The Fundamental Principles Of Finance 1st Edition Robert Irons - Solutions

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What is the difference between a defined benefit retirement plan and a defined contribution retirement plan?
What does the Federal Open Market Committee do?
What are the three tasks mandated to the Federal Reserve Bank?
Starbucks’ common stock (SBUX) is currently selling for $64.24. SBUX has call options with a strike price of $62.50 and three weeks remaining until maturity that sell for $2.28.Determine the following things with regard to the SBUX call options:a. Their moneyness.b. Their intrinsic value.c. Their
What does a call option offer the purchaser?
What are the two main differences between a forward contract and a futures contract?
What is a mutual fund?
What are derivatives?
There are two big differences between common and preferred equity. What are they?
What do all money market securities have in common?
What are institutional investors?
What are the forces that help make markets efficient?
Based on the efficient market hypothesis, what type of data may be used to earn excess returns if the market is:a. Weak form efficient.b. Semi-strong form efficient.c. Strong form efficient.
Yancy Products’ common stock has a required return of 14.65% and a beta of 1.33. The risk-free rate is 2.66%, and the return to the stock market is 12.12%. Is Yancy beating the market? Prove your answer using the data.
On January 28, Krumholz Industries announced in their annual report and in their annual analyst call with Wall Street that earnings for the prior year were down 6.2% over the prior year. On January 29, Krumholz’ common stock had a capital gain of 3.6%. What reason could there be for the increase
What is the biggest difference between the money market and the capital market?
Which is more important, the primary market for stocks or the secondary market?
What is the essential purpose for financial markets?
What risk metric proved insufficient for Long Term Capital Management?
What situation that arose due to the S&L crisis caused the federal government to bail out Wall Street and the big banks in the 2007 financial crisis?
What part of the strategy made things worse for both Orange County and Long Term Capital Management when returns started going negative?
What strategy that Nick Leeson tried only made things worse?
What circumstance allowed Nick Leeson to put Barings Bank’s funds at risk?
What circumstance allowed Robert Citron to put the Orange County Investment Pool’s funds at risk?
What circumstance in the economy made Robert Citron’s investment strategy change from a winner to a loser?
What particular form of debt did Robert Citron use to leverage up the returns to the Orange County Investment Pool?
In what way was Proctor and Gamble’s interest rate swap deal unethical?
Who were the Keating five?
What circumstance made it possible for Charles Keating to quintuple Lincoln Savings and Loan’s assets in a short period of time?
What other firm did the Enron scandal bring down, and for what reason?
How does a Ponzi scheme work?
What legal accounting tool did Enron’s CFO use to make earnings look better than they were?
What unusual step did the board of directors at WorldCom take to avoid lowering the stock price?
Which of the following statements is correct?a. A limited partnership is legally the same as a corporation.b. Partnerships are the most complex type of organization to form.c. Earnings from sole proprietorships and partnerships are taxed at the individual level.d. Only sole proprietorships have
Which of the following statements is correct?a. Corporations can have an unlimited life.b. Corporate profits are taxable income to the shareholders when earned.c. Shareholders are protected from all potential losses.d. The majority of firms in the US are organized as corporations.e. Retained
A business owned by two or more individuals, with some owners having different amounts of liability in the firm’s debt, is called a:a. Corporation.b. S corporation.c. General partnership.d. Limited partnership.e. Sole proprietorship.
A business owned by two or more individuals, all having equal liability in the firm’s debt, is called a:a. Corporation.b. S corporation.c. General partnership.d. Limited partnership.e. Sole proprietorship.
A business owned by a single individual who has unlimited liability for the firm’s debt is called a:a. Corporation.b. S corporation.c. General partnership.d. Limited partnership.e. Sole proprietorship.
A firm’s short-term assets and short-term liabilities are referred to as the firm’s:a. Capital structure.b. Debt-to-equity ratio.c. Working capital.d. Net fixed assets.e. Additional funds needed.
Which of the following is a capital structure decision:a. How many shares of stock to issue.b. Whether or not to purchase a new machine for the production line.c. How much of a common dividend to pay.d. How much inventory to keep on hand.e. Whether or not to offer a discounted price to boost sales.
Which of the following is a working capital management decision:a. How many shares of stock to issue.b. Whether or not to purchase a new machine for the production line.c. How much of a common dividend to pay.d. How much inventory to keep on hand.e. Whether or not to offer a discounted price to
Which of the following is a capital budgeting decision:a. How many shares of stock to issue.b. Whether or not to purchase a new machine for the production line.c. How much of a common dividend to pay.d. How much inventory to keep on hand.e. Whether or not to offer a discounted price to boost sales.
Why is finance important to a business?
What is the main point of the Enron example used in this chapter?
Define the intrinsic value of the firm’s stock.
Why is finance a strategic discipline?
Name the three general areas in which financial decisions arise.
The CEO of Harlem Hardware Supplies has submitted together a capital budget of$48,500,000 for the following year’s investment opportunities. He expects to have$19,000,000 in retained earnings at the end of the year. Harlem’s target capital structure calls for 45% equity. Based on these figures,
Anspagh Automobiles just paid a common dividend of $2.50 at the end of last year, and that dividend is expected to grow at an annual rate of 10%. Their common stock currently sells for $101.85, which is what they expect to get for newly issued shares at this time. Flotation costs on newly issued
Fairweather Pharmacies’ component costs of capital and their weights are given below:k 10% w 45%k 5% w 10%k 8% w 45%T d d p p e e= == == == 40%Given these figures, what is Fairweather’s weighted average cost of capital?
T-bonds are currently paying 5.5%, while the S&P 500 is paying 8%. Sentry Electronics has a beta of 1.5. What is the component cost of Sentry’s retained earnings?
Daytona Dairies has preferred stock that pays a dividend of $3.25. Their preferred stock currently sells for $34.21. Flotation costs for new preferred stock are expected to be 5%of the share price. What is the component cost of Daytona’s preferred equity?
The most recent data for Harper Housewares is given below:Balance Sheet Data Cash 250,000 Accounts Payable 480,000 Marketable Securities 150,000 Notes Payable 425,000 Receivables 350,000 Long-Term Debt 1,465,000 Inventory 800,000 Preferred Equity 430,000 Net Fixed Assets 3,450,000 Common Equity
Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share.
Gallagher Industries’ common stock currently sells for $20.00 per share. The common dividend just paid was $1.20, and the dividend is expected to increase at a rate of 5%annually. Floating new common shares will cost Gallagher 5% of the market price of the stock. What is Gallagher’s component
Empire Capital Enterprises has a beta of 1.36. The current yield on 10-year US T-notes is 4.25%, and the return to the S&P 500 index fund is 9.60%. Given these data, what is Empire’s cost of retained earnings?
Your boss is the treasurer of the company, and she expects the firm will grow at 4.00%annually in the future. She also believes that issuing bonds is less expensive than the cost of retained earnings. Your firm’s debt securities have a yield to maturity of 8.50%, and the firm’s marginal tax
Tandem Industries can sell new shares of preferred stock for $28.00 per share, but flotation costs will run them $1.00 per share. Tandem’s preferred stock currently pays a $3.00 dividend. What is the component cost for Tandem’s new preferred equity?
Calculate the after-tax cost of debt for firms with the following yields to maturity for their new bonds. Assume the firm’s marginal tax rate is 25.00%.a. YTM = 6.40%.b. YTM = 7.80%.c. YTM = 9.90%.Repeat parts a–c using a marginal tax rate of 35.00%. What effect does raising the tax rate have
List the component costs of capital in ascending order (all four of them). Justify your ranking with an explanation for each component cost.
Explain in your own words the logic of using the weighted average cost of capital as the discount rate for capital projects.
What is the project’s DPB, using the 8.50% discount rate? Report your answer to two decimal places.
What is the project’s PB? Report your answer to two decimal places.
What is the project’s MIRR, using the 8.50% as the reinvestment rate? Report your answer to two decimal places.
What is the project’s IRR? Report your answer to two decimal places.
What is the project’s NPV, using the 8.50% discount rate? Round your answer to the nearest dollar.
What is the net operating cash flow for year 5? Round your answer to the nearest dollar.
What is the total of the terminal cash flows for the project? Round your answer to the nearest dollar.
What is the net operating cash flow for year 4? Round your answer to the nearest dollar.
What is the net operating cash flow for year 3? Round your answer to the nearest dollar.
What is the net operating cash flow for year 2? Round your answer to the nearest dollar.
What is the net operating cash flow for year 1? Round your answer to the nearest dollar.
What is the net operating cash flow for year 0? Round your answer to the nearest dollar.
What is the depreciable basis of the new machine?
All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project’s modified internal rate of return? Calculate to two decimal places.Use the following data to answer questions 14–26.Your firm needs a new machine for producing a specific
A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year
A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4.All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project’s
A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4.All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project’s
A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4.All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project’s
A project has an initial cost of $45,000. The incremental inflows associated with the project are $20,000 in year 1, $15,000 in year 2, $10,000 in year 3 and $8,000 in year 4.All cash inflows are at the end of the year. The appropriate discount rate for this project is 8.0%. What is the project’s
A cost that has been incurred, or will be incurred, whether a project is accepted or rejected, is known as:a. An incremental cash flow.b. An externality.c. A sunk cost.d. A terminal cash flow.
An externality can best be described as:a. An impact, positive or negative, that a new project would have on existing operations.b. An example of an opportunity cost.c. Something that always has a negative impact.d. Something that should not be included in the capital budgeting process.
Which of the following items would not represent an incremental cash flow?a. Salvage value of the new asset required for the project.b. Purchase price of the new asset required for the project.c. Interest payments for the debt used to finance the project.d. Salvage value of an existing asset sold
The net present value represents:a. The percentage return on the project.b. The dollar profits added to the firm discounting at the cost of capital.c. The percentage change represented by the project.d. The dollar change in the firm’s value resulting from undertaking the project.
Independent projects:a. Always have negative NPVs.b. Do not compete with each other for resources.c. Can be mutually exclusive under certain conditions.d. Compete with each other for resources.
The internal rate of return is best described as the discount rate that:a. Equates the NPV and the IRR.b. Equals the required rate of return.c. Makes the net present value equal to zero.d. Equates all cash flows to the current market rate.
The payback period is best defined as:a. The time period required for total revenue to equal the initial investment.b. The time period required to receive cash flows sufficient to cover the initial investment.c. The time period required for the present value of all cash flows to equal the initial
Use the data above and your calculations from questions 15 through 18 to estimate the intrinsic value per share of the firm’s common stock as of the end of 2018.
Use the data above and your calculations from questions 15, 16 and 17 to estimate the value of the firm’s common equity as of the end of 2018.
Use the data above and your calculations from questions 15 and 16 to estimate the value of the firm as of the end of 2018.
Use the data above and the gCFFA you estimated to calculate the value of Gaspar’s operations as of the end of 2018.
Use the CFFA data above to estimate the growth rate for Gaspar’s cash flow from assets.
One year ago today, you bought 600 shares of Mullen Manufacturing’s common stock for $42.50 per share. During the past year you received two quarterly dividends of$0.35 each and two quarterly dividends of $0.38 each. Today the stock’s market price is$44.20. Calculate the dividend yield, capital
Allyson Enterprises just lost a big lawsuit. Their most recent dividend was $0.88, and that dividend is expected to grow by 2% in year 1, 4% in year 2, 5% in year 3 and 6% in year 4 and beyond. If the required return on Allyson’s common stock is 10.50%, what is the intrinsic value of the stock?
Gerard Consolidated’s last annual dividend was $1.40. The dividend is expected to grow by 20% this year, 16% next year, 12% the year after next and 8% from the following year forward. If the required return on Gerard’s common stock is 13.50%, what is the intrinsic value of Gerard’s common
Fester Industries’ common stock is currently selling for $30.00 per share. Next year’s dividend (D1) is expected to be $1.26. If the required return on Fester’s common stock is 9.20%, what was the most recent dividend that Fester paid (D0)?
Anthony Inc.’s common stock is currently selling for $20.00 per share. Their most recent annual dividend was $0.60, and the dividend is expected to grow at the rate of 10% annually in the future. What is the required return on Anthony’s common equity?
Burkhead Sales just paid an annual dividend of $0.70, and the dividend is expected to grow at a constant rate of 7.00% in the future. If the required return on Burkhead’s stock is 10.50%, what is the intrinsic price of the shares?
Edwards International’s preferred stock sells for $70 per share. If the required return on Edwards’ preferred stock is 7.50%, how much is Edwards’ preferred dividend?
Garner Electronics pays a preferred dividend of $7.50. If the required return on Garner’s preferred stock is 6.00%, what is the price of Garner’s preferred stock?

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