Fin 370 final
W.1.4. You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?
$1,736.25
If you want to value a firm that has consistent earnings growth, but varies how it pays out these earnings to shareholders between dividends and repurchases, the simplest model for you to use is the:
total payout model.
W.2.6 A 5.5 percent $1,000 bond matures in seven years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?
$959.09
W.6.5 Steel Corp. Industries has no debt, total equity capitalization of $600 million, and an equity beta of1.2. Included in Steel Corp's assets is $90 million in cash and risk-free securities. Assume the risk-free rate is 4% and the market risk premium is 6%. Steel Corp.'s asset beta (ie the beta of its operating assets) is closest to:
1.4
W.6.7. 7-9 Rockwood Enterprises is currently an all equity firm and has just announced plans to expand their current business. In order to fund this expansion, Rockwood will need to raise $100 million in new capital. After the expansion, Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity. Rockwood has already announced the planned expansion, but has not yet determined how best to fund the expansion. Rockwood currently has 16 million shares outstanding and following the expansion announcement these shares are trading at $25 per share. Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per share. If Rockwood finances their expansion by issuing new stock, what will Rockwood's cost of equity capital be?
10%
W.6.8. f Rockwood finances their expansion by issuing $100 million in debt at 5%, what will Rockwood's cost of equity capital be?
11.25%
W.4.3. The common stock of Sweet Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.40 per share. What is the total rate of return on this stock?
11.70 percent
W.6.6 Continuing from the Question 5, Steel Corp.'s WACC is closest to:
12.5%
W.2.1 A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?
13.53
W.3.6 A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500, and finally in year 4, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project?
$8,166.19
W.1.3 Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?
$9,672.48
One factor that can affect the market risk of a project is its degree of operating leverage, which is:
the relative proportion of fixed versus variable costs.
Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one hour service. Suppose that of the 60% of FFL's current overnight photo customers, half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service. The level of incremental sales in this case is closest to:
$120,000 Exam 2 question 12
W.4.8. Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. This stock will pay an annual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you desire a 15 percent rate of return?
$18.95
You are considering adding a microbrewery on to one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. This equipment will be depreciated straight line over five years. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's depreciation tax shield in the first year of operation?
$2,800 Exam 2 question 14
W.4.4. This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now?
$2.43
W.4.1. The common stock of The Garden of Eden is selling for $42 a share. The company pays a constant annual dividend and has a total return of 5.8 percent. What is the amount of the dividend?
$2.44
W.4.6. A firm expects to increase its annual dividend by 20 percent per year for the next two years and by15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent?
$20.50
W.4.5 Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?
$25.51
You own 100 shares of a Sub Chapter "S" corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non dividend) income is 30%, then how much money is left for you after all taxes have been paid?
$350 Exam 1 solutions question 13
W.2.5 A bond has a par value of $1,000, a current yield of 7.5 percent, and semiannual interest payments. The bond quote is 98.6. What is the amount of each coupon payment?
$36.98
W.3.1. What is the net present value of a project with the following cash flows if the discount rate is 15percent?
$39.80
W.1.5 Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?
$443.13
W.1.1 Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings?
$489,512.14
Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost$250,000 per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderado's discount rate is 10%.The NPV for Boulderado's snowboard project is closest to:
$51,600 Exam 1 solutions question 15
W.3.2. The Greasy Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 16 percent. What is the project's net present value?
$512,408.23
W.1.7 At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?
$566,190.22
W.5.4. Temporary Housing Services incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost 55 million to set up and will generate S20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total S12 million during this year and depreciation expense will be another Sg million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. ignoring the original investment of 55million, what is THSI's free cash flow for the first and only year of operation?
$6.25 million
W.1.8 Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
$7,546.70
W.4.7. A preferred stock sells for $48.20 a share and has a market return of 15.65 percent. What is thedividend amount?
$7.54
The firm's unlevered (asset) beta is:
the weighted average of the equity beta and the debt beta.
W.6.4 Suppose that Rearden Metal currently has no debt and has an equity cost of capital of 12%.Rearden is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If Rearden borrows until they achieved a debt-to-equity ratio of 50%, then Rearden's levered cost of equity would be closest to:
15.0%
W.1.2 Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from -today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return?
2,113.05
W.3.3 A project has the following cash flows. What is the payback period?
2.60 years
W.3.5. You are considering the following two mutually exclusive projects. What is the crossover point?
22.56
W.5.1 Ford Motor Company is considering launching a new line of Plug-in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that Ford Motor Company will owe in taxes next year without the launch of the new SUV is closest to:
24.0 million
W.6.3. Louie's Truck Repair has assets with a market value of $8000. The company has three types of securities: equity, a debt-equity ratio of 0.7142, and 100 warrants that are fairly priced at $20each. What is the value of Louie's equity closest to?
3,500
W.4.2. Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for$18.53 a share and has a total return of 12 percent. What is the dividend growth rate?
3.47 percent
W.6.1. Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion. It also has $750 million in debt outstanding. Galt Industries has decided to de lever the firm by issuing new equity and completely repaying all the outstanding debt. Assume perfect capital markets. The number of shares that Galt must issue is:
30 million
Rearden Metals has a current stock price of $30 share, is expected to pay a dividend of $1.20 in one year, and its expected price right after paying that dividend is $33. Rearden's expected dividend yield is closest to:
4% Exam 2 question 15
W.2.7. Best Western has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in six years, and have a 5 percent coupon. The current price is quoted at 101. What is the yield to maturity?
4.80 percent
W.2.4 A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $28.50 each and matures in six years. What is the coupon rate?
5.7%
W.2.8. One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent and pay interest annually. Today, the market rate of interest on these bonds is 7.2 percent. How does the price of these bonds today compare to the issue price?
6.05 percent lower
Rearden Metals is considering opening a strip mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. The payback period for Rearden's mining operation is closest to:
6.25 years Exam 1 solutions question 11
W.3.4. Chasteen, Inc. is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?
6.94 percent
W.5.5 Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of5540,000. These tractors are expected to generate EBITDA of 5250,000 for each of the next three years. Casa Grande Farms has a 35% tax rate and has a cost of capital of 7O%.Assuming that Casa Grande Farms depreciates these tractors straight line over the three year life, then the annual depreciation tax shield in year 2 is closest to:
63,000
Your firm is planning to invest in a new power generation system. Galt Industries is an all equity firm that specializes in this business. Suppose Galt's equity beta is0.75, the risk free rate is 3%, and the market risk premium is 6%. If your firm's project is all equity financed, then your estimate of your cost of capital is closest to:
7.50% Exam 2 question 11
W.2.3 bond has a $1,000 face value, a market price of $1,045, and pays interest payments of $80 every year. What is the coupon rate?
8 percent
The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to:
8.30% Exam 1 solutions question 14
Luther's return on equity (ROE) for the year ending December 31, 2009 is closest to:
8.4% Exam 1 solutions question 12
W.1.6 Overnight Trucking recently purchased a new truck costing $150,800. The firm financed thispurchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take thefirm to pay off this debt?
8.44 years
W.2.2 f your nominal rate of return is 14.38 percent and your real rate of return is 4.97 percent, what isthe inflation rate?
8.96
W.5.2 Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000per year. FFL currently offers overnight film processing with annual sales of $100,000.While many of the one-hour photo sales will be to new customers, FFL estimates that 60%of their current overnight photo customers will switch and use the one-hour service. The level of incremental sales associated with introducing the new one-hour photo service is closest to:
90,000
Which of the following statements is FALSE? A. An IRR will always exist for an investment opportunity. B. The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is C. In general, there can be as many IRRs as the number of times the project's cash flows change sign over time. D. A NPV will always exist for an investment opportunity.
An IRR will always exist for an investment opportunity.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten year bonds with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for similar ten year corporate bonds of various credit ratings:−−Rating AAA AA A BBB BBYTM 6.70% 6.80% 7.00% 7.40% 8.00%Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Luther's bonds received?
BBB Exam 2 question 13
The Principal Agent Problem arises:− A. because managers have little incentive to work in the interest of shareholders when this means working against their B. because of the separation of ownership and control in a corporation. C. Both A and B D. None of the above
Both A and B
jefferson International is trying to choose between the following two mutually exclusive design projects: Year 0 1 2 3Proj A -$75,000 $32,400 $30,200 $36,600Proj B -$38,000 $17,800 $14,200 $19,800The required return is 12 percent. If the company applies the internal rate of return (IRR) decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? Given your first two answers, which project should the firm actually accept?
Exam 1 solutions question 16
Second Union Bank pays 7.5 percent simple interest on its savings account balances, whereas Third Street Bank pays 7.5 percent compounded annually. If you made a $50,000 deposit in each bank, how much more money would you earn from your Third Street Bank account at the end of 35 years?
Exam 1 solutions question 17
You have just purchased a home and taken out a $500,000 mortgage. The mortgage has a 30-year term with monthly payments and an APR of 6%? How much will you pay in principal and interest will you pay during the first year?
Exam 1 solutions question 18
Three years ago, ABC Corp. issued 20-year bonds at par. The bonds have a coupon rate of 8 percent and pay interest quarterly (every 3 months). Today, the market rate of interest on these bonds is 10 percent. How does the price of these bonds today compare to the issue price?
Exam 1 solutions question 19
Prices of zero-coupon, default-free securities with face values of $ 1,000 are summarized in the following table:1 2 3$974.71 $942.75 $911.62Maturity(years)Price(per $1,000 Face Value) YTM 2.59% 2.99% 3.13%Suppose you observe that a three-year, default-free security with an annual coupon rate of 10 % and a face value of $ 1,000 has a price today of $ . Is there an arbitrage opportunity? If so, show specifically how you would take advantage of this opportunity. If not, why not?
Exam 1 solutions question 20
You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of . However, the new business will be debt financed, and you anticipate its debt cost of capital will be . If its corporate tax rate is , what is your estimate of its WACC?10% 29% 7%36%The equity cost of capital is %. (Round to one decimal place.)The weighted average cost of capital is %. (Round to one decimal place.)
Exam 2 question 16
Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash flows for this division: Year 1Year 2Year 3 Year 4Free cash flow −$115,000Assume cash flows after year 4 will grow at 2% $13,000 $92,000 $207,000per year, forever. If the cost of capital for this division is , what is the continuation value in year 4 for cash flows after year 4? What is the value today of this division? 14%What is the continuation value in year 4 for cash flows after year 4? . (Round to the nearest dollar.)The continuation value is $What is the value today of this division?The value today is $ . (Round to the nearest dollar.)
Exam 2 question 17
You work for an outdoor play structure manufacturing company and are trying to decide between the following two projects: Year-End Cash Flows ($ thousands)Project012IRRPlayhouse (minor project) −30 15 20 %10.4Fort (major poject) −80 39 52 % 8.6You can undertake only one project. If your cost of capital is , use the incremental IRR rule to make the correct decision.8%The incremental IRR is %. (Round to two decimal places.) With the incremental IRR at and the cost of capital of , you should undertake the (1)
Exam 2 question 18
Procter and Gamble (PG) paid an annual dividend of $2.87 in 2018. You expect PG to increase its dividends by per year for the next five years (through 2023), per year. If the appropriate equity cost of capital for Procter and Gamble is per year, use the dividend-discount model to estimate its value per share at the end of 2018. 8.0%and thereafter by 3.0% 8.0%The price per share is $ . (Round to the nearest cent.)
Exam 2 question 19
IDX Tech is looking to expand its investment in advanced security systems. The project will be financed with equity. You are trying to assess the value of the investment, and must estimate its cost of capital. You find the following data for a publicly-traded firm in the same line of business: . By making some realistic assumptions, estimate the project's beta.1The estimated project's beta is . (Round to two decimal places.)
Exam 2 question 20
Which of the following statements is FALSE? A. A dollar today and a dollar in one year are not equivalent. B. The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of mo C. Finding the present value and compounding are the same. D. If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash
Finding the present value and compounding are the same.
Which of the following statements is TRUE? A. If a bond's yield to maturity exceeds its coupon rate, the bond trades at a premium. B. Prices of bonds with lower durations are more sensitive to interest rate changes. C. Bonds with higher coupon rates are more sensitive to interest rate changes. D. If a bond's yield to maturity is less than its coupon rate, the bond trades at a premium.
If a bond's yield to maturity is less than its coupon rate, the bond trades at a premium.
W.5.6 Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. lts chief financial officer has developed the following estimates (in millions of dollars): Assuming that Castle View currently does not have any working capital invested in this division, calculate the cash flows associated with changes in working capital for the first five years of this investment.
Look at the week 5 solution
W.5.7. Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars): what are the incremental earnings for this project for years 1 and 2?
Look at the week 5 solution
W.5.8 Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash flows for this division:
Look at the week 5 solution
Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.
Look at worksheet 6
You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is: A. profitability index. B. NPV. C. incremental IRR. D.IRR.
NPV
Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?
Profitability Index
Which of the following statements is FALSE? A. For the market portfolio, the investment in each security is proportional to its market capitalization. B. Market capitalization is the total market value of the outstanding shares of a firm. C. Because the market portfolio is defined as the total supply of securities, the proportions should correspond exactly to the proportion of the total market that each D. The market portfolio contains more of the smallest stocks and less of the larger stocks.
The market portfolio contains more of the smallest stocks and less of the larger stocks.
W.5.3 Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be S20 million per year. While many of these sales will be to new customers, Pisa Pizza estimates that 40% will come from customers who switch to the new, healthier pizza instead of buying the original version. a. Assume customers will spend the same amount on either version. incremental sales is associated with introducing the new pizza? b. Suppose that 50% of the customers who will switch from Pisa Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this case?
a. $12 million b.$16 million
You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%.The decision you should take regarding this project is
accept the project since the IRR > 20%.
The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:
an opportunity cost.
W.6.2. Continuing from Question 1, suppose you are a shareholder in Galt industries holding 100 shares, and you disagree with this decision to deliver the firm. You can undo the effect of this decision by
borrowing $1500 and buying 60 shares of stock.
A decrease in the sales of a current project because of the launching of a new project is:
cannibalization.
Accounts payable is a:
current liability.
Sovereign debt is:
debt issued by national governments.
The largest stock market in the world by market capitalization is:
the New York Stock Exchange.
The inventory days ratio measures:
the average length of time it takes a company to sell its inventory.
If a bond is currently trading at its face (par) value, then it must be the case that:
the bond's yield to maturity is equal to its coupon rate.
When discounting dividends you should use:
the equity cost of capital.