Fin 370 Final

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%. What is the dividend growth rate?

$18.53=($1.58/.12-g) g=3.47

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 a 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:

$80 million * .30= $24 million

Money that has been or will be paid regardless of the decision whether or not to proceed with the project is:

A Sunk Cost

A loan that compounds interest monthly has an EAR of 14.40%. What is the APR?

APR= ((1+EAR)^1/months-1)*12 APR= ((1+.1440)^1/12)-1)*12= .1352 = 13.53%

The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:

An opportunity Cost

Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6% interest. The annuity costs $200,000 today. What is the amount of each annuity payment?

Begin Mode N=25*2=50 P/Y=2 I/Y=6 PV=-200,000 FV=N/A PMT= $7546.70

Steel's Corp. Industries has no debt, total equity capitalization of $600 million, and an equity beta of 1.2. Included in Steel Corps assets os $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 (i.e. the beta of its operating assets) is closest to:

Bu= E/E+D *Be+ D/E+D*Bd Bu= 600/600-90*1.2 + 0/600-90*Bd 600/510*1.2= 1.411

A firm expects to increase its annual dividend by 20% per year for the next 2 years and by 15% per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 per 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%?

Create timeline: Year 1-5 After year 4 the dividend stays constant CF0= $1 CF1= 1*.20= $1.20 CF2= $1.20*.20= $.24 +$1.20= $1.44 CF3= $1.44*.15=.2160 + 1.44= $1.656 CF4= $1.656*.15=.2484 + 1.656= 1.9044 P= 3/.12=25 CF4= 25+1.904=26.90 I=12% NPV= $20.50

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

Dividend Growth Model

Rockwood Enterprises is currently an all-equity firm and has just announced it 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 $2 5 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 $100 million in debt at 5%, what would Rockwood's cost of equity capital be?

Equity= 20 million * $25= $500 Re= Ru +D/D+E(ru-rd) Re= .10% + 100/(500-100)* (.10-.05) Re= 11.25%

Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the forseeable future. Wyatt's annual interest tax shield is closest to?

Interest Tax Shield= Interest Expense *Marginal Tax Rate Interest Expense= $100 million * .07= 7 7* 40(marginal tax rate)= $2.8 million

Equity in a firm with debt is called:

Levered equity

What to change on semi-annual terms on a bond

N*2 PMT= annual coupon/2 P/Y=1*2

Which of the following costs would you consider when making a capital budgeting decision?

Opportunity Cost

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?

Par Value- $1000 Issued 1 year ago= 15-1=14 Coupon Rate= 6.5*1000= 65 N=14 I/Y= 7.2 PMT= 65 FV=1000 PV= 939.51 Find rate of change(percentage change) 939.51-1000/1000= -6.05 Answer= 6.05 percent lower

Rockwood Enterprises is currently an all-equity firm and has just announced it 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 $2 5 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 would Rockwood's cost of equity capital be?

Price= EPS/Re(Ru) $100 million/$25= 4 million per share 16 million outstanding +4 new issues= 20 million new shares EPS= $50/20= 2.5 $25=2.5/ru= 10%

The common stock o Sweet Treats is valued at $10.80 a share. The company increases its dividend by 8% annually and expects its next dividend to be $0.40 per share. What is the total rate of return on this stock?

R= D1/P0+g .40/10.80 +.08= 11.70

Suppose that Taggart Transcontinental currently has no debt and has an equity cost of capital of 10%. Taggart is considering borrowing funds at a cost of 6% and using these funds to repurchase existing shares of stock. Assume perfect capital markets. If Taggart borrows until they achieve a debt-to-equity ratio of 25%, then Taggart's levered cost of equity would be closet to?

Re= ru+D/E(ru-rd) re= 10+.25(10-6) re=11%

The payback period is the length of time it takes an investment to generate enough cash flows to:

Recover its initial costs

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% on his retirement savings, how much will Les have in his retirement account 30 years from now?

Reminder this is in months N=30*12= 360 P/Y=12 I/Y= 10.5 PMT= 150+75(.5*150)= $225 PV=N/A FV= $566,190.22

First Bank pays 10% simple interest if you deposit $8,000 for 10 years. How much more would you earn if First Bank were to pay 10% compound interest?

Simple Interest= P(1+r*t) 8000(1+0.1*10)= 16,000 Compound Interest = FV= 20,749.94 I/Y= 10 N=10 PMT=0 PV=-8000 =20,749.94-16,000= 4,749.94

This morning you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12% rate of return and the annual dividend increases at 3.5% annually. What will your capital gain be on this stock if you it 3 years from now?

Timeline 0-3 with P0 at 1.90 P0=1.90 P1= 1.90*.035= 1.9965 P2= 1.9965*.035= 2.035 P3= 2.035* .035= 2.1065 P4= 2.1065/(.12-.035)= 24.7824 I= 12% NPV= 22.352 Capital Gain= 24.7824-22.352= 2$.43

What is the NPV of a project with the following cash flows if the discount rate is 15%? Year CF 0 -39,400 1 12,800 2 21,700 3 18,100

Use calculator Cash Flow Bank CF0= -39,400 CF1= 12,800 F=1 CF2= 21,700 F=1 CF3 18,100 F=1 I= 15% NPV= 39.80

A decrease in the sales of a current project because of the launching of a new project is:

cannibalization

M&M Proposition I, under perfect capital market conditions, states that the:

capital structure of a firm is irrelevant

Steel's Corp. Industries has no debt, total equity capitalization of $600 million, and an equity beta of 1.2. Included in Steel Corps assets os $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 (i.e. the beta of its operating assets) is closest to: There WACC is closest to:

rWACC= rf+ Bu (Rm-rf) rWACC= 4%+ 1.4*6% 12.4

Consider the follow formula: VL=Vu+TcD The term TcD represents:

the present value of the interest tax shield

Consider the following equation: E+D=U+A The U in this equation represents:

the value of the firms unlevered equity