Questions and Answers of Fundamentals Of Corporate Finance

The RLX Co. just paid a dividend of $3.20 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 10.5
The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004:Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible? 5/15/2009 9.125
The next dividend payment by Im, Inc., will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. If the stock currently sells for $37 per share, what is
Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan,
Five Star Corporation will pay a dividend of $3.04 per share next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on
Caccamise Co. is expected to maintain a constant 3.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.3 percent, what is the required return on the
Suppose you know that a company’s stock currently sells for $78 per share and the required return on the stock is 10.9 percent. You also know that the total return on the stock is evenly divided
Hailey Corp. pays a constant $9.45 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this
Fegley, Inc., has an issue of preferred stock outstanding that pays a $3.80 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $4.15 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Cornwall Enterprises. Unfortunately, you will be the only person
One of the assumptions of the two stage growth model is that the dividends drop immediately from the high growth rate to the perpetual growth rate. What do you think about this assumption? What
The Dahlia Flower Co. has earnings of $3.64 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
Z Space, Inc., is a new company and currently has negative earnings. The company’s sales are $2.7 million and there are 175,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what
Quinoa Farms just paid a dividend of $2.95 on its stock. The growth rate in dividends is expected to be a constant 3.4 percent per year indefinitely. Investors require a return of 15 percent for 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
Premier, Inc., has an odd dividend policy. The company has just paid a dividend of $3.75 per share and has announced that it will increase the dividend by $5 per share for each of the next five years
McCabe Corporation is expected to pay the following dividends over the next four years: $15, $11, $9, and $2.95. Afterward, the company pledges to maintain a constant 4 percent growth rate in
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required
Orkazana Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 6 percent per year
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $12.40, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of
Matterhorn Corporation stock currently sells for $49 per share. The market requires a return of 11 percent on the firm’s stock. If the company maintains a constant 3.5 percent growth rate in
E-Eyes.com just issued some new 20/20 preferred stock. The issue will pay an annual dividend of $20 in perpetuity, beginning 20 years from now. If the market requires a return of 5.4 percent on this
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If
Impossible Corp. just paid a dividend of $1.93 per share. The dividends are expected to grow at 24 percent for the next eight years and then level off to a growth rate of 3.5 percent indefinitely. If
Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 18 percent per year for the next 11 years before leveling off at 4 percent into perpetuity. The
Meadow Dew Corp. currently has an EPS of $4.05, and the benchmark PE for the company is 21. Earnings are expected to grow at 4.9 percent per year.a. What is your estimate of the current stock
You have found the following historical information for the Daniela Company over the past four years:Earnings are expected to grow at 11 percent for the next year. Using the company’s historical
In the previous problem, we assumed that the stock had a single stock price for the year. However, if you look at stock prices over any year, you will find a high and low stock price for the year.
Regal, Inc., currently has an EPS of $3.25 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 23, what is the target share price five years from now?
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the terminal stock price using a benchmark PE
Penguin, Inc., has balance sheet equity of $7.9 million. At the same time, the income statement shows net income of $832,000. The company paid dividends of $285,000 and has 245,000 shares of stock
Consider four different stocks, all of which have a required return of 12 percent and a most recent dividend of $3.45 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 $3.65 per share. The company will increase its dividend by 20 percent next year and then reduce its dividend growth rate by 5 percentage points per year until it
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $67.25 and all the dividend information remains the same. What required return must investors be
Assume a stock has dividends that grow at a constant rate forever. If you value the stock using the constant dividend growth model, how many years’ worth of dividends constitute one-half of the
Regarding the two-stage dividend growth model in the chapter, show that the price of a share of stock today can be written as follows:Can you provide an intuitive interpretation of this expression?
Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated
Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $15,000 balance from your current credit
In Problem 24, suppose the firm wishes to keep its debt-equity ratio constant. What is EFN now?Problem 24The most recent financial statements for Crosby, Inc., follow. Sales for 2021 are projected to
Gamgee Co. wishes to maintain a growth rate of 11 percent per year, a debt-equity ratio of .75, and a dividend payout ratio of 25 percent. The ratio of total assets to sales is constant at .65. What
a. What is the relationship between the price of a bond and its YTM?b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2021. What is
Milton Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
You purchase a bond with a coupon rate of 6.4 percent, a par value of $1,000, and a clean price of $1,027. If the next semiannual coupon payment is due in two months, what is the invoice price?
You purchase a bond with an invoice price of $1,053 and a par value of $1,000. The bond has a coupon rate of 5.3 percent, and there are four months to the next semiannual coupon date. What is the
Uliana Co. wants to issue new 20-year bonds for some much needed expansion projects. The company currently has 6 percent coupon bonds on the market with a par value of $1,000 that sell for $967, make
Williams Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 106.32 percent of par. What is the current yield on
Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 18 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly
Both Bond Sam and Bond Dave have 7.1 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest
Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 6.8 percent, has a YTM of 6.2 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual
Say you own an asset that had a total return last year of 14.1 percent. If the inflation rate last year was 2.83 percent, what was your real return?
An investment offers a total return of 11.7 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 9 percent. What does Janice believe the inflation
Suppose the real rate is 1.8 percent and the inflation rate is 2.7 percent. What rate would you expect to see on a Treasury bill?
What does the lack of transparency in the bond market imply for bond investors?
If Treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent, what is the approximate real rate of interest? The exact real rate?
Union Local School District has a bond outstanding with a coupon rate of 2.9 percent paid semiannually and 16 years to maturity. The yield to maturity on this bond is 2.7 percent, and the bond has a
Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.7 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 5.05 percent. What is the
You find a zero coupon bond with a par value of $10,000 and 24 years to maturity. If the yield to maturity on this bond is 4.2 percent, what is the dollar price of the bond? Assume semiannual
Draiman Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $987. The bonds make semiannual payments. What must the
Ashburn Corp. issued 25-year bonds two years ago at a coupon rate of 5.6 percent. The bonds make semiannual payments. If these bonds currently sell for 97 percent of par value, what is the YTM?
Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?
Westco Co. issued 15-year bonds a year ago at a coupon rate of 5.4 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the
A company is contemplating a long-term bond issue. It is debating whether to include a call provision. What are the benefits to the company from including a call provision? What are the costs? How do
Nikita Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $962. At this price, the bonds yield 5.1 percent. What must the
company is contemplating a long-term bond issue. It is debating whether to include a call provision. What are the benefits to the company from including a call provision? What are the costs? How do
A Japanese company has a bond outstanding that sells for 96.318 percent of its ¥100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 6.3 percent interest per week.a. What APR must the store report to its
You have 40 years left until retirement and want to retire with $4.5 million. Your salary is paid annually, and you will receive $60,000 at the end of the current year. Your salary will increase at 3
As discussed in the text, an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period instead of at the end of the period. Show that the
What is the value of an investment that pays $75,000 every other year forever, if the first payment occurs one year from today and the discount rate is 7 percent compounded daily? What is the value
You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is
Your financial planner offers you two different investment plans. Plan X is an annual perpetuity of $35,000 per year. Plan Y is an annuity for 15 years and an annual payment of $47,000. Both plans
This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this:
Two banks in the area offer 30-year, $320,000 mortgages at 4.9 percent and charge a $5,500 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the
You have just arranged for a $2.55 million mortgage to finance the purchase of a large tract of land. The mortgage has an APR of 5.3 percent, and it calls for monthly payments over the next 30 years.
You are buying a house and will borrow $265,000 on a 30-year fixed-rate mortgage with monthly payments to finance the purchase. Your loan officer has offered you a mortgage with an APR of 4.6
The interest rate on a one-year loan is quoted as 13 percent plus 3 points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?
You are looking at a one-year loan of $10,000. The interest rate is quoted as 9.7 percent plus 2 points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to
After deciding to acquire a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $49,000. The dealer has a special leasing arrangement where you
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 14.6
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $16,000 per month for 25 years, with the first
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $11,700 every year instead of equal annual payments.Problem 55Prepare an amortization schedule for a five-year
Prepare an amortization schedule for a five-year loan of $58,500. The interest rate is 6 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
You want to buy a new sports car from Muscle Motors for $64,500. The contract is in the form of a 60-month annuity due at an APR of 5.4 percent. What will your monthly payment be?
Suppose you are going to receive $14,500 per year for five years. The appropriate interest rate is 7.1 percent.a. What is the present value of the payments if they are in the form of an ordinary
A five-year annuity of 10 $5,500 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 8 percent compounded monthly, what is the
A local finance company quotes an interest rate of 18.4 percent on one-year loans. So, if you borrow $20,000, the interest for the year will be $3,680. Because you must repay a total of $23,680 in
Given a discount rate of 4.6 percent per year, what is the value at Date t = 7 of a perpetual stream of $7,300 payments with the first payment at Date t = 15?
You have your choice of two investment accounts. Investment A is a 13-year annuity that features end-of-month $1,600 payments and has an APR of 7.8 percent compounded monthly. Investment B is a 7
A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the APR is 9 percent compounded monthly for the first seven years, and APR of 6 percent compounded monthly
What is the value today of $5,100 per year, at a discount rate of 7.9 percent, if the first payment is received 6 years from today and the last payment is received 20 years from today?
Consider a firm with a contract to sell an asset for $175,000 four years from now. The asset costs $104,600 to produce today. Given a relevant discount rate of 11 percent per year, will the firm make
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 $2.6 million purchase price. The monthly payment on this loan
You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $450,000 per year. Thus, in one year, you receive $1.45 million. In two years, you get
The present value of the following cash flow stream is $8,200 when discounted at 9 percent annually. What is the value of the missing cash flow?Year .................... Cash Flow1
You need a 30-year, fixed-rate mortgage to buy a new home for $245,000. Your mortgage bank will lend you the money at an APR of 4.8 percent for this 360-month loan. However, you can afford monthly

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