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intermediate financial management
Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions
In Finance for Life: Higher Education as an Investment in Yourself on page 384, the decision to get a three-year bachelor’s degree from a university in England was discussed in the context of an investment decision. Discuss how our NPV changes for the given example if we also include a one-year
What is the rationale for using the MIRR as opposed to the IRR decision criterion?Describe the fundamental shortcoming of the MIRR method.
If a project’s payback period is less than the maximum payback period that the firm will accept, does this mean that the project’s NPV will also be positive?
Briefly compare and contrast the NPV, PI, and IRR criteria. What are the advantages and disadvantages of using each of these methods?
What are the limitations of the payback period as an investment decision criterion?What are its advantages? Why do you think it is used so frequently?
What does it mean to say that two or more investment projects are mutually exclusive?
Why is the NPV generally considered to be the preferred method for evaluating new capital investment proposals? Describe the meaning of the NPV to a close relative who has no business background in terms they would understand.
How is the presence or absence of product market competition that a firm faces related to the NPV of the firm’s investment opportunities? What are the types of barriers to competition (market entry) that tend to preserve positive NPVs?
Distinguish between revenue enhancement investments, cost-reduction investments, and mandated investments.
Why might it be difficult for firms to find good investment ideas?
In Regardless of Your Major: Making Personal Investment Decisions on page 362, what were the types of personal decisions discussed that can be addressed using capital-budgeting analyses?
How does the payback period method provide an indication of the risk of an investment proposal?
What is the most widely used measure of capital budgeting in business practice?
What is the discounted payback period method, and how does it improve on the payback period measure?
What is the payback period method, and what is the source of its appeal?
What is the modified internal rate of return metric, and why is it sometimes used?
Describe the situations in which the NPV and IRR metrics can provide conflicting signals.
Describe what the IRR metric tells the analyst about a new investment opportunity.
What is capital rationing?
What is the equivalent annual cost (EAC) measure, and when should it be used?
Describe what the NPV tells the analyst about a new investment opportunity.
What are the three basic types of capital investment projects?
What makes a capital-budgeting project a good one?
Describe the two-phase process typically involved in carrying out a capital-budgeting analysis.
What does the term capital budgeting mean?
Understand current business practice with respect to the use of capital-budgeting criteria.
Use the profitability index, internal rate of return, and payback criteria to evaluate investment opportunities.
Evaluate investment opportunities using the net present value and describe why it is the best measure to use.
Understand how to identify the sources and types of profitable investment opportunities.
(Valuing preferred stock) Kendra Corporation’s preferred shares are trading for $25 in the market and pay a $4.50 annual dividend. Assume that the market’s required yield is 14 percent.a. What is the stock’s value to you, the investor?b. Should you purchase the stock?
(Valuing preferred stock) Your friend owns 500 shares of Acorn Ltd.’s preferred stock, which currently sells for $50 per share and pays annual dividends of $3 per share. If the market’s required yield on similar shares is 5 percent, should your friend sell the shares or buy more?
(Valuing preferred stock) What is the value of a preferred stock of Augustus Plc, where the dividend rate is 4 percent on a £50 par value and the market’s required yield on similar shares is 8 percent?
(Valuing preferred stock) Pioneer’s preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.a. If the market’s required yield is 10 percent, what is the value of the stock to investors?b. Should investors acquire the stock?
(Valuing preferred stock) Calculate the value of a preferred stock that pays a dividend of £4 per share when the market’s re-quired yield on similar shares is 10 percent.
(Valuing common Stock) Assume the following:• The investor’s required rate of return is 15 percent.• The expected level of earnings at the end of this year (E1) is $5.00.• The retention ratio is 50 percent.• The return on equity (ROE) is 20 percent (that is, it can earn 20 percent on
(Valuing common stock) Assume the following:• The investor’s required rate of return is 13.5 percent.• The expected level of earnings at the end of this year (E1) is $6.00.• The retention ratio is 50 percent.• The return on equity (ROE) is 15 percent (that is, it can earn 15 percent on
(Using relative valuation for common stock) (Related to Checkpoint 10.2 on page 345) Using the P/E ratio approach to valuation, calculate the value of a share of stock under the following conditions:• The investor’s required rate of return is 12 percent.• The expected level of earnings at the
(Valuing common stock) Dubai Metro’s stock price was at $100 per share when it announced that it would cut its dividends for next year from $10 per share to $6 per share, with the additional funds to be used for expansion. Prior to the dividend cut, Dubai Metro expected its dividends to grow at a
(Measuring growth) Bonaparte Ceramics Ltd. has appointed a new CEO who is driving some strategic changes. So, management plans to reduce its expected annual dividend from €6 to €4 per share to have more money to invest in new projects. If it does not cut the dividend, the firm’s expected rate
(Measuring growth) Solarpower Systems expects to earn $20 per share this year and intends to pay out $8 in dividends to shareholders and retain $12 to invest in new projects with an expected return on equity of 20 percent. In the future, Solarpower expects to maintain the same dividend payout
(Measuring growth) Griffin Plc’s return on equity is 12 percent, and management has decided to retain 40 percent of earnings for investment in new projects.a. What will be the company’s growth rate?b. How would the growth rate change if management (i) increased retained earnings to 60 percent
(Valuing common stock) Wayne, Inc.’s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, return on equity is 20 percent, and its retention rate is 25 percent.a. What is the value of the stock to you, given a 15 percent required
(Measuring growth) Given that a firm’s return on equity is 20 percent and management plans to retain 75 percent of earnings to fund investment projects, what will be the firm’s growth rate? If the firm decides to increase its retention rate, what will happen to the value of its common stock?
(Valuing common stock) The common stock of NCP paid $1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years.a. If your required rate of return is 10.5 percent, what is the value of the stock to you?b. Should you make the investment?
(Valuing common stock) Heck Fook Inc. paid a $4.60 dividend last year. If Heck Fook’s return on equity is 20 percent and its retention rate is 70 percent, what is the value of the common stock if the investors require a 12 percent rate of return?
(Valuing common stock) O’Connor Apparel Ltd. paid a €5.50 dividend last year.At a constant growth rate of 8 percent, what is the value of the common stock if the investors require a 15 percent rate of return?
(Measuring growth) If Midland Technologies’ net income is £400 million, its common equity) is £930 million, and management plans to retain 75 percent of the firm’s earnings to finance new projects, what will be the firm’s growth rate?
(Measuring growth) If Nadia Builder Ltd.’s return on equity is 15 percent and management plans to retain 50 percent of earnings for investment purposes, what will be the firm’s growth rate?
The opening vignette on page 333 described Google first going public in 2004. Prior to going public, did Google’s stock have a market price? What principles would go into determining the value of a company that hadn’t gone public yet?
Common stockholders receive two types of return from their investment. What are they?
The market’s required yield on preferred stock is actually a promised rate of return.Explain this statement.
Compare the methods for valuing preferred stock and common stock.
In Finance for Life: Stock Valuation Practices: Scientific Methods or Emotional Reactions on page 335, we learned that it is common for investors to be affected by their personal biases or “anchors.” If an investor believes that FinTech firms are the new winners, how likely is he to react to a
Discuss two reasons why investors may perceive preferred stock to be less risky than common stock.
Because preferred stock dividends must be paid before common stock dividends, should preferred stock be considered a liability and appear on the right side of the balance sheet alongside of the firm’s long-term debt?
Why is preferred stock referred to as a hybrid security?
Regardless of Your Major: Getting Your Fair Share on page 334 focuses on the valuation of a new business venture. If you were faced with the need to value this business, what would you want to know about the business?
Explain the meaning of the following statement: The market yield is a promised rate of return rather than an expected rate of return.
What is the market’s required yield on a preferred stock?
What are three common features of preferred stock?
How does a firm’s dividend policy affect the firm’s P/E ratio?
What is the price/earnings model of equity valuation?
If a corporation decides to retain its earnings and reinvest them in the firm, does the market value of the firm’s shares always increase? Why or why not?
Describe the three-step process for valuing common stock using the discounted dividend model.
What does agency cost mean with respect to the owners of a firm’s common stock?
What are the attributes of common stock that distinguish it from bonds and preferred stock?
Identify the basic characteristics and features of preferred stock and value preferred shares.
Use the price/earnings (P/E) ratio to value common stock.
Identify the basic characteristics and features of common stock and use the discounted cash flow model to value common shares.
Which of the bonds (if any) would you recommend to your uncle? Explain.
What are some of the things you can conclude from these computations?
How would the value of the bonds change if the market’s required yield to maturity on a comparable-risk bond (i) increases 3 percentage points or (ii) decreases 3 percentage points? Which of the bond issues is the most sensitive to changes in the rate of interest?
Given your estimate of the proper discount rate, what is your estimate of the value of each of the bonds? In light of the prices recorded above, which issue do you think is most attractively priced?
Consider the selling price for each of the bond issues as given in the table above. Calculate the yield to maturity for each bond.
Estimate an appropriate market’s required yield to maturity for each of the bond issues using credit spreads reported in Table 9.4.
(Calculating interest rates) What would you expect the nominal rate of interest to be in a country where the real rate of interest is 6 percent and the expected inflation rate is also 6 percent?
(Calculating interest rates) Assume the expected inflation rate is 7.5 percent. If the current real rate of interest is 5 percent, what should the nominal rate of interest be?
(Calculating interest rates) (Related to Checkpoint 9.6 on page 315) What would you expect the nominal rate of interest to be if the real rate is 4 percent and the expected inflation rate is 2.2 percent?
(Applying bond valuation relationships) Everglade, Inc., issues a 15-year $1,000 bond that pays $90 annually. The market price for the bond is $920. The market’s required yield to maturity on a comparable-risk bond is 10 percent.a. What is the market value of this bond?b. What happens to the
(Applying bond valuation relationships) A bond of Berlin Cotton GmbH pays €32 in annual interest, with a €800 par value. The bond matures in 15 years. The market’s required yield to maturity on a comparable-risk bonds is 6 percent.a. Calculate the market value of the bond.b. What happens to
(Applying bond valuation relationships) A bond of Seasalt Ltd pays 6 percent annual interest, with a £100 par value. The bond matures in 15 years. The market’s required yield to maturity on a comparable-risk bond is 8 percent.a. Calculate the market value of the bond.b. How does the value change
(Applying bond valuation relationships) Arizona Public Utilities issued a bond that pays $80 in interest, with a $1,000 par value. It matures in 20 years. The market’s required yield to maturity on a comparable-risk bond is 7 percent.a. Calculate the value of the bond.b. How does the value change
(Applying bond valuation relationships) (Related to Checkpoint 9.3 on page 302)You own a bond that pays $100 in annual interest, with a $1,000 par value. It matures in 15 years. The market’s required yield to maturity on a comparable-risk bond is 12 percent.a. Calculate the value of the bond.b.
(Applying bond valuation relationships) (Related to Checkpoint 9.2 on page 298)The 15-year, $1,000 par value bonds of Waco Industries pay 8 percent interest annually. The market price of the bond is $1,085, and the market’s required yield to maturity on a comparable-risk bond is 10 percent.a.
(Calculating yield to maturity) (Related to Checkpoint 9.2 on page 298) The Saleemi Corporation’s $1,000 bonds pay 5 percent interest annually and have 12 years until maturity. You can purchase a bond for $915.a. What is the yield to maturity on this bond?b. Should you purchase the bond if the
(Valuing bonds) (Related to Checkpoint 9.2 on page 298 and Checkpoint 9.3 on page 302) The seven-year $1,000 par bonds of Vail Inc. pay 9 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,100.a. Determine
(Calculating yield to maturity) (Related to Checkpoint 9.2 on page 298) Bonds of Paliflex Ltd. mature in 20 years and pay 8 percent interest annually. If you purchase the bonds for A$860 with a face value of A$1,000, what is their yield to maturity?
(Valuing bonds) (Related to Checkpoint 9.2 on page 298 and Checkpoint 9.3 on page 302) A 14-year, $1,000 par value Fingen bond pays 9 percent interest annually.The market price of the bond is $1,100, and the market’s required yield to maturity on a comparable-risk bond is 10 percent.a. Compute
(Calculating yield to maturity) (Related to Checkpoint 9.2 on page 298) You can purchase Chang Limited’s bond for S$560 in Singapore with a face value of S$800. This bond matures in 12 years and pays 12 percent interest annually. What is the yield to maturity for this bond?
(Valuing bonds) Five years ago XYZ International issued some 30-year zero-coupon bonds that were priced with a market’s required yield to maturity of 8 percent. What did these bonds sell for when they were issued? Now that five years have passed and the market’s required yield to maturity on
(Valuing bonds) (Related to Checkpoint 9.3 on page 302) Doisneau 20-year bonds have a 10 percent annual coupon interest, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a 12 percent market’s required yield to maturity, are these premium or
(Calculating yield to maturity) A16-year old Jain Plc bond pays 10 percent interest annually on a £100 par value. If the bond sells for £92, what is the bond’s yield to maturity? What will be the yield to maturity if the bond pays interest semiannually?Explain the difference.
(Calculating yield to maturity) A bond’s market price is ¥600. It has a ¥800 par value, will mature in eight years, has an annual coupon interest rate of 10 percent but makes its interest payments semiannually. What is the bond’s yield to maturity? What happens to the bond’s yield to
(Calculating yield to maturity) (Related to Checkpoint 9.2 on page 298) The market price is $400 for an 8-year bond ($500 par value) that pays 4 percent annual interest but makes interest payments on a semiannual basis (2 percent semiannually). What is the bond’s yield to maturity?
(Valuing bonds) (Related to Checkpoint 9.3 on page 302) Rayyan Industries is considering issuing bonds that will mature in 10 years with a 6 percent annual coupon rate. Their face value will be €500, and the interest will be paid semiannually. Rayyan has applied for its credit rating and is
(Valuing bonds) Red Plc bonds have a 6 percent annual coupon rate. The interest is paid semiannually, and the bonds mature in eight years. Their face value is £400. If the market’s required yield to maturity on a comparable-risk bond is 8 percent, what is the value of the bond? What is its value
(Valuing bonds) (Related to Checkpoint 9.4 on page 305) Calculate the market value of a bond that matures in eight years and has a €1,000 face value. The annual coupon interest rate is 4 percent, and the market’s required yield to maturity on a comparable-risk bond is 6 percent.
(Valuing bonds) (Related to Checkpoint 9.3 on page 302) Calculate the market value of a bond that matures in 10 years and has a 100 par value. The annual coupon interest rate is 6 percent, and the market’s required yield to maturity on a comparable-risk bond is 8 percent.
(Computing floating-rate loans) After looking at a fixed-rate loan, Ace-Campbell Manufacturing entered into a floating-rate loan agreement. This loan is set at 40 basis points(or .40 percent) over an index based on LIBOR. Ace-Campbell is concerned that the LIBOR index may go up, causing the loan
(Computing floating-rate loans) (Related to Checkpoint 9.1 on page 292) The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating interest rate that was 30 basis points(.30 percent) over an index based
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