Fin 300 Final: HW

PRE Utilities preferred stock has an annual dividend payment of $8, a stated (par) value of $100, and an effective maturity of 30 years. If similar preferred stock issues have market yields of 7 percent, what is the value of the preferred stock? (Round your answer to the nearest dollar.)

$112

Stump, Inc. issues a 66 million IPO priced at $17 per share, and the price offered to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underwriting spread?

$15 million

The WedLink Company is considering the possibility of developing a new wedding planning website. The cost of development is assumed to be $250,000 and the company expects to generate after-tax cash flows of $70,000 per year for the next 5 years from subscribers. If the firm's discount rate is 12%, the NPV of this project is

$2,334.33

The Stagnant Growth Corporation has paid a constant dividend of $2.50 per year for the past 3 years and is expected to continue paying the same dividend per share for the foreseeable future. If the required rate of return on its common stock is 12%, the most an investor should pay per share is _____. (Round to two decimal places.)

$20.83

When GeoCorp went public, the offer price was $19.00 per share and the closing price at the end of the first day was $24.70. The firm issued 24 million shares. What was the loss to the company due to underpricing?

$22.8 million

A utility company pays an annual dividend of $20 (paid quarterly), a stated par value of $200, and has a maturity of 10 years because of a sinking fund requirement. Similarly risky securities have market yields of 8%, at what price will this preferred stock sell?

$227.36

Fortune Hotels issues an IPO on a best effort basis. The company's investment bank requires a spread of 20 percent of the selling price. The average selling price is expected to be $31 per share. Five million shares are issued. What are the net proceeds per share for the issuer?

$24.80

A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment of 500,000 shares priced at $50 per share. The underwriter's spread is 12%. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the firm's stock closed at $61. What are the total costs of the issuer?

$3,600,000

Fortune Hotels issues an IPO on a best effort basis. The company's investment bank requires a spread of 20 percent of the selling price. The average selling price is expected to be $31 per share. Five million shares are issued. How much did the investment bank receive?

$31,000,000

You are considering purchasing a share of preferred stock that pays an annual dividend of $4.50. If you require an 11% rate of return on your investment, what is the maximum price you will pay for the stock?

$40.91

The Pineapple Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return is 12%. What is the best estimate of the current stock price?

$42.64

Pau, Inc., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the underpricing cost of issuing securities to the firm?

$6.948 million

A share of common stock just paid a dividend of $3.25. It is expected that the stock will grow at a rate of 18 percent. If investors require a rate of return of 24 percent, what should be the price of the stock?

$63.92

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5%?

$65.68

Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

$777,713

Bethesda Biosys issues an IPO on a best-efforts basis. The company's investment bank requires a spread of 18 percent of the selling price. The average selling price is expected to be $25 a share. Four million shares are issued. What are the net proceeds for the issuer?

$82 million

Stump, Inc. issues a 66 million IPO priced at $17 per share, and the price offered to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the underpricing on this issue?

$9,900,000

Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $30 million to finance it. The company plans to raise the money through a general cash offering priced at $23.50 per share. Star's underwriters charge a 6 percent spread. How many shares does the company need to sell in order to meet its goal?

1,358,081

What is the beta of a firm whose equity has an expected return of 21.3 percent when the risk-free rate of return is 7.0 percent and the expected return on the market is 18.0 percent?

1.30

Radical VenOil, Inc. has a cost of equity capital equal to 22.8 percent. If the risk-free rate of return is 10 percent and the expected return on the market is 18 percent, what is the firm's beta if the marginal tax rate is 35 percent?

1.60

UltraFlex Diving Boards, Inc. just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat 4 percent forever, what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00?

10.00%

Jackson, Inc is considering two mutually exclusive, equally risky projects S and L. Their cash flows are shown below. What is the crossover rate? WACC: 7.50% Year 0, 1, 2, 3, 4 CFS -1,100, 550, 600, 100, 100 CFL, -2,700, 650, 725, 800, 1,400

10.16%

Tranquility, Inc. has common shares with a price of $18.37 a share. The firm paid a dividend of $1.50 yesterday. If dividends are expected to grow at a rate of 9 percent for three years and then at 2 percent thereafter, what is the implied cost of common equity capital for tranquility?

12.0%

Jacque Ewing Drilling, Inc. has a beta of 1.3. If the risk-free rate of return is 8 percent and the expected return on the market is 12 percent, what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 40 percent?

13.20%

Oasis, Inc. has common shares with a price of $21.12 per share. The firm is expected to pay a dividend of $1.75 one year from today. Dividends are expected to grow at 10 percent for two years and then at 5 percent thereafter. What is the implied cost of common equity capital for Oasis? Round your final answer to nearest percentage.

14%

Gangland Water Guns, Inc. is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3 percent forever, what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50?

15.00%

TeleNyckel, Inc. has a beta of 1.4 and is trying to calculate its cost of equity capital. If the risk-free rate of return is 9 percent and the market risk premium is 5 percent, then what is the firm's after-tax cost of equity capital if the firm's marginal tax rate is 30 percent?

16.00%

You have been asked to analyze a potential project. The project's cost is $180,000. Cash inflows are projected to be: year 1 = $55,000. year 2 = $65,000. year 3 = $75,000. year 4 = $85,000. year 5 = $95,000. What is the investment project's payback?

2.8 years

Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the internal rate of return that Jamaica can earn on this project?

20%

A recent leveraged buyout was financed with $50M: $12M in equity capital, $20M unsecured debt borrowed at 7% from one bank, and the remaining debt from another bank at 8.5%. What is the overall after-tax cost of the debt financing if the firm's marginal tax rate is 33%?

5.17%

Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B's credit standing is prime rate plus 2 percent. The current prime rate is 5.75 percent, the 30 year treasury bond yield is 4.35 percent, the three month Treasury bill yield is 3.54 percent, and the 10 year treasury note yield is 4.24 percent. What are the appropriate loan rates for both the firms?

6.45% for Firm A, 8.45% for Firm B.

Dynamo Corporation has semiannual bonds outstanding with 12 years to maturity, and the bonds are currently priced at $1,080.29. If the bonds have a coupon rate of 8 percent, then what is the equivalent annual return (EAR) to the investor for purchasing the bonds at the described price? Round your final percentage answer to two decimal places.

7.12%

Turquoise Electronics, Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10 percent next year and then zero thereafter, what is its cost of equity capital if the price of its common shares is currently $25.71?

8.00%

PackMan Corporation has semiannual bonds outstanding with nine years to maturity and the bonds are currently priced at $754.08. If the bonds have a coupon rate of 7.25 percent, what is the after-tax cost of debt for PackMan if its marginal tax rate is 30 percent? Round your intermediate calculation to two decimal places & final percentage answer to three decimal places.

8.225%

Billy's Goat Coats has a preferred share issue outstanding with a current price of $38.89. The firm last paid a dividend on the issue of $3.50 per share. What is the firm's cost of preferred equity?

9%

The Dedus Shoes, Inc. has common shares with a price of $28.76 per share. The firm paid a dividend of $1.00 yesterday. If dividends are expected to grow at 10 percent for two years and then at 5 percent thereafter, what is the implied cost of common equity capital for Dedus?

9%

Advantages of going public

A larger amount of capital can be raised this way than the amount that can be raised through private sources. Additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost. Going public can enable an entrepreneur to fund a growing business.

Which of the following cash flow patterns is NOT an unconventional cash flow pattern?

A negative initial cash flow is followed by future positive cash flows.

Which of the following is not true of broker markets?

Brokers can guarantee an order because they have an inventory of securities

Tactics that venture capitalists use to reduce the risk of their investment include A) funding the ventures in stages, requiring entrepreneurs to make no personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. D) None of the above.

C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize.

Which of the following steps is necessary when computing the value of a stock?

Determining the required rate of return based on the riskiness of the cash flows

Which of the following is true regarding the relation between insider trading and market efficiency?

Insider trading causes stock prices to react more quickly to information, leading to a more efficient market

Which of the following is NOT true of capital budgeting?

It involves investing large amounts of capital. It involves identifying projects that will add to a firm's value It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake IT ALLOWS THE FIRM TO REVERSE THE DECISION OF LARGE CAPITAL INVESTMENTS AT ANY TIME.

Which of the following is an advantage enjoyed by a firm that goes public?

It makes it easier for the firm to attract top management talent

Which of the following are not true?

Private equity firms invest in more mature non-public companies? Private equity firms pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments Private equity investors focus on firms that have stable cash flows because they use a lot of debt to finance their acquistions. AGENCY PROBLEMS TEND TO BE MORE IN FIRMS OWNED BY PRIVATE EQUITY INVESTORS THAN IN PUBLIC FIRMS.

As automakers increase the production of EV's and decrease the production of traditional cars with internal combustion engines, which of the following best describes the impact to the workers and in the auto industry?

Some auto workers may lose their jobs if their knowledge is limited to internal combustion technology and the demand for such jobs decline. There will be an overall loss of jobs in the auto-service industry as EV's have fewer moving parts, and do not need oil or transmission fluid changes. As demand for these types of service decline, so will be the jobs in the auto-service industry. BOTH B AND C.

Disadvantages of going public

The cost of going public is less in comparison with debt financing

The downside of manufacturing EV's include

The negative environmental impact of mining the necessary materials (cobalt and lithium) needed for EV batteries Cobalt, a critical component in the lithium batteries used by EVs, is mainly produced in the Republic of Congo, where there are concerns of abusive child labor practices and lack of worker protections from cobalt's toxic effects. BOTH A AND C.

In order to use a firm's WACC to evaluate its future project's cash flows, which of the following must hold?

The project will be financed with the same proportion of debt and equity as the firm, and the systematic risk of the project is the same as the overall systematic risk of the firm.

Two projects are considered to be mutually exclusive if:

The projects would perform the same function, and selecting one would automatically eliminate accepting the other

All of the following is true about firm-commitment underwriting EXCEPT

The underwriter bears the risk that the resale price might be lower than the price the underwriter pays. The investment banker guarantees the issuer a fixed amount of money from the stock sale. The investment banker actually buys the stock from the firm. THE ISSUER BEARS THE RISK THAT THE RESALE PRICE MIGHT BE LOWER THAN THE PRICE THE UNDERWRITER PAYS.

Which of the following statements is true?

The venture capital industry as we know it today emerged in the late 1960s with the formation of the first venture capital limited partnerships. Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. A significant number of venture capital firms focus on high-technology investments. ALL OF THE ABOVE ARE TRUE!

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? a. $10.76 b. $9.80 c. $11.88 d. $11.50

a. $10.76

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the payback period for this project? A) 1.7 years B) 2.2 years C) 1.2 years D) 2.7 years

a. 1.7 years

Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? A) 2.12 years B) 1.88 years C) 4.00 years D) 3.00 years.

a. 2.12 years

Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Round to the nearest percent.) A) 22% B) 20% C) 24% D) 28%

a. 22%

Zephyr Electricals is a company with no growth potential. Its last dividend was $4.50, and it expects no change in future dividends. What is the current price of the company's stock given a discount rate of 9 percent? a. $40.50 b. $50.00 c. $45.00 d. $500.00

b. $50.00

Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Round to the nearest percent.) A) 10% B) 12% C) 14% D) 16%

b. 12%

Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the payback period for this project? A) 2.8 years B) 3.0 years C) 3.2 years D) 3.4 years

b. 3.0 years

Castle Co. needs to borrow $10 million for process improvement upgrades. Management decides to sell 20-year bonds. They determine that the 3-month Treasury bill rate is 2.75 percent, the firm's credit rating is A, and the yield on 20-year Treasury bonds is 1.80 percent higher than that for 3-month Treasury bills. Bonds with an A rating are selling for 50 basis points above the 20-year Treasury bond rate. What is the borrowing cost to do this transaction? a. 4.55% b. 5.05% c. 7.75% d. 9.55%

b. 5.05%

If a firm has bonds outstanding and the firm would like to calculate the current cost of debt for the bonds, then the firm would A) use the coupon rate of the bonds to estimate the cost. B) use the current yield to maturity of the bonds to estimate the cost. C) use the current coupon yield of the bonds to estimate the cost. D) none of the above.

b. use the current yield to maturity of the bonds to estimate the cost

Each quarter, Transam, Inc., pays a dividend on its perpetual preferred stock. Today, the stock is selling at $83.45. If the required rate of return for such stocks is 10.5 percent, what is the quarterly dividend paid by this firm? a. $8.76 b. $10.50 c. $2.19 d. $2.63

c. $2.19

Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? a. $39.00 b. $3.69 c. $27.08 d. $21.23

c. $27.08

Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It then will settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? a. $85.94 b. $97.19 c. $50.59 d. $65.68

c. $50.59

Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 18 percent, what is the NPV of this project? A) $2,875,000 B) $3,830,785 C) $580,785 D) $2,1225,875

c. $580,785

Kleine Toymakers is introducing a new line of robotic toys, which it expects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of rat of return is 15 percent? a. $13.24 b. $12.00 c. $6.57 d. $10.24

c. $6.57

Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return? (Round to the nearest percent.) A) 11% B) 13% C) 15% D) 17%

c. 15%

Ryder Supplies has its stock currently selling at $63.25. The company is expected to grow at a constant rate of 7 percent. If the appropriate discount rate is 17 percent, what is the expected dividend, a year from now? a. $4.43 b. $3.25 c. $10.75 d. $6.33

d. $6.33

Givens, Inc., is a fast growing technology company that paid a $1.25 dividend last week. The company's expected growth rates over the next four years are as follows: 25 percent, 30 percent 35 percent, and 30 percent. The company then expects to settle down to a constant-growth rate of 8 percent annually. If the required rate of return is 12 percent, what is the present value of the dividends over the fast growth phase? a. $1.25 b. $6.46 c. $8.37 d. $7.24

d. $7.24

Ambassador Corp. sells household cleaners producing a revenue stream that has remained unchanged in the last few years. The firm does not expect any change in its sales or earnings in the next several years. The stock is currently selling at $46.88. If the required rate of return is 16 percent, what is the dividend paid by this company? a. $2.93 b. $4.65 c. $6.89 d. $7.50

d. $7.50

Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? A) $1,802,554 B) $197,446 C) -$1,802,554 D) -$197,446

d. -$197,446

Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If their acceptance period is three years, will this project be accepted? A) 2.67 years; yes B) 2.67 years; no C) 3.33 years; yes D) 3.33 years; no

d. 3.33 years, no

The internal rate of return is:

discount rate that results in a zero net present value for the project.

If markets are not reasonably efficient, then:

estimates of expected returns that were based on security prices will not be reliable.

If a company's weighted average cost of capital is less than the required return on equity, then the firm

has debt in its capital structure

Growth stocks usually do not pay dividends. Therefore the stock value increases because the firms:

reinvest earnings to provide dividends in the future.

The three principal ways in which venture capital firms exit venture-backed companies are:

selling to a strategic buyer, selling to a financial buyer, and offering stock to the public

The beta of a firm can be estimated by:

taking the weighted average of the betas for the firm's individual projects

The recommended model to estimate the cost of common equity for a firm is

the capital asset pricing model (CAPM)

The three costs associated with issuing stock in an IPO are:

underwriting spread, out-of-pocket expenses, and underpricing