these fell to 5%. At what price would the bonds sell?b. Suppose
Castle Company's pension fund projected that a significant number of its employees would take advantage of a retirement program the company plans to offer in 10 years. Anticipating the need to fund these pensions, the firm bought zero coupon Government of Canada bonds maturing in 10 years. When
The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 x (t - 1), where t = number of years to maturity. What is the nominal interest rate on a 7-year government security?
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 6.5%. One bond, Bond C, has a 10% coupon (paid semiannually); the other bond, Bond Z, is a zero coupon bond. Assuming that the yield to maturity of each bond
A bond trader purchased each of the following bonds at a yield to maturity of 9%. Immediately after she purchased the bonds, interest rates fell to 8%. What is the percentage change in the price of each bond after the decline in interest rates? Fill in the following table: (Assume semiannual
A bond that matures in 6 years sells for $1,090. The bond has a face value of $1,000 and Current Yield with a yield to maturity of 5.2328%. The bond pays coupons semiannually. What is the bond's Semiannual Payments current yield?
You just purchased a bond that matures in 12 years. The bond has a face value of $1,000 and has an 6% annual coupon. The bond has a current yield of 6.4%. What is the bond's yield to maturity?
The Brownstone Corporation bonds have 10 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9%.a. What is the yield to maturity at a current market price of (1) $875 or (2) $1,080?b. Would you pay $875 for one of these bonds if
Digicomp's bonds will mature in 8 years. The bonds have a face value of $1,000 and a 7% coupon rate, paid semiannually. The price of the bonds is $1,110. The bonds are callable in 3 years at a call price of $1,050. What is their yield to maturity? What is their yield to call?
The real risk-free rate is 2%, and inflation is expected to be 2.5% for the next 2 years. A 2-year government security yields 4.9%. What is the maturity risk premium for the 2-year security?
Temex bonds have 7 years remaining to maturity. Interest is paid annually, the bonds have for a $1,000 par value, and the coupon interest rate is 8%. The bonds sell at a price of $930. What is their yield to maturity?
Assume that your aunt sold her house on December 31 and that she took a mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10%, but it calls for payments every 6 months, beginning on June 30, and the mortgage is to be amortized over 10
The Bookbinder Company has made $150,000 before taxes during each of the past 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2015 the firm incurred a loss of $650,000. The firm will claim a loss carryback at the time it files its 2015 income tax return, and
Define each of the following terms:a. Bond; Government of Canada bond; corporate bond; foreign bondb. Par value; maturity date; coupon payment; coupon interest ratec. Floating-rate bond; zero coupon bondd. Call provision; retractable bond; sinking funde. Convertible bond; warrant; income bond; real
Assume that you have recently been hired as Simmons's assistant and that your first major task is to help her develop the forecast. She has asked you to begin by answering the following set of questions.a. Describe three ways that pro forma statements are used in financial planning. b. Explain
Start with the partial model in the file Ch 05 Build a Model.xlsx from the textbook's website. Cumberland Industries' financial planners must forecast the company's financial results for the corning year. The forecast will be based on the forecasted financial statements method, and any additional
Based on the information in Problem 5-6, assume that Booth has just completed a review of its net operating working capital policies and found that it can reduce its DSO to 60 and achieve an inventory turnover of 4.57X without impacting sales or profits, based on a cost of goods sold of $1,600.a.
Refer to Problem 5-1. Return to the assumption that the company had $5 million in assets at the end of 2015, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFNdifferent from the one you found in
Refer to Problem 5-1. What would be the additional funds needed if the company's year-end 2015 assets had been $7 million? Assume that all other numbers, including sales, are the same as in Problem 5-1 and that the company is operating at full capacity. Why is this AFN different from the one you
Start with the partial model in the file Ch 04 Build a Model.xlsx from the textbook's website. Answer the following questions, using a spreadsheet model to do the calculations. a. Find the FV of $1 ,000 invested to earn 10% after 5 years. Answer this question by using of Money a math
A father is planning a savings program to put his daughter through university. She is 13, Annuity she plans to enroll in 5 years, and she should graduate after 4 years. Currently, the annual Payments cost (for everything-food, clothing, tuition, books, transportation, and so forth) is $15,000, but
You wish to accumulate $1 million by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 6% interest, compounded annually. Because of expected inflation, you anticipate an annual raise of 2%, so you will let the
Jenny Lin, manager of Boutique Clothing, wants to sell on credit, giving customers 3 months in which to pay. However, Jenny will have to borrow from her bank to carry the accounts receivable. The bank will charge a nominal 8%, but with monthly compounding. Jenny wants to quote a nominal rate to her
a. It is now January 1. You plan to make five deposits of $100 each, one every 6 months, with the first payment being made today. If the bank pays a nominal interest rate of 8% but uses semiannual compounding, how much will be in your account after 8 years?b. You must make a payment of $2,200 10
Alex Leggatt made an initial deposit of $15,000 into a savings program. He plans on making additional payments of $2,500 each year for the next 5 years. If Alex earns 6% per annum, Compounding compounded semiannually, how much will he have at the end of 5 years?
Jane Doe has two borrowing alternatives. Loan A is offered at a rate of 1.1% per month. Her second alternative, loan B, uses quarterly compounding. What must be the annual percentage rate (APR) on loan B, so that it is equivalent in cost to loan A?
Based on Problem 4-31, what would be your monthly payments if your mortgage amortization period was 20 years? 15 years?Data from problem 4-31:You have decided to become a homeowner with the purchase of a condominium in a newly redeveloped part of town. The condo costs $300,000 and you have a down
You have decided to become a homeowner with the purchase of a condominium in a newly redeveloped part of town. The condo costs $300,000 and you have a down payment of $90,000, so you will be carrying a mortgage of $210,000. If you take on a 5-year mortgage with a 25-year amortization period at a
What is the present value of a perpetuity of $10,000 per year if the appropriate discount rate is 5%? If interest rates in general were to double and the appropriate discount rate rose to 10%, what would happen to the present value of the perpetuity?
While Lisa was a student at the University of Ottawa, she borrowed $12,000 in student loans a loan at an annual interest rate of 8%. If Lisa repays $1,600 per year, how long, to the nearest year, will it take her to repay the loan?
Hanebury Corporation's current sales were $4 million. Sales were $2 million 4 years earlier.a. To the nearest percentage point, at what rate have sales been growing?b. Suppose someone calculated the sales growth for Hanebury Corporation in part a as follows: "Sales doubled in 4 years. This
Find the future values of the following ordinary annuities:a. FV of $750 each 6 months for 4 years at a nominal rate of 10%, compounded semiannually.b. FV of $375 each 3 months for 4 years at a nominal rate of 10%, compounded quarterly.c. The annuities described in parts a and b have the same total
a. Find the present values of the following cash flow streams. The appropriate interest rate is 14%. b. What is the value of each cash flow stream at a 0% interest rate? Year Cash Stream A Cash Stream B $800 300 $100 1 300 3 300 300 300 4 300 800 100
Find the following values, using the equations, and then work the problems using a financial calculator to check your answers. Disregard rounding differences.a. An initial $9,500 compounded for 1 year at 7%.b. An initial $9,500 compounded for 2 years at 7%.c. The present value of $9,500 due in 1
If you deposit money in an account today, how long will it take to triple your money based on the annual interest rates below?a. 2.5%. b. 7%.c. 4%d. 10%.
Your parents will retire in 18 years and they think they will need $1,000,000 at retirement. What annual interest rate must they earn to reach their goal, based on the starting amounts shown below? Assume they don't save any additional funds.a. $50,000. b. $100,000. c. $200,000.d.
What is the present value of a security that will pay the amounts shown below in 20 years? Securities of equal risk pay 7% annually.a. $20,000.b. $30,000. c. $40,000.d. $50,000.
How much money will you have in your bank account in 5 years if it pays 4% annually and you start with the following amounts. a. $5,000. b. $10,000. c. $15,000.d. $20,000.
a. Why are ratios useful? What are the five major categories of ratios?b. Calculate the 2016 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity position in 2014,2015, and as projected for 2016? We often think of
Joshua & White (J&W) Technologies's financial statements are also shown below. Answer the following questions. (Note: Industry average ratios are provided in Ch03 Build a Model.xlsx.)a. Has J&Ws liquidity position improved or worsened? Explain.b. Has J&Ws ability to manage its
In the table that follows, complete the balance sheet and sales information for J. White Industries using the following financial data:Quick ratio: 0.80XTotal assets turnover: 1.5XDays sales outstanding: 36.5 daysaGross profit margin on sales: (Sales - Cost of goods sold)/Sales = 25%Inventory
Selected information is provided for Tiny Bubbles Bath Company:Calculate ROE from 2013 to 2015 and evaluate whether you think this company's ROE growth is sustainable. 2014 2015 2013 Sales Assets Net income Total equity $2,600,000 $2,000,000 $ 207,000 $ 800,000 $3,000,000 $2,250,000 $ 222,000 $
Cayman Auto has $600,000 of debt outstanding, and it pays an interest rate of 8% annually: Cayman Auto's annual sales are $3 million, its average tax rate is 25%, and its net profit margin is 3%. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the
Davison Truck Repairs has sales of $3,500,000 and cost of goods sold of $2,800,000. The company believes it is possible to delay payment by 6 days and not offend its suppliers. Will the company's accounts payable increase or decrease, and by how much if it takes on average 6 days longer to pay its
A company's stock price is $12 per share, and it has $7 million in total assets. Its balance sheet shows $1 million in current liabilities, $2.5 million in long-term debt, and $3.5 million in common equity. It has 500,000 common shares outstanding. What is the company's market/book ratio?
Grey Brothers has a DSO of 27 days. The company's average daily sales are $35,000. What is the level of its accounts receivable? Assume there are 365 days in a year.
Assume that you are Cochran's assistant and that you must help her answer the following questions for Meissner.a. What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet? What effect did it have on liabilities and
a. Using the financial statements shown below for Lan & Chen Technologies, calculate net Cash Flows, EVA, operating working capital, total net operating capital, net operating profit after taxes, and MVA free cash flow, and return on invested capital for 2016. b. Assume there were 15
Using the information from 22-16, create a cash flow statement for 2016.Information from 22-16:Bristle Brush-Off Corporation: Income Statements for Years Ended December 31 ($000s) 2016 2015 Sales $7,950 $7,000 Cost of goods sold Other expenses 5,100 4,600 500 350 Depreciation 750 600 Earnings
Financial information on Bristle Brush-Off Corp. is shown below. Calculate the following for 2016:a. Free cash flowb. ROICc. EVA and MVABristle Brush-Off Corporation: Income Statements for Years Ended December 31 ($000s) 2016 2015 Sales $7,950 $7,000 Cost of goods sold Other expenses 5,100 4,600
Using the information from 2-12, prepare the cash flow statement for Rhodes Corporation.Information from 2-12:Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars) 2014 2015 $11,000 $10,000
Using the information from 2-12, calculate the:a. Market Value Added in 2015 for Rhodes Corporation.b. Economic Value Added in 2015.Information from 2-12:Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)Rhodes Corporation: Balance Sheets as of December 31
Using Rhodes Corporation's financial statements (shown below), answer the following questions.a. What is the net operating profit after taxes (NOPAT) for 2015?b. What are the amounts of net operating working capital for both years?c. What are the amounts of total net operating capital for both
The Berndt Corporation expects to have sales of $20 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $2.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndt's tax
Companies X and Y are very similar. Both have sales of $5,000,000, and COGS are 65% of sales. Both companies have operating expense of $700,000 and are taxed at 26%. However, X and Y will be claiming $60,000 and $120,000 each respectively in depreciation expense. Calculate each company's net cash
Karen, a resident of Nova Scotia, has $10,000 to invest for one year. She has found two alternatives: a bond that will provide interest income at year-end of $400, and a common stock whose price is $50 and is expected to increase by $2.00. Ignoring risk and other factors, how much money will Karen
Based on the following information, what are Ever Green's cash flows from operations? The company reported profits of $18,000 and claimed amortization of $4,000, while accounts receivable increased by $4,000, inventories decreased by $8,000, and accounts payable increased by $4,000.
Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of $250,000. What was its net cash flow? Assume it had no amortization expense.
Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.6 million. It had $2.0 million of interest expense, and its corporate tax rate was 30%. What was its charge for depreciation and amortization?
Little Books Inc. recently reported $3.5 million of net income. Its EBIT was $7 million, and its tax rate was 30%. What was its interest expense?
An investor recently purchased a corporate bond which yields 5%. The investor is in the 30% tax bracket. What is the bond's after-tax yield?
Suppose a new government was elected in Ottawa and its first order of business was to take away the independence of the Bank of Canada and to force the BoC to greatly expand the money supply. What effect would this have on the level of interest rates immediately after the announcement?
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