American Public University Finc 400 Midterm

3q How much money do I need to place into a bank account that pays a​ 1.08% rate in order to have​ $500 at the end of 7​ years? A. ​$629.51 B. ​$751.81 C. ​$332.54 D. ​$463.78

D

3h Present value a. ​$700 to be received 8 years from now discounted back to the present at 10 percent.

. What is the present value of ​$700 to be received 8 years from now discounted back to the present at 10 percent? ​$326.56 Spread Sheet interest rate = 10% number of periods = 8 payment = 0 future value = -700 type = 0 =PV(rate,nper,pmt,fv,type)

​5h Weighted average cost of capital​) The capital structure for the Carion Corporation is provided​ here: CAPITAL STRUCTURE​ ($000) Bonds $1,200 Preferred stock 350 Common stock 3,450 $5, 000 The company plans to maintain its debt structure in the future. If the firm has an​ after-tax cost of debt of 10.0 percent, a cost of preferred stock of 16.0 percent, and a cost of common stock of 21.0 percent, what is the​ firm's weighted average cost of​ capital

1200/5000 = 24% 350/5000=7% 3450/5000=69% WACC = (.1x.24)+(.16x.07)+(.210x.69)=.1801

1q According to Principle​ 3, how should investors decide where to invest their​ money? ​(Select the best choice​ below.) A. By determining if the return is more than expected given the level of risk. Your answer is correct. B. By determining the expected EPS. C. By determining the lowest return. D. By determining the highest return.

A

2q A firm paid dividends of​ $10,000, paid interest of​ $20,000, reduced debt principal outstanding​ (paid off​ debt) in the amount of​ $100,000, and sold new stock for​ $150,000. What was the​ firm's cash flow from financing​ activities? A. ​+$40,000 ($40,000 flowed into the​ firm) Your answer is correct. B. minus ​$280,000 ​($280,000 flowed out of the​ firm) C. ​+$280,000 ($280,000 flowed into the​ firm) D. minus ​$40,000 ​($40,000 flowed out of the​ firm)

A

2q California Retailing Inc. has sales of​ $4,000,000; the​ firm's cost of goods sold is​ $2,500,000; and its total operating expenses are​ $600,000. The​ firm's interest expense is​ $250,000, and the corporate tax rate is​ 40%. The firm paid dividends to preferred stockholders of​ $40,000, and the firm distributed​ $60,000 in dividend payments to common stockholders. What is California​ Retailing's "Addition to Retained​ Earnings"? A. ​$290,000 Your answer is correct. B. ​$330,000 C. ​$390,000 D. ​$650,000

A

3q Marble Corp. has a beta of 2.5 and a standard deviation of returns of​ 20%. The return on the market portfolio is​ 15% and the risk free rate is​ 4%. According to​ CAPM, what is the required rate of return on​ Collectible's stock? A. ​31.5% Your answer is correct. B. ​37.5% C. ​26.5% D. ​23.5%

A

3q Of the​ following, which differs in meaning from the other​ three? A. Assetminus unique Risk Your answer is correct. B. Systematic Risk C. Undiversifiable Risk D. Market Risk

A

3q Today is your 21st birthday and your bank account balance is​ $25,000. Your account is earning​ 6.5% interest compounded monthly. How much will be in the account on your 50th ​ birthday? A. ​$163,823 Your answer is correct. B. ​$159,795 C. ​$164,631 D. ​$162,183

A

​​4h (Common stock valuation​) Dalton Inc. has a return on equity of 13.4 percent and retains 57 percent of its earnings for reinvestment purposes. It recently paid a dividend of ​$3.75 and the stock is currently selling for ​$43 . a. What is the growth rate for Dalton​ Inc.? b. What is the expected return for​ Dalton's stock? c. If you require a 14 percent​ return, should you invest in the​ firm?

A = 7.64% =.0134x.57 B = 17.03% =3.75x(1+.0764)=4.04 =4.04/43+.0764 C = if your reuite a 14% return should you invest in the firm = yes

​4h Bond Valuation You own a 10-year, $1, 000 par value bond paying 8 percent interest annually. The market price of the bond is ​$825, and your required rate of return is 12 percent.

A. What is the expected rate of return of the 10 ​-year, $1, 000 par value bond paying 8 percent interest annually if its market price is ​$825 = 10.97% Spread Sheet NPER 10 PMt 80 pv -825 fv 1000 type 0 RATE (nper,pmt,pv,fv,type) B. What is the value of the bond to you, given you 12 percent require rate of return? 773.99 Spread sheet rate 12% Nper 10 pmt -80 fv -1000 type 0 PV (rate,np....) c. Should you sell the bond or continue to own​ it? ​(Select the best choice​ below.) A. You should sell the bond because the​ bond's yield to maturity is higher than your expected rate of return and thus it is undervalued. B. You should continue to hold the bond because the​ bond's yield to maturity is higher than your expected rate of return and thus it is undervalued. C. You should sell the bond because the​ bond's yield to maturity is lower than your expected rate of return and thus it is overvalued. Your answer is correct. D. You should continue to hold the bond because the​ bond's yield to maturity is lower than your expected rate of return and thus it is overvalued. C

2q Financial analysis A. relies on generally accepted accounting principles to make comparisons between companies valid B. uses historical financial statements to measure a​ company's performance and in making financial projections of future performance C. uses historical financial statements and is thus useful only to assess past performance D is accounting record-keeping using generally accepted accounting principles

B

3q At what rate must​ $287.50 be compounded annually for it to grow to​ $650.01 in 14​ years? A. 8 percent B. 6 percent Your answer is correct. C. 5 percent D. 7 percent

B

1q The​ long-run goal of the firm is to ​(Select the best choice​ below.) A. hold large quantities of cash. B. maximize earnings per share. C. maximize shareholder wealth. Your answer is correct. D. increase sales regularly.

C

2q Which of the following statements concerning net income is most​ correct? A. Net income represents cash available to pay dividends. B. Net income represents sales minus operating expenses at a specific point in time. C. Net income represents income that may be reinvested in the firm or distributed to its owners. Your answer is correct. D. Negative net income reduces a​ company's cash balance.

C

3q Changes in the general​ economy, like changes in interest rates or tax laws represent what type of​ risk? A. Companyminus unique risk B. Diversifiable risk C. Market risk Your answer is correct. D. Unsystematic risk

C

2q Inventory Ratio

COGS/Inventories

1q Why is it so hard to find extremely profitable​ projects? ​(Select the best choice​ below.) A. To find high profit​ projects, the product or service must be differentiated​ and/or have a cost advantage over the competition. B. To find high profit​ projects, you must locate imperfections in the market that are not currently being taken advantage of. C. If an industry is generating large​ profits, then new entrants are​ attracted, driving down profits. D. All of the above.

D

2q Which of the following has the most significant influence on return on​ equity? A. principal payments B. common dividends C. accruals D. operating income

D

3q You have a savings bond that will be worth​ $750 when it matures in 3​ years, but you need cash today. If the current going rate of interest is​ 5%, what is your bond worth if you sell it today​ (rounded to the nearest​ dollar)? A. ​$625 B. ​$675 C. ​$612 D. ​$648

D

3q Your grandparents deposit​ $2,000 each year on your​ birthday, starting the day you are​ born, in an account that pays​ 7% interest compounded annually. How much will you have in the account on your 21st​ birthday, just after your grandparents make their​ deposit? A. ​$101,802 B. ​$86,058 C. ​$79,640 D. ​$98,016

D

1q Advantages of the corporation include ​ (Select the best choice​ below.) A. transferability of ownership. B. unlimited liability. C. ability of the corporation to raise capital. D. double taxation of dividend income. E. A and C. Your answer is correct. F. A and B.

E

1q Disadvantages of the partnership are ​(Select the best choice​ below.) A. expense of formation. B. lack of permanence. C. double taxation of income. D. unlimited liability. E. b and d. Your answer is correct. F. a and d.

E

1q Maximizing shareholder wealth means maximizing the ​ (Select the best choice​ below.) A. value of the​ firm's assets. B. value of the​ firm's profits. C. value of the​ firm's cash. D. value of the​ firm's investments. E. market value of the​ firm's common stock.

E

​5q (Determining a​ firm's capital budget​) Newcomb Vending Company manages soft drink dispensing machines in western Tennessee for several of the major bottling companies in the area. When a machine malfunctions the company sends out a repair​ technician, and if he cannot repair it on the spot he puts in a replacement machine so that the broken one can be taken to the​ firm's repair facility in​ Murfreesboro, Tennessee. Betsy Newcomb recently completed her BBA from a nearby university and has been trying to incorporate as much of what she learned as possible into the operations of her family business.​ Specifically, Betsy recently reviewed the​ firm's capital structure and estimated that the​ firm's weighted average cost of capital is approximately 11 %. She hopes to help her father determine which of several major capital expenditures he should make in the current year based on a comparison of the rates of return she estimated for each project​ (that is, the internal rate of​ return) and the​ firm's cost of capital.​ Specifically, the firm is considering the following projects​ (ranked by their internal rate of​ return): Project invest capital IRR A 350,000 14% B 1200000 12% C 700000 10% D 500000 8% E 1450000 6% If all five of the investments being considered by Newcomb are of similar risk and that risk is very similar to that of the company as a​ whole, which​ project(s) should Betsy recommend the firm​ undertake? You may assume that the firm can raise all the capital it needs to fund its investments at the cost of capital of 11 % . Explain your answer.

If the firm can raise all the capital it needs to fund its investments at the cost of capital of 11%, which​ project(s) should Betsy recommend the firm​ undertake? ​(Select the best choice​ below.) A. Project E only because it offers the lowest rate of return. B. There is not enough information to make the investment decision. *******C. Projects A and B because they offer the rates of return that exceed the​ firm's 11 %cost of capital. D. Projects C comma D comma and E because they offer the rates of return that are less than the​ firm's 11 % cost of capital. E. Project A only because it offers the highest rate of return.

​2q (Evaluating liquidity​) The Allen Marble Company has a target current ratio of 2.0 but has experienced some difficulties financing its expanding sales in the past few months. At present, the firm has current assets of ​$2.5 million and a current ratio of 2.5. If Allen expands its receivables and inventories using its​ short-term line of​ credit, how much additional​ short-term funding can it borrow before its current ratio standard is​ reached?

The addition to current assets is ​$500000. 2.5mill-2.0mill/1.0 = 500,000

​​4h (Yield to maturity​) ​A(n) 14-year bond for Rusk Corporation has a market price of $ 800 and a par value of $ 1, 000. If the bond has an annual interest rate of 9 percent, but pays interest​ semiannually, what is the​ bond's yield to​ maturity?

The bond yield to maturity is 11.98% NPer 28 pmt 45 pv -800 fv 1000 type 0 RATE (.....

​​4h (​Bondholders' expected rate of return​) Sakara Co. bonds are selling in the market for $ 1,075. These 12-year bonds pay 13 percent interest annually on a $ 1,000 par value. If they are purchased at the market​ price, what is the expected rate of​ return?

The bonds expected rate of return is 11.8% NPer 12 pmt 130 pv -1075 fv 1000 type 0 RATE (nper pmt ....

​1h (Calculating the​ default-risk premium​) At​ present, 10-year Treasury bonds are yielding 4.3 ​% while a​ 10-year corporate bond is yielding 6.3 ​%. If the​ liquidity-risk premium on the corporate bond is 0.6 ​%, what is the corporate​ bond's default-risk​ premium? Note that a Treasuty security should have no​ default-risk premium and​ liquidity-risk premium.

The corporate​ bond's default risk premium is 1.4 % ​Thus, the corporate​ bond's default risk premium is 6.3 ​% - 4.3​%m - 0.6​% = 4​%.

​1q (Calculating the​ default-risk premium​) At​ present, 10-year Treasury bonds are yielding 4.4% while a​ 10-year corporate bond is yielding 6.6%. If the​ liquidity-risk premium on the corporate bond is 0.6%, what is the corporate​ bond's default-risk​ premium? Note that a Treasuty security should have no​ default-risk premium and​ liquidity-risk premium.

The corporate​ bond's default-risk premium is 1.6% 6.6% - 4.4% - .6% = 1.6%

​5q (Cost of preferred stock​) Your firm is planning to issue preferred stock. The stock sells for ​$129; however, if new stock is​ issued, the company would receive only ​$112.23. The par value of the stock is ​$100, and the dividend rate is 14 percent. What is the cost of capital for the stock to your​ firm?

The cost of capital for the preferred stock to your firm is 12.47% kps(cost of prefered stock) = preferred stock dividend/net proceeds per preferred share (NPps) 14/112.23=12.47%

​​5h (Cost of preferred stock​) Your firm is planning to issue preferred stock. The stock sells for ​$111; however, if new stock is​ issued, the company would receive only ​$97.68. The par value of the stock is ​$100, and the dividend rate is 13 percent. What is the cost of capital for the stock to your​ firm?

The cost of capital for the preferred stock to your firm is 13.31%. .13x100=13 13/97.68

2h (Computing earnings per share​) If ABC Company earned $ 300,000 in net income and paid cash dividends of $ 60,000, what are​ ABC's earnings per share if it has 70,000shares​ outstanding?

The earnings per share of ABC Company is ​$4.29 EPS = net income/number of shares EPS = 300,000/70,000=4.29

3h Loan Amortization Mr. Bill S.​ Preston, Esq., purchased a new house for ​$110,000. He paid ​$10,000 down and agreed to pay the rest over the next 25 years in 25 equal​ end-of-year payments plus 11 percent compound interest on the unpaid balance. What will these equal payments​ be?

The equal payments will be $11874.2 Spread Sheet Interest rate = 11% Number of periods = 25 present value = 100,000 future value = 0 type = 0 =PMT9rate,nper,pv,fv,type)

​1q (Real interest​ rates: approximation method​) If the real​ risk-free rate of interest is 4.3 % and the rate of inflation is expected to be constant at a level of 4.5 %, what would you expect​ 1-year Treasury bills to return if you ignore the cross product between the real rate of interest and the inflation​ rate?

The expected rate of return on​ 1-year Treasury bills is 8.8% .043+.045=.088 = 8.8%

​​1h (Inflation and interest rates​) What would you expect the nominal rate of interest to be if the real rate is 3.8% and the expected inflation rate is 7.2 %

The nominal rate of interest is 11.27%. The nominal rate of interest =.038 + .072 + (.038x.072) = .1127 = 11.27%

​1q (Inflation and interest rates​) Assume the expected inflation rate to be 3.7 percent. If the current real rate of interest is 5.9 percent, what ought the nominal rate of interest​ be?

The nominal rate of interest is 9.8%. real +inflation +product of the real rate of interest and the inflation rate) .059+.037+(.059x.037)=.0982

3h Solving for Annuity You lend a friend ​$45,000, which your friend will repay in 13 equal annual​ end-of-year payments of ​$8,000, with the first payment to be received 1 year from now. What rate of return does your loan​ receive?

The rate of return your loan will receive is 14.83%. Spread Sheet Number of period = 13 payment = 8000 present value = -45,000 future value = 0 type = 0 =RATE(nper,pmt,pv,fv,type)

​1q (Interest rate determination​) If the​ 10-year Treasury bond rate is 6.2 %, the inflation premium is 2.5 %, and the​ maturity risk premium on​ 10-year Treasury bonds is 0.7 %, assuming that there is no​ liquidity-risk premium on these​ bonds, what is the real​ risk-free interest​ rate?

The real​ risk-free interest rate is 3% 6.2% - 2.5% - .7% = 3.0%

​1h (Real interest​ rates: approximation method​) You are considering investing money in Treasury bills and wondering what the real​ risk-free rate of interest is.​ Currently, Treasury bills are yielding 5.2 % and the future inflation rate is expected to be 3.1 % per year. Ignoring the cross product between the real rate of interest and the inflation​ rate, what is the real​ risk-free rate of​ interest?

The real​ risk-free rate of interest is 2.1% Real rate of interest = .052 - .031 = .021 = 2.1%

​​4h (Preferred stock valuation​) You are considering an investment in one of two preferred​ stocks, TCF Capital or TAYC Capital Trust. TCF Capital pays an annual dividend of $ 2.94, while TAYC Capital pays an annual dividend of $ 3.15. If your required return is 7 percent, what value would you assign to the​ stocks?

The value of the TCF Capital preferred stock is ​$42.00 per share. ​(Round to the nearest​ cent.) 2.94/.07 The value of the TAYC Capital preferred stock is ​$45.00 per share 3.15/.07

2h Being able to identify an industry to use for benchmarking your​ firm's results with those of similar companies is not always easy. Choose a type of business and go to www.naics.com. This website allows you to do a free search for the NAICS​ (North American Industry Classification​ System, pronounced​ Nakes) number for different types of businesses. Choose keywords​ "athletic shoes" or​ "auto dealers" and others to see which industry they have been assigned to.

The​ "athletic shoes" has been assigned to the Manufacturing industry and the​ "auto dealers" has been assigned to the Retail Trade industry

​5h Cost of Debt The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new ​$1,000 par value bonds at a net price of ​$910. The coupon interest rate is 11 percent, and the bonds would mature in 15 years. If the company is in a 40 percent tax​ bracket, what is the​ after-tax cost of capital to Zephyr for​ bonds?

The​ after-tax cost of capital to Zephyr for bonds is 7.41% NPer 15 pmt 110 pv -910 fv 1000 type 0 RATE = some number *(1-.4)=7.41%

2h (Computing income taxes​) The William B. Waugh Corporation is a regional Toyota dealer. The firm sells new and used trucks and is actively involved in the parts business. During the most recent​ year, the company generated sales of $ 3.03 million. The combined cost of goods sold and the operating expenses were ​$2.01 million.​ Also, ​$396,000in interest expense was paid during the year. Calculate the​ corporation's tax liability by using the corporate tax rate structure in the popup​ window: ​ 15% $0-$50,000 ​ 25% $50,001-$75,000 ​ 34% $75,001-$10,000,000 ​ 35% over​ $10,000,000 Additional​ surtax: 5% on income between​ $100,000 and​ $335,000 ​3% on income between​ $15,000,000 and​ $18,333,333

The​ corporation's tax liability is ​$212160 7500+6250+186660+11750 = 212160

​2q (Computing income taxes​) Sales for L. B. Menielle Inc. during the past year amounted to ​$5.00million. The firm provides parts and supplies for oil field service companies. Gross profits for the year were ​$3.00 million. Operating expenses totaled $ 1.00 million. The interest income from the securities owned was ​$20,000. The​ firm's interest expense was ​$100,000. Calculate the​ corporation's tax liability by using the corporate tax rate structure in the popup​ window, 15% $0-$50,000 ​ 25% $50,001-$75,000 ​ 34% $75,001-$10,000,000 ​ 35% over​ $10,000,000 Additional​ surtax: 5% on income between​ $100,000 and​ $335,000 ​3% on income between​ $15,000,000 and​ $18,333,333

The​ corporation's tax liability is ​$652800 Taxable income = operating income + interest income - interest expense Taxable income * 35% op income = 3 mill - 1 mill = 2 mill 2mill + 20,000-100,000 = 1,920,000 *.34 = 6528000

​5q (Cost of debt​) Carraway Seed Company is issuing a ​$1. 000 par value bond that pays 7percent annual interest and matures in 15 years. Investors are willing to pay ​$850 for the bond. Flotation costs will be 3 percent of market value. The company is in a 30 percent tax bracket. What will be the​ firm's after-tax cost of debt on the​ bond?

The​ firm's after-tax cost of debt on the bond will be 6.44%. nper 15 pmt 70 pv -824.50 fv 1000 type 0 RATE 9.20% 9.20% x (1-.30)= 6.44%

​​1h (Calculating the​ maturity-risk premium​) At​ present, the real​ risk-free rate of interest is 1.2 ​%, while inflation is expected to be 1.8% for the next two years. If a​ 2-year Treasury note yields 5.5%, what is the​ maturity-risk premium for this​ 2-year Treasury​ note?

The​ maturity-risk premium for the​ 2-year Treasury note is 2.5%. At​ present, the real​ risk-free rate of interest is 1.2%, while inflation is expected to be 1.8% for the next two years.​ So, the nominal​ risk-free interest rate can be computed as​ follows: Nominal risk-free interest rate = 1.2% + 1.8% = 3% If a two-year treasury note yields 5.5% the maturity-risk premium for this 2-year treasury note should be maturity-risk premium = 5.5%-3.)%=2.5%

​2h (Price book​) ​Chang, Inc.'s balance sheet shows a​ stockholders' equity-book value​ (total common​ equity) of ​$759,000. The​ firm's earnings per share is ​$2.97, resulting in a​ price/earnings ratio of 12.39X. There are 53,000 shares of common stock outstanding. What is the​ price/book ratio? What does this indicate about how shareholders view​ Chang, Inc.?

The​ price/book ratio is 2.57. Book value per share = 759,000/53000 shares = 14.32 Price/book ratio = 36.80/14.32 = 2.57 ​"The price/book ratio indicates that the shareholders believe that the​ company's shares are worth more than twice their historical cost value on the balance​ sheet." Is the above statement true or​ false? True

3h (Capital asset pricing model​) MFI Inc. has a beta of 1.39. If the expected market return is 10.0 percent and the​ risk-free rate is 8.0 percent, what is the appropriate required return of MFI​ (using the​ CAPM)?

Using the CAPM, the appropriate required return of MFI is 10.78% 8%+[1.39x(10%-8%)]

​​1h (Term structure of interest rates​) You want to invest your savings of ​$25,000 in government securities for the next 2 years.​ Currently, you can invest either in a security that pays interest of 8.2 percent per year for the next 2 years or in a security that matures in 1 year but pays only 5.6 percent interest. If you make the latter​ choice, you would then reinvest your savings at the end of the first year for another year. a. Why might you choose to make the investment in the 1 ​-year security that pays an interest rate of only 5.6 percent, as opposed to investing in the 2-year security paying 8.2 percent? Provide numerical support for your answer. Which theory of term structure have you supported in your​ answer? b. Assume your required rate of return on the​ second-year investment is 11.9percent; otherwise, you will choose to go with the 2-year security. What rationale could you offer for your​ preference?

Why might you choose to make the investment in the 1 ​-year security that pays an interest rate of only 5.6 percent, as opposed to investing in the 2-year security paying 8.2 percent? Provide numerical support for your answer. Which theory of term structure have you supported in your​ answer? If you choose the 2-year security, the value of your savings after the second year will be ​$29268 If you choose to invest in the 1-year security, the value of your savings after the first year will be ​$26400 How much interest must the 1-year security earn after its renewal in the second year in order for your account to equal the 2-year investment? To do as well as you would with the first​ choice, during the second year the 1-year security would have to earn ​$2868 In order for the investment in the 1-year security to equal the 2-year investment, how much should the renewal rate on the 1-year security​ be? The required interest rate during the second year is 10.8%. ​"Thus, you would invest in the 1-year security paying 5.6 % only if you believed you could earn at least 10.9 % in the second year on a security issued at the beginning of the second year. The foregoing logic is based on the expectations theory of term structure of interest​ rates." Is the above statement true or​ false? True b. Assume your required rate of return on the​ second-year investment is 11.9 percent; otherwise, you will choose to go with the 2-year security. What rationale could you offer for your​ preference? ​"If you require an 11.9 % rate on the second​ one-year investment, then the expectations theory is not explaining fully the term structure of interest rates. The expectations theory suggests you should accept 10.9 % in year two.​ Thus, you are requiring a​ liquidity-risk premium on the​ second-year investment to compensate for the uncertainty of the future interest rates in year​ two." Is the above statement true or​ false? True

​3h (Expected rate of return and risk​) Carter Inc. is evaluating a security. Calculate the​ investment's expected return and its standard deviation. Probability return .15 6% .5 8% .2 10% .15 15%

a. (.15)(6%)+(.5)(8%)+(.2)(10%)+(.15)(15%)=9.15% b. The​ investment's standard deviation is computed as​ follows: [(6%-9.15%)^2x(.15)+(8%-9.15)^2x(.5)+(10%-9.15)^2x(.2)+(15%-9.15%)^2x(.15)]^.5 = 2.73%

​​5h (Individual or component costs of capital​) Compute the costs for the following sources of​ financing: a. A $ 1, 000 par value bond with a market price of $ 982 and a coupon interest rate of 14 percent. Flotation costs for a new issue would be approximately 4 percent. The bonds mature in 17 years and the corporate tax rate is 30 percent. b. A preferred stock selling for $ 130 with an annual dividend payment of $ 12 The flotation cost will be $ 6 per share. The​ company's marginal tax rate is 30 percent. c. Retained earnings totaling $ 4.8 million. The price of the common stock is $ 62 per​ share, and dividend per share was $ 10.00 last year. The dividend is not expected to change in the future. d. New common stock for which the most recent dividend was $ 3.60. The​ company's dividends per share should continue to increase at a growth rate of 6 percent into the indefinite future. The market price of the stock is currently $ 40; however, flotation costs of $ 4 per share are expected if the new stock is issued.

a. 10.46% Spread sheet nper 17 pmt 140 pv -942.72 fv 1000 type 0 RATE(.... 14.94%*91-.30) b. 6/118=.0508 (130-12=118) c. 10/62+0 = .1613 d. 3.6x(1+.06) = 3.82=d1 3.82/(40-4)=.1660

3h Compound value solving for n How many years will the following​ take? a. ​$480 to grow to ​$1 comma 245.00 if invested at 10percent compounded annually b. ​$39 to grow to ​$71.29 if invested at 9 percent compounded annually c. ​$115 to grow to ​$400.03 if invested at 12 percent compounded annually d. ​$51 to grow to ​$68.34 if invested at 5 percent compounded annually

a. How many years will it take for ​$480 to grow to ​$1 comma 245.00 if invested at 10 percent compounded​ annually? 10 years ​ (Round to the nearest whole​ number.) b. How many years will it take for ​$39 to grow to ​$71.29 if invested at 9 percent compounded​ annually? 7 years ​(Round to the nearest whole​ number.) c. How many years will it take for ​$115 to grow to ​$400.03 if invested at 12 percent compounded​ annually? 11 years ​ (Round to the nearest whole​ number.) d. How many years will it take for ​$51 to grow to ​$68.34 if invested at 5 percent compounded​ annually? 6 years ​ Spread sheet interest rate = 10% payment = 0 present value = -480 Future value = 1245 type = 0 =NPER (rate,pmt,pv,fv,type)

​3h (Complex present value​) You would like to have ​$38,000 in 9 years. To accumulate this amount you plan to deposit each year an equal sum in the​ bank, which will earn 9 percent interest compounded annually. Your first payment will be made at the end of the year. a. How much must you deposit annually to accumulate this​ amount? b. If you decide to make a large​ lump-sum deposit today instead of the annual​ deposits, how large should this​ lump-sum deposit​ be? (Assume you can earn 9percent on this​ deposit.) c. At the end of 6 years you will receive ​$8,000 and deposit this in the bank toward your goal of ​$38,000 at the end of 9 years. In addition to this​ deposit, how much must you deposit in equal annual deposits to reach your​ goal? (Again assume you can earn 9 percent on this​ deposit.)

a. How much must you deposit annually to accumulate ​$38, 000 in 9years? ​$2918.35 (spreadsheet pmt) b. If you decide to make a large​ lump-sum deposit today instead of the annual​ deposits, how large should this​ lump-sum deposit​ be? (Assume you can earn 9 percent on this​ deposit.) ​$17496.26 (spread sheet pv positive numbers all) ​(Round to the nearest​ cent.) c. At the end of 6 years you will receive ​$8,000 and deposit this in the bank toward your goal of ​$38 ,000 at the end of 9 years. In addition to this​ deposit, how much must you deposit in equal annual deposits to reach your​ goal? (Again assume you can earn 9 percent on this​ deposit.) ​$2122.70 (future value)

3h Future value Sarah Wiggum would like to make a single​ lump-sum investment and have ​$2.4 million at the time of her retirement in 35 years. She has found a mutual fund that expects to earn 5 percent annually. How much must Sarah invest​ today? If Sarah earned an annual return of 17 percent, how much must she invest​ today

a. If Sarah can earn 5 percent annually for the next 35 years, how much will she have to invest​ today? ​ $435096.68 Spread Sheet interest rate = 5% number of periods =35 payment = 0 future value = -2400000 type = 0 =PV(rate,nper,pmt,fv,type)

​5q (Growth rate in stock dividends and the cost of equity​) In March of this past​ year, Manchester Electric​ (an electrical supply company operating throughout the southeastern United States and a publicly held​ company) was evaluating the cost of equity capital for the firm. The​ firm's shares are selling for $ 45.00 a​ share; it expects to pay an annual cash dividend of $ 4.50 a share next​ year, and the​ firm's investors anticipate an annual rate of return of 18 % a. If the firm is expected to provide a constant annual rate of growth in​ dividends, what rate of growth must the firm​ experience? b. If the​ risk-free rate of interest is 3 %, and the market risk premium is 6 %, what must the​ firm's beta be to warrant an expected rate of return 18 % on the​ firm's stock?

a. The constant annual rate of growth in dividends is 8.00%. 4.5/45=.08 b. The​ firm's beta is 2.5 .18-.03/.06

2h (Ratio analysis​) The balance sheet and income statement for the A. Thiel Mfg. Company are given in the popup​ window . Calculate the following​ ratios: a. Current ratio b. Operating return on assets c. Times interest earned d. Debt ratio e. Inventory turnover f. Average collection period g. Total asset turnover h. Fixed asset turnover i. Operating profit margin j. Return on equity

a. The current ratio is 1.74X. ​ (Round to two decimal​ places.) b. The operating return on assets is 21.37%. ​(Round to one decimal​ place.) c. The times interest earned is 4.90X. ​ (Round to two decimal​ places.) d. The debt ratio is 50.17%. ​(Round to one decimal​ place.) e. The inventory turnover is 3.28X. ​ (Round to two decimal​ places.) f. The average collection period is 90.90 days. ​(Round to two decimal​ places.) g. The total asset turnover 1.00X. ​ (Round to two decimal​ places.) h. The fixed asset turnover is 1.78X. ​ (Round to two decimal​ places.) i. The operating profit margin is 21.28%. ​(Round to one decimal​ place.) j. The return on equity is 20.47%

5q (Divisional costs of capital and investment decisions) Saddle River Operating Company​ (SROC) is a​ Dallas-based independent oil and gas firm. In the​ past, the​ firm's managers have used a single​ firm-wide cost of capital of 16 percent to evaluate new investments.​ However, the firm has long recognized that its exploration and production division is significantly more risky than the pipeline and transportation division. In​ fact, firms comparable to​ SROC's E&P division have equity betas of about 1.7, whereas distribution companies typically have equity betas of only 0.9. Given the importance of getting the cost of capital estimate as close to correct as​ possible, the​ firm's chief financial officer has asked you to prepare cost of capital estimates for each of the two divisions. The requisite information needed to accomplish your task is presented​ here: The cost of debt financing is 7 percent before taxes of 33 percent.​ However, if the​ E&P division were to borrow based on its projects​ alone, the cost of debt would probably be 8.3 percent, and the pipeline division could borrow at 5.9 percent. You may assume these costs of debt are after any flotation costs the firm might incur. The​ risk-free rate of interest on​ long-term U.S. Treasury bonds is currently 3.4 percent, and the​ market-risk premium has averaged 6.8 percent over the past several years. The​ E&P division adheres to a target debt ratio of 10 percent, whereas the pipeline division utilizes 20 percent borrowed funds. The firm has sufficient internally generated funds such that no new stock will have to be sold to raise equity financing. a. Estimate the divisional costs of capital for the​ E&P and pipeline divisions. b. What are the implications of using a​ company-wide cost of capital to evaluate new investment proposals in light of the differences in the costs of capital you estimated​ previously?

a. What is the divisional cost of capital for the​ E&P division? 14.02% Cost of common stock = 3.4%+(1.7x6.8%) = 14.96% after cost of debt = .083x(1-.33) = .0556 = 9.52% weighted cost of capital = (.0556x.10)+(.1496x.9) = 14.02% What is the divisional cost of capital for the pipeline​ division? 8.41% pipeline = 3.4%+(.9x6.8%) after cost of debt = .059x (1-.33)=.0395 weighted cost of captial = (.0395x.20)+(.0952x.8) = 8.41% b. ​"The dramatic difference in the two divisional costs of capital underscores the importance of analyzing the capital costs corresponding to divisions of very different​ risk." Is the above statement true or​ false? True.

​5q (Cost of debt​) Sincere Stationery Corporation needs to raise ​$500, 000 to improve its manufacturing plant. It has decided to issue a ​$1,000 par value bond with an annual coupon rate of 14 percent and a maturity of 10 years. The investors require a rate of return of 9 percent. a. Compute the market value of the bonds. b. What will the net price be if flotation costs are 10.5 percent of the market​ price? c. How many bonds will the firm have to issue to receive the needed​ funds? d. What is the​ firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent?

a. What is the market value of the​ bonds? ​$1320.88 rate = 9% nper 10 pmt -140 fv-1000 0 PV( b. What will the net price be if flotation costs are 10.5 percent of the market​ price? ​$1182.19 1320.88x(1-.105) ​(Round to the nearest​ cent.) c. How many bonds will the firm have to issue to receive the needed​ funds? 423 bonds 500,000/1,182.19 d. What is the​ firm's after-tax cost of debt if its average tax rate is 25 percent and its marginal tax rate is 34 percent? 7.21% nper 10 pmt 140 pv -1182.19 fv 1000 type 0 RATE 10.92% 10.92%x(1-.34)

5q (individual or component costs of capital​) Compute the costs for the following sources of​ financing: a. A $ 1, 000 par value bond with a market price of $ 970 and a coupon interest rate of 10 percent. Flotation costs for a new issue would be approximately 5 percent. The bonds mature in 10 years and the corporate tax rate is 34 percent. b. A preferred stock selling for $ 100 with an annual dividend payment of $ 8. The flotation cost will be $ 9 per share. The​ company's marginal tax rate is 30 percent. c. Retained earnings totaling $ 4.8 million. The price of the common stock is $ 75 per​ share, and dividend per share was $ 9.80 last year. The dividend is not expected to change in the future. d. New common stock for which the most recent dividend was $ 2.80. The​ company's dividends per share should continue to increase at a growth rate of 8 percent into the indefinite future. The market price of the stock is currently $ 53; however, flotation costs of $ 6 per share are expected if the new stock is issued

a. What is the​ firm's after-tax cost of debt on the​ bond? 7.49% nper 10 pmt 100 pv -921.5 fv 1000 type 0 RATE = 11.35% 11.35% x (1-.34) = 7.49% b. What is the cost of capital for the preferred​ stock? 8.79% preferred stock dividend/net proceeds per preferred share 8/91=8.79% c. What is the cost of internal common​ equity? 13.07% The cost of internal common equity can be estimated by using the following dividend growth​ model: kcs=D 1/ Pcs+g where D 1=the dividend expected to be received by the​ firm's common shareholders 1 year hence g=the rate at which dividends are expected to grow forever kcs= the​ investor's required rate of return Pcs= the current price of a share of common stock 9.8/75+0=13.07% d. What is the cost of external common​ equity? 14.43% The cost of external common equity using the dividend growth model is expressed as​ follows: kcs=D 1/ NPcs+g where D 1=the dividend expected to be received by the​ firm's common shareholders 1 year hence g=the rate at which dividends are expected to grow forever kncs=the​ investor's required rate of return on the new common equity NPcs=the net proceeds per share of common equity D1=2.80x(1+.08) = 3.02 KNCS = 3.02/47+.08=14.43%

5q cost of equity The common stock for the Bestsold Corporation sells for ​$58. If a new issue is​ sold, the flotation costs are estimated to be 8 percent. The company pays 50percent of its earnings in​ dividends, and a ​$4.00 dividend was recently paid. Earnings per share 5 years ago were ​$5.00. Earnings are expected to continue to grow at the same annual rate in the future as during the past 5 years. The​ firm's marginal tax rate is 34 percent. Calculate the cost of ​(a​) internal common equity and ​(b​) external common equity.

a. What is the​ firm's cost of internal common​ equity? 17.44% [8/5]^1/5)-1 = 9.86% 4.39/58+.0986 = 17.44% b. What is the​ firm's cost of external common​ equity? 18.10% 58*(1-.08) = 53.36 4.39/53.36+.0986=18.10%

​4h (Preferred stockholder expected return​) You own 200 shares of Dalton Resources preferred​ stock, which currently sells for $ 47.78 per share and pays annual dividends of $ 2.50 per share. a. What is your expected​ return? b. If you require a return of 8 percent, given the current​ price, should you sell or buy more​ stock?

a. Your expected return is 5.23 percent. 2.5/47.78 b. If you require a return of 8 percent, the value of the stock for you is ​$31.25 2.5/.08 Because the expected rate of return is less than your required rate of return or the intrinsic​ value, or because the current market price is greater than $ 31.25, the Dalton Resources preferred stock is overvalued and you should sell the stock.

​2h (Financing decisions​) ​Emma's Electronics Incorporated has total assets of ​$59 million and total debt of ​$38 million. The company also has operating profits of ​$18 million with interest expenses of ​$5million. a. What is​ Emma's debt​ ratio? b. What is​ Emma's times interest​ earned? c. Based on the information​ above, would you recommend to​ Emma's management that the firm is in a strong enough position to assume more debt and increase interest expense to ​$7 million?

a.​ Emma's debt ratio is 64.41%. ​(Round to two decimal​ places.) b.​ Emma's times interest earned ratio is 3.6X. (Round to two decimal​ places.) c. Based on the information​ above, would you recommend to​ Emma's management that the firm is in a strong enough position to assume more debt and increase interest expense by ​$7 million?​(Select the best choice​ below.) A.No. Emma should not take on more debt because of high debt ratio and low times interest earned ratio.

2q Current Ratio

current assets / current liabilities

5q The cost of capital

is a weighted average of the required rates of return of the firm's sources of capital (after adjusting for flotation costs and tax considerations)

5q opportunity cost

is the cost of making a choice in terms of the next best alternative that must be foregone

5q A transaction cost

is the expense that a firm incurs when raising funds by issuing a particular type of security

5q A financial policy

is the target mix of sources of funds that a firm uses when raising new money to invest in the firm

3h holding rate of return Period Stock price 1 9 2 10 3 11 4 13

price at end of period +dividend - price at beginning of period/ price at beginning of period holding price period return in period 2 for the stock is 11.11% 10+0-9/9

3h Treasury bills are​ risk-free assets because they have a​ short-term maturity​ date, their price is less​ volatile, and there is no chance of default on them.

true

​5q (Individual or component costs of capital​) Compute the cost of the​ following: a. A bond that has ​$1,000 par value​ (face value) and a contract or coupon interest rate of 7 percent. A new issue would have a floatation cost of 5 percent of the ​$1 comma 150 market value. The bonds mature in 14 years. The​ firm's average tax rate is 30 percent and its marginal tax rate is 34 percent. b. A new common stock issue that paid a ​$1.30 dividend last year. The par value of the stock is​ $15, and earnings per share have grown at a rate of 11 percent per year. This growth rate is expected to continue into the foreseeable future. The company maintains a constant​ dividend-earnings ratio of 30 percent. The price of this stock is now ​$31, but 8 percent flotation costs are anticipated. c. Internal common equity when the current market price of the common stock is ​$49. The expected dividend this coming year should be ​$3.40, increasing thereafter at an annual growth rate of 11 percent. The​ corporation's tax rate is 34percent. d. A preferred stock paying a dividend of 9 percent on a ​$100 par value. If a new issue is​ offered, flotation costs will be 13 percent of the current price of ​$164 e. A bond selling to yield 11 percent after flotation​ costs, but before adjusting for the marginal corporate tax rate of 34 percent. In other​ words, 11 percent is the rate that equates the net proceeds from the bond with the present value of the future cash flows​ (principal and​ interest).

what is the firms after tax cost of debt on the bond? 3.96% nper 14 pmt 70 pv -1092.50 fv 1000 type 0 RATE = 6% 6%x(1-.34) = 3.96% What is the cost of external common equity? 16.06% d1 = 1.30 x (1+.11) = 1.44 NPCS = pcs x(1-flotation cost)= 31x (1-.08) = 28.52 1.44/28.52+.11=16.06% what is the cost of internal common equity? 17.94% kcs = d1/pcs+g=3.40/49+.11=17.94% what is the cost of capital for the preferred stock? 6.31% NPps = Pps x (1-flotation cost) = 164x(1-.13) = 142.68 cost of preferred stock = .09x100/142.68=6.31% what is the after-tax cost of debt on the bond? 7.26% 11%x(1-.34) = 7.26%

​5h Cost of equity Brille Corporation is issuing new common stock at a market price of $34. Dividends last year were $ 1.70 and are expected to grow at an annual rate of 8 percent forever. Flotation costs will be 11 percent of the market price. What is​ Brille's cost of​ equity?

​Brille's cost of external common equity is 14.07% D1 = 1.70x(1+.08) NPCS = 34 x (1-.11) equity = d1/npcs+.08

​5h (Divisional costs of capital​) LPT Inc. is an integrated oil company headquartered in​ Dallas, Texas. The company has three operating​ divisions: oil exploration and production​ (commonly referred to as​ E&P), pipelines, and refining.​ Historically, LPT did not spend a great deal of time thinking about the opportunity costs of capital for each of its divisions and used a​ company-wide weighted average cost of capital of 14 percent for all new capital investment projects. Recent changes in its businesses have made it abundantly clear to​ LPT's management that this is not a reasonable approach. For​ example, investors demand a much higher expected rate of return for exploration and production ventures than for pipeline investments. Although​ LPT's management​ agrees, in principle at​ least, that different operating divisions should face an opportunity cost of capital that reflects their individual risk​ characteristics, they are not in agreement about whether a move toward divisional costs of capital is a good idea based on practical considerations. a. Pete Jennings is the chief operating officer for the​ E&P division, and he is concerned that going to a system of divisional costs of capital may restrain his ability to undertake very promising exploration opportunities. He argues that the firm really should be concerned about finding those opportunities that offer the highest possible rate of return on invested capital. Pete contends that using the​ firm's scarce capital to take on the most promising projects would lead to the greatest increase in shareholder value. Do you agree with​ Pete? Why or why​ not? b. The pipeline division​ manager, Donna​ Selma, has long argued that charging her division the​ company-wide cost of capital of 14 percent severely penalizes her opportunities to increase shareholder value. Do you agree with​ Donna? Explain.

​Pete's division invests capital in​ high-risk projects and should use an appropriate​ risk-based *divisional* cost of capital.​ Donna's division involves​ low-risk activities and her division should use its own​ risk-based *divisional* cost of capital. Each division should use the cost of capital that reflects the risk level of the *division*