CAP MANAGEMENT FINAL
A firm has a return on equity of 15 percent. The total asset turnover is 1.4 and the profit margin is 8 percent. The total equity is $7,000. What is the net income?
$1,050 Net income = .15 × $7,000 = $1,050
Jenny Enterprises has just entered a lease agreement for a new manufacturing facility. Under the terms of the agreement, the company agreed to pay rent of $18,500 per month for the next 10 years with the first payment due today. If the APR is 7.92 percent compounded monthly, what is the value of the payments today?
$1,540,222.14 BEGIN N = 120 I/Y = .66% PV = ? PMT = -18,500 FV = 0 BEGIN
Gugenheim, Inc., has a bond outstanding with a coupon rate of 5.9 percent and annual payments. The yield to maturity is 7.1 percent and the bond matures in 15 years. What is the market price if the bond has a par value of $2,000?
$1,782.78 N = 15 I/Y = 7.1% PV = ? PMT = -2000*.059 FV = -2000
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $1.80 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 15.60 percent on your equity investments?
$11.54 P = $1.80/.1560 = $11.54
King Nothing is evaluating a new 6-year project that will have annual sales of $465,000 and costs of $317,000. The project will require fixed assets of $565,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 34 percent. What is the operating cash flow for Year 3?
$134,563 OCF = ($465,000 − 317,000)(1 − .34) + .34(.1920)($565,000) OCF = $134,563
Bruno's Lunch Counter is expanding and expects operating cash flows of $21,700 a year for 5 years as a result. This expansion requires $63,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $5,400 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 11 percent?
$15,006 NPV = 0 = −$63,000 − 5,400 + 21,700(PVIFA11%,5) + 5,400/1.115 NPV = $15,006
An investor purchases a zero coupon bond with 24 years to maturity at a price of $285.95. The bond has a par value of $1,000. What is the implicit interest for the first year? Assume semiannual compounding.
$15.31 $285.95 = $1,000/(1 + r)48 r = .0264, or 2.64% YTM = 2.64% × 2 = 5.29% PV = $1,000/(1 + .0264)46 = $301.26 Implicit interest = $301.26 − 285.95 = $15.31 N = 48 I/Y = ? PV = -285.95 PMT = 0 FV = -1000 N = 46 I/Y = 5.29/2 PV = ? PMT = 0 FV = -1000 Difference between PV's
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 17 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.40 per share. What is the current value of one share of this stock if the required rate of return is 7.90 percent?
$196.91 P4 = ($2.40 × 1.174 × 1.06)/(0.079 - 0.06) = $250.90 P0 = ($2.40 × 1.17)/1.079 + ($2.40 × 1.172)/1.0792 + ($2.40 × 1.173)/1.0793 + ($2.40 × 1.174)/1.0794 + $250.90/1.0794 = $196.91
You have just started a new job and plan to save $4,450 per year for 39 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 10.59 percent?
$2,087,993.51 N = 39 I/Y = 10.59% PV = 0 PMT = -4,450 FV = ?
Beatrice invests $1,450 in an account that pays 4 percent simple interest. How much more could she have earned over a 5-year period if the interest had been compounded annually?
$24.15 Balance Year 5 with simple interest = $1,450 + ($1,450 × 0.04 × 5) = $1,740.00 Balance Year 5 with compound interest = $1,450 × 1.045 = $1,764.15 Additional interest = $1,764.15 - $1,740.00 = $24.15
Your grandparents would like to establish a trust fund that will pay you and your heirs $190,000 per year forever with the first payment 9 years from today. If the trust fund earns an annual return of 3.7 percent, how much must your grandparents deposit today?
$3,839,916.90 PV(perp) = 190,000/.037 = 5,135,135.14 N = 8 I/Y = 3.7% PV = ? PMT = -18,500 FV = 5,135,135.14
You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 3.1 percent indefinitely. The company just paid a dividend of $3.86 and you feel that the required return on the stock is 12.5 percent. What is the price per share of the company's stock?
$42.34
Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.
$43.59
At the beginning of the year, long-term debt of a firm is $286 and total debt is $328. At the end of the year, long-term debt is $258 and total debt is $338. The interest paid is $24. What is the amount of the cash flow to creditors?
$52 CFC = $24 - ($258 - 286) = $52
Pear Orchards is evaluating a new project that will require equipment of $239,000. The equipment will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, and 11.52 percent, respectively. The company plans to shut down the project after 4 years. At that time, the equipment could be sold for $60,600. However, the company plans to keep the equipment for a different project in another state. The tax rate is 34 percent. What aftertax salvage value should the company use when evaluating the current project?
$54,038 Book value = $239,000 − 239,000(.2000 + .3200 + .1920 + .1152) Book value = $41,299 Tax refund (due) = ($41,299 − 60,600)(.34) Tax refund (due) = −$6,562 Aftertax salvage value = 60,600 − 6,562 Aftertax salvage value = $54,038
Rousey, Inc., had a cash flow to creditors of $16,560 and a cash flow to stockholders of $6,992 over the past year. The company also had net fixed assets of $49,480 at the beginning of the year and $56,860 at the end of the year. Additionally, the company had a depreciation expense of $12,036 and an operating cash flow of $50,533. What was the change in net working capital during the year?
$7,565 Cash flow from assets = $16,560 + 6,992 = $23,552 Net capital spending = $56,860 − 49,480 + 12,036 = $19,416 Change in net working capital = $50,533 − 19,416 − 23,552 = $7,565
Railway Cabooses just paid its annual dividend of $2.10 per share. The company has been reducing the dividends by 11.5 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 13 percent?
$7.59 P0 = [$2.10 × [1 + (- .115)]]/[.13 - (- .115)] = $7.59
Alpha Industries is considering a project with an initial cost of $8.8 million. The project will produce cash inflows of $1.68 million per year for 8 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.85 percent and a cost of equity of 11.43 percent. The debt-equity ratio is .68 and the tax rate is 40 percent. What is the net present value of the project?
$772,720 WACC = (1/1.68)(11.43) + (.68/1.68)(5.85%)(1 − .40) WACC = 8.22% NPV = −$8,800,000 + $1,680,000(PVIFA8.22%,8) NPV = $772,720
What is the beta of a portfolio comprised of the following securities? (Stock, Amount Invested, Security Beta) A; $4,800; 1.60 B; $5,800; 1.71 C; $8,300; 1.00
1.370 Weighted average
POD has a project with the following cash flows: Year 0 − $257,000 Year 1 - $146,700 Year 2 - $164,200 Year 3 - $129,300 The required return is 9.5 percent. What is the profitability index for this project?
1.437 PI = [$146,700/(1 + .095) + $164,200/(1 + .095)2 + $129,300/(1 + .095)3]/$257,000 PI = 1.437
The stock of Big Joe's has a beta of 1.46 and an expected return of 12.40 percent. The risk-free rate of return is 4.9 percent. What is the expected return on the market?
10.04% E(R) = .124 = .049 + 1.46[E(RM) − .049] .075 = 1.46[E(RM) − .049] E(RM) = .1004, or 10.04%
A project will generate annual cash flows of $237,500 for each of the next three years, and a cash flow of $274,300 during the fourth year. The initial cost of the project is $765,800. What is the internal rate of return of this project?
10.72% 0 = −$765,800 + $237,500/(1 + IRR) + $237,500/(1 + IRR)^2 + $237,500/(1 + IRR)^3 + $274,300/(1 + IRR)^4 IRR = .1072, or 10.72%
Judy's Boutique just paid an annual dividend of $2.89 on its common stock. The firm increases its dividend by 3.60 percent annually. What is the company's cost of equity if the current stock price is $40.60 per share?
10.97% RE = [($2.89(1.0360)/$40.60] + .0360 RE = .1097, or 10.97%
Jupiter Explorers has $10,600 in sales. The profit margin is 5 percent. There are 5,600 shares of stock outstanding, with a price of $2.00 per share. What is the company's price-earnings ratio?
21.13 times Earnings per share = ($10,600 × .05)/5,600 = $.09464 Price-earnings ratio = $2.00/$.09464 = 21.13 times
A project that costs $18,500 today will generate cash flows of $5,300 per year for seven years. What is the project's payback period?
3.49 years Payback period = $18,500/$5,300 Payback period = 3.49 years
Galvatron Metals has a bond outstanding with a coupon rate of 6.4 percent and semiannual payments. The bond currently sells for $1,912 and matures in 16 years. The par value is $2,000 and the company's tax rate is 35 percent. What is the company's aftertax cost of debt?
4.46% $1,912 = $64.00{1 − [1/(1 + R)^32]}/R + $2,000/R^32 R = .0343, or 3.43% YTM = 3.430% × 2 YTM = 6.86% RD = 6.86%(1 − .35) RD = 4.46% N = 16 * 2 I/Y = ?/2 PV = -1,912 PMT = 64 FV = -2000
Broke Benjamin Co. has a bond outstanding that makes semiannual payments with a coupon rate of 5.6 percent. The bond sells for $951.07 and matures in 12 years. The par value is $1,000. What is the YTM of the bond?
6.18% N = 12*2 I/Y = ?/2 PV = -951.07 PMT = (1000*.056)/2 FV = 1000
The Green Giant has a 5 percent profit margin and a 41 percent dividend payout ratio. The total asset turnover is 1.6 times and the equity multiplier is 1.4 times. What is the sustainable rate of growth?
7.08% Return on equity = .05 × 1.60 × 1.40 = .112 Sustainable rate of growth = [.112 × (1 - .41)]/{1 - [.112 × (1 - .41)]} = .0708, or 7.08 percent.
The Two Dollar Store has a cost of equity of 10.9 percent, the YTM on the company's bonds is 5.5 percent, and the tax rate is 39 percent. If the company's debt-equity ratio is .44, what is the weighted average cost of capital?
8.59% WACC = (1/1.44)(10.9%) + (.44/1.44)(5.5%)(1 − .39) WACC = 8.59%
You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $44.60 Variable costs per abalone = $11.25 Fixed costs per year = $498,000 Depreciation per year = $102,000 Tax rate = 21% The discount rate for the company is 13 percent, the initial investment in equipment is $918,000, and the project's economic life is 9 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. Accounting Breakeven?
Accounting break-even level = 17,991.00 Financial break-even level = 20,909.41 The accounting break-even is the aftertax sum of the fixed costs and depreciation charge divided by the aftertax contribution margin (selling price minus variable cost). So, the accounting break-even level of sales is: QA = [(FC + Depreciation)(1 - TC)]/[(P - VC)(1 - TC)] QA = [($498,000 + $918,000/9)(1 - .21)]/[($44.60 - 11.25)(1 - .21)] QA = 17,991.00, or about 17,991 units
Which one of the following actions by a financial manager creates an agency problem?
Agreeing to expand the company at the expense of stockholders' value
Which one of these is most apt to be an agency problem?
Forsaking a profitable project because it involves some risk
What is the quick ratio for 2017?
Quick ratio = ($2,405 - 1,545)/$1,135 = .76 times
What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?
The PV will decrease.
You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone = $44.60 Variable costs per abalone = $11.25 Fixed costs per year = $498,000 Depreciation per year = $102,000 Tax rate = 21% The discount rate for the company is 13 percent, the initial investment in equipment is $918,000, and the project's economic life is 9 years. Assume the equipment is depreciated on a straight-line basis over the project's life and has no salvage value. Financial Breakeven?
When calculating the financial break-even point, we express the initial investment as an equivalent annual cost (EAC). Dividing the initial investment by the 9-year annuity factor, discounted at 13 percent, the EAC of the initial investment is: EAC = Initial Investment/PVIFA13%,9 EAC = $918,000/5.13166 EAC = $178,889.65 The financial break-even point for this project is: QF = [EAC + FC(1 - TC) - D(TC)]/[(P - VC)(1 - TC)] QF = [$178,889.65 + $498,000(.79) - ($918,000/9)(.21)]/[($44.60 - 11.25)(.79)] QF = 20,909.41, or about 20,909 units
You would be making a wise decision if you chose to:
accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate.
Free cash flow is:
cash that the firm can distribute to creditors and stockholders.
Sensitivity analysis is primarily designed to determine the:
degree to which the net present value reacts to changes in a single variable.
An annuity stream of cash flow payments is a set of:
equal cash flows occurring at equal periods of time over a fixed length of time.
The Sarbanes-Oxley Act requires public corporations to:
list any deficiencies in internal controls.
Ratios that measure a firm's financial leverage are known as ________ ratios.
long-term solvency
Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either project, you should rely most heavily on the _____ method of analysis.
net present value
The net present value method of capital budgeting analysis does all of the following except:
provide a specific anticipated rate of return.
The term structure of interest rates reflects the:
pure time value of money.
For a tax-paying firm, the net present value of a project will increase when:
the operating cash flows increase.
Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using:
their equivalent annual costs.
