Exam 3 Finance
Dollar Return
(ending value- beginning value)+income
TAFKAP Industries has 3 million shares of stock outstanding selling at $17 per share, and an issue of $20 million in 7.5 percent annual coupon bonds with a maturity of 15 years, selling at 106 percent of par. Assume TAFKAP's weighted average tax rate is 34 percent and its cost of equity is 14.5 percent. What is TAFKAP's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
$1,000 * 106% = -$1,060 = PV, 15 = N, $1,000 * 7.5% = $75 = PMT, $1,000 = FV, CPT I/Y = 6.8476% WACC = [E/(E+P+D)](Ie)+[D/(E+P+D)]Id*(1-Tc) WACC = [(3M * $17/(3m * $17 + $20m *1.06)) * 14.5%]+[($20M * 1.06/(3m * $17 + $20m *1.06)) *6.8476% * (1-0.34) WACC = (.7064* 14.5%) + (.2936 * 6.8476% * (1-0.34)) = 11.57%
Oberon, Inc., has a $20 million (face value) 10-year bond issue selling for 97 percent of par that pays an annual coupon of 8.25 percent. What would be Oberon's before-tax component cost of debt? (Round your answer to 2 decimal places.)
$20million * 97% = $19.4million = PV, 10 = N, $20million * 8.25% = $1.65million = PMT, $20million = FV, CPT I/Y = 8.7115%
Problem 24
* N= 1, I/Y = 11, FV = 65800, PMT = 0, CPT PV =59279.28 ** N= 2, I/Y = 11, FV = 84000, PMT = 0, CPT PV = 68176.28 *** N= 3, I/Y = 11, FV = 141000, PMT = 0, CPT PV = 103097.98 **** N= 4, I/Y = 11, FV = 122000, PMT = 0, CPT PV = 80365.18 Project discounted payback = 3 + $4446.45/$80365.18 = 3.06 years < 3.5 years, ACCEPT
Problem 7
@ 8% Time CF Discounted CF Cumulative 0 ($1,000) ($1,000) ($1,000) T1 $480 $444.44* ($555.56) T2 $480 $411.52** ($144.04) T3 CF$520 Dicounted CF$412.79*** Cumulative $268.75 T4 CF $300 T5 CF$100 * N= 1, I/Y = 8, FV = 480, PMT = 0, CPT PV = 444.44 ** N= 2, I/Y = 8, FV = 480, PMT = 0, CPT PV = 411.52 *** N= 3, I/Y = 8, FV = 520, PMT = 0, CPT PV = 412.79 DPB = 2 + $144.04/$412.79 = 2.35 years < 3 years ACCEPT
The past five monthly returns for PG&E are −3.17 percent, 3.88 percent, 3.77 percent, 6.47 percent, and 3.58 percent. What is the average monthly return? (Round your answer to 3 decimal places.)
Average Return = (−3.17% + 3.88% + 3.77% + 6.47% + 3.58%) / 5 = 2.906%
The average annual return on an Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these ten years? (Round your answer to 1 decimal place.)
Average market risk premium: 15.8%-5.6%= 10.2%
Problem 9
CFO = -1000 CO1 = 350, F01 = 1 C02 = 480, F02 = 1 C03 = 520, F03 = 1 C04 = 300, F04 = 1 C05 = 100, F05 = 1 IRR, then hit CPT = 25.49% 25.49% > 8%, ACCEPT
Problem 1
CFO = -1000 CO1 = 350, F01 = 1 C02 = 480, F02 = 1 C03 = 520, F03 = 1 C04 = 600, F04 = 1 C05 = 100, F05 = 1 I = 8 NPV = 657.47 (NOTE: > 0, ACCEPTABLE)
Problem 10
CFO = -11000 CO1 = 3350, F01 = 1 C02 = 4180, F02 = 1 C03 = 1520, F03 = 1 C04 = 2000, F04 = 1 IRR, then hit CPT = 0.21% 0.21% < 12%, REJECT
Problem 25
CFO = -235000 CO1 = 65800, F01 = 1 C02 = 84000, F02 = 1 C03 = 141000, F03 = 2 C04 = 122000, F04 = 1 C05 = 81200, F05 = 1 CPT IRR = 28.79% 28.79% > 11%, ACCEPT
Problem 27
CFO = -235000 CO1 = 65800, F01 = 1 C02 = 84000, F02 = 1 C03 = 141000, F03 = 2 C04 = 122000, F04 = 1 C05 = 81200, F05 = 1 I = 11% NPV = $124,106.98 > 0, ACCEPT
Problem 19
CFO = -5000 CO1 = 1200, F01 = 1 C02 = 2400, F02 = 1 C03 = 1600, F03 = 2 C04 = 1400, F04 = 1 C05 = 1200, F04 = 1 CPT IRR = 22.69% 22.69% > 8%, ACCEPT
Problem 21
CFO = -5000 CO1 = 1200, F01 = 1 C02 = 2400, F02 = 1 C03 = 1600, F03 = 2 C04 = 1400, F04 = 1 C05 = 1200, F04 = 1 I = 8% NPV = $2,323.92 > 0, ACCEPT
Problem 2
CFO = -8000 CO1 = 3350, F01 = 1 C02 = 4180, F02 = 1 C03 = 1520, F03 = 1 C04 = 300, F04 = 1 I = 12 NPV = -404.10 (NOTE: < 0, REJECT)
FedEx Corp stock ended the previous year at $103.39 per share. It paid a $0.35 per share dividend last year. It ended last year at $106.69. If you owned 200 shares of FedEx, what was your dollar return and percent return? (Round your percent return answer to 2 decimal places.)
Dollar Return = (Ending Value − Beginning Value) + Income = $106.69 × 200 − $103.39 × 200 + $0.35 × 200 = $21,338 - $20,678 + 70 = $730 Percentage Return = $730 / ($103.39 × 200) = 3.53%
A corporate bond that you own at the beginning of the year is worth $975. During the year, it pays $35 in interest payments and ends the year valued at $965. What was your dollar return and percent return? (Round your "Percent return" to 2 decimal places.)
Dollar Return = Capital gain + Income = $965 − $975 + $35 = $25 Percent return = $25 / $975 = 2.56%
Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic states: Fast growth- probability (0.3) return (40%) Slow growth- probability (0.4) return (10%) Recession- probability (0.3) return (-25%)
Expected return = (0.3 × 40%) + (0.4 × 10%) + (0.3 × -25%) = 12% + 4% - 7.5% = 8.5%
You own $10,000 of Olympic Steel stock that has a beta of 2.2. You also own $7,000 of Rent-a-Center (beta = 1.5) and $8,000 of Lincoln Educational (beta = 0.5). What is the beta of your portfolio? (Round your answer to 2 decimal places.)
First determine the total value of the portfolio and the weights of each stock in the portfolio: Total value = $10,000 + $7,000 + $8,000 = $25,000 Olympic Steel weight = $10,000 / $25,000 = 40% Rent-a-Center weight = $7,000 / $25,000 = 28% Lincoln Educational weight = $8,000 / $25,000 = 32% Now compute the portfolio beta: (0.40 × 2.2) + (0.28 × 1.5) + (0.32 × 0.5) = 0.88 + 0.42 + 0.16 = 1.46
Hastings Entertainment has a beta of 0.65. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings' required return? (Round your answer to 2 decimal places.)
Hastings' required return = 4% + 0.65 × (11% - 4%) = 4% + 4.55% = 8.55%
Rank the following three stocks by their level of total risk, highest to lowest. Rail Haul has an average return of 12 percent and standard deviation of 25 percent. The average return and standard deviation of Idol Staff are 15 percent and 35 percent; and of Poker-R-Us are 9 percent and 20 percent.
Idol Staff CV = 35%/15% = 2.33 Poker-R-Us CV = 20%/9% = 2.22 Rail Haul CV = 25%/12% = 2.08
Netflix, Inc., has a beta of 3.61. If the market return is expected to be 13 percent and the risk-free rate is 3 percent, what is Netflix' risk premium? (Round your answer to 2 decimal places.)
Netflix' risk premium = 3.61 × (13% - 3%) = 36.1%
You have a portfolio with a beta of 1.35. What will be the new portfolio beta if you keep 95 percent of your money in the old portfolio and 5 percent in a stock with a beta of 0.78? (Round your answer to 2 decimal places.)
New portfolio beta = (0.95 × 1.35) + (0.05 × 0.78) = 1.32
Year-to-date, Oracle had earned a −1.34 percent return. During the same time period, Valero Energy earned 7.96 percent and McDonald's earned 0.88 percent. If you have a portfolio made up of 30 percent Oracle, 25 percent Valero Energy, and 45 percent McDonald's, what is your portfolio return? (Round your answer to 2 decimal places.)
Portfolio Return = (0.30 × −1.34%) + (0.25 × 7.96%) + (0.45 × 0.88%) = 1.98%
If the risk-free rate is 3 percent and the risk premium is 5 percent, what is the required return?
Required return = 3% + 5% = 8%
Problem 11
Step #1 N= (4-1) = 3, I/Y = 12, PV = 5330, PMT = 0, CPT FV = 7488.27 N= (4-2) = 2, I/Y = 12, PV = 4180, PMT = 0, CPT FV = 5243.39 N= (4-3) = 1, I/Y = 12, PV = 1520, PMT = 0, CPT FV = 1702.40 N= (4-4) = 0, I/Y = 12, PV = 2000, PMT = 0, CPT FV = 2000 (NOTE: FV is the same as PV on the last CF) Sum of all FV = 16,434.06 Step #2 FV = 16434.06 PV = -11000.00 N = 4 PMT = 0 CPT I/Y = 10.56% (NOTE: < Cost of Capital of 12% so REJECT)
Problem 26
Step #1 N= (5-1) = 4, I/Y = 11, PV = 65800, PMT = 0, CPT FV = 99889.03 N= (5-2) = 3, I/Y = 11, PV = 84000, PMT = 0, CPT FV = 114881.00 N= (5-3) = 2, I/Y = 11, PV = 141000, PMT = 0, CPT FV = 173726.10 N= (5-4) = 1, I/Y = 11, PV = 122000, PMT = 0, CPT FV = 135420.00 N= (5-5) = 0, I/Y = 11, PV = 81200, PMT = 0, CPT FV = 81200.00 Sum of all FV = $605,116.14 Step #2 FV = 605116.14 PV = -235000.00 N = 5 PMT = 0 CPT I/Y = 20.82% 20.82% > 11%, ACCEPT
Problem 20
Step #1 N= (6-1) = 5, I/Y = 8, PV = 1200, PMT = 0, CPT FV = 1763.19 N= (6-2) = 4, I/Y = 8, PV = 2400, PMT = 0, CPT FV = 3265.17 N= (6-3) = 3, I/Y = 8, PV = 1600, PMT = 0, CPT FV = 2015.54 N= (6-4) = 2, I/Y = 8, PV = 1600, PMT = 0, CPT FV = 1866.24 N= (6-5) = 1, I/Y = 8, PV = 1400, PMT = 0, CPT FV = 1512.00 N= (6-6) = 0, I/Y = 8, PV = 1200, PMT = 0, CPT FV = 1200.00 Sum of all FV = 11622.15 Step #2 FV = 11622.15 PV = -5000.00 N = 6 PMT = 0 CPT I/Y = 15.09% 15.09% > 8%, ACCEPT
Amazon.com; Price: ($40.80) Shares: (100) Beta (3.8) Family Dollar Stores Price: (30.10) Shares: (150) Beta: (1.2) McKesson Corp: Price:($57.40) Shares : (75) Beta: (0.4) Schering-Plough Corp: Price: (23.80) Shares: (200) Beta: (0.5) What is the beta of your portfolio If you expect the market to earn 12 percent and the risk-free rate is 3.5 percent, what is the required return of the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
This problem can be solved two different and equivalent ways. Both ways require the weights of the stocks in the portfolio. In one method, compute the required return for each stock and then use the weights to form the portfolio required return. The other solution uses the weights to compute the portfolio beta. This portfolio beta is used to compute the portfolio required return. The solution below shows the portfolio beta approach. For the portfolio, determine the total value of the portfolio and the weights of each stock in the portfolio: Total value = ($40.80 × 100) + ($30.10 × 150) + ($57.40 × 75) + ($23.80 × 200) = $17,660 Amazon.com weight = ($40.80 × 100) / $17,660 = 23.10% Family Dollar weight = ($30.10 × 150) / $17,660 = 25.57% McKesson weight = ($57.40 × 75) / $17,660 = 24.38% Schering-Plough weight = ($23.80 × 200) / $17,660 = 26.95% Now compute the portfolio beta: (0.2310 × 3.8) + (0.2557 × 1.2) + (0.2438 × 0.4) + (0.2695 × 0.5) = 1.42 So, the portfolio's required return = 3.5% + 1.42 × (12% − 3.5%) = 15.57% Sara Lee Corp weight = ($17.25 × 150) / $15,887.50 = 16.29% Now compute the portfolio beta: (0.2776 × 4.2) + (0.3777 × 1.1) + (0.1819 × 0.7) + (0.1629 × 0.5) = 1.79 So, the portfolio's required return = 3.5% + 1.79 × (12% − 3.5%) = 18.72%
Problem 6
Time CF Cumulative 0 ($1,000) ($1,000) 1 $350 ($650) 2 $480 ($170) 3 $520 $350 4 $300 $650 5 $100 $750 Project payback = 2 + $170/$520 = 2.33 years < 4 years, ACCEPT
Problem 5
Time CF Cumulative 0 ($11,000) ($11,000) 1 $3,350 ($7,650) 2 $4,180 ($3,470) 3 $1,520 ($1,950) 4 0 ($1,950) 5 $1,000 ($950)
At the beginning of the month, you owned $5,500 of General Dynamics, $7,500 of Starbucks, and $8,000 of Nike. The monthly returns for General Dynamics, Starbucks, and Nike were 7.44 percent, −1.36 percent, and −0.54 percent. What is your portfolio return? (Do not round intermediate calculations and round your final answer to 2 decimal places.)
Total portfolio = $5,500 + $7,500 + $8,000 = $21,000 General Dynamics weight = $5,500 / $21,000 = 0.2619 Starbucks weight = $7,500 / $21,000 = 0.3571 Nike weight = $8,000 / $21,000 = 0.3810 Portfolio return = (0.2619 × 7.44%) + (0.3571 × −1.36%) + (0.3810 × −0.54%) = 1.9485 - 0.4857 - 0.2057 = 1.2571%
An investor owns $6,000 of Adobe Systems stock, $5,000 of Dow Chemical, and $5,000 of Office Depot. What are the portfolio weights of each stock? (Round your answers to 4 decimal places.)
Total portfolio = $6,000 + $5,000 + $5,000 = $16,000 Adobe System weight = $6,000 / $16,000 = 0.3750 Dow Chemical weight = $5,000 / $16,000 = 0.3125 Office Depot weight = $5,000 / $16,000 = 0.3125
Suppose that B2B, Inc., has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. Assume the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11 percent, and 9.5 percent, respectively. What is B2B's WACC if the firm faces an average tax rate of 30 percent? (Round your answer to 2 decimal places.)
WACC= e/e+p+d ie + p/ e+ p+d ip+ d/ e+p+d id * (1-Tc) = 0.37 × 14.5% + 0.17 × 11% + 0.46 × 9.5% × (1 - 0.30) = 10.29%
Suppose that TapDance, Inc.'s, capital structure features 65 percent equity, 35 percent debt, and that its before-tax cost of debt is 8 percent, while its cost of equity is 13 percent. Assume the appropriate weighted average tax rate is 34 percent.
WACC= e/e+p+d ie + p/ e+ p+d ip+ d/ e+p+d id * (1-Tc) = 0.65 × 13% + 0 × 0% + 0.35 × 8% × (1 - 0.34) = 10.30%
Paccar's current stock price is $48.20 and it is likely to pay a $0.80 dividend next year. Since analysts estimate Paccar will have an 8.8 percent growth rate, what is its required return? (Round your answer to 2 decimal places.)
i = (D1/P0) + g = ($0.80/$48.20) + .088 = 0.01660 + .0880 = .1046 = 10.46%
Diddy Corp. stock has a beta of 1.2, the current risk-free rate is 5 percent, and the expected return on the market is 13.5 percent. What is Diddy's cost of equity
iE = if + βE [ E(iM) - if ] = 0.05 + 1.2 [0.135 - 0.05] = 0.152, or 15.20%
Suppose that Brown-Murphies' common shares sell for $19.50 per share, that the firm is expected to set their next annual dividend at $0.57 per share, and that all future dividends are expected to grow by 4 percent per year, indefinitely. Assume Brown-Murphies faces a flotation cost of 13 percent on new equity issues. What will be the flotation-adjusted cost of equity? (Round your answer to 2 decimal places.)
ie= D1/ (P0-F)+ g = $0.57/ $19.50 - (0.13 x $19.50) + 0.04 =0.0736 or 7.36%
ILK has preferred stock selling for 97 percent of par that pays an 8 percent annual coupon. What would be ILK's component cost of preferred stock? (Round your answer to 2 decimal places.)
ip= D1/P0 = $8/$97 = 8.25% or 0.0825