Finance 303 Homework for Test 3
What is the estimated cost of equity if the risk free rate is 2.1%, the beta for the company is 1.45 and the expected return on the market is 8.9%? 10.97% 15.01% 11.96% 12.91%
11.96%
Calculate the Levered Beta for a firm that has a debt to equity ratio of 120%, a tax rate of 30% and an Unlevered Beta of 1.25.
Bl/[1+(1-tax)*(D/E)=1.25=Bl/[1+(1-.3)*(1.2)=1.84 1.84*1.25=2.3
If a company has finished projecting its expected cash receipts and expenditures for the following quarter, what do you call this projection? Operating Projection Payables Timeline Cash Budget Receivables Schedule
Cash Budget
Moore & Moore has just finished projecting its expected cash receipts and expenditures for next year. What is this projection called? Operating projection Receivables schedule Balance sheet Cash budget Compromise policy
Cash budget
Fama's Llamas has a WACC of 9.8 percent. The company's cost of equity is 12.2 percent, and its pretax cost of debt is 7.4 percent. The tax rate is 40 percent. What is the company's target debt-equity ratio?
Cost of equity=12.2 tax rate=40 cost of debt=7.4 cost of capital=9.8 .122(E/V)+.074(D/V)(1-.40)= Rearranging the equation: .0980(V/E)=.122+.074(.6)(D/E) V/E is just the equity multiplier V/E=1+D/E .0980(D/E+1)=.122+.444(D/E) ................................................?
Standard deviation measures _____ risk while beta measures _____ risk. systematic; unsystematic unsystematic; systematic total; unsystematic total; systematic asset-specific; market
total; systematic
Portfolio diversification eliminates: all investment risk. the portfolio risk premium. market risk. unsystematic risk. the reward for bearing risk.
unsystematic risk.
Unsystematic risk can be defined by all of the following except: unrewarded risk. diversifiable risk. market risk. unique risk. asset-specific risk.
market risk.
What is the cost of preferred stock if it is priced at 29.50 per share and pays a dividend of 1.75 per year? 5.93% 8.43% 2.95% 16.86%
Cost of preferred stock = Dividend per share / Current price per share x 100 = 1.75 / 29.50 x 100 = 5.93%
If the risk of a particular project is higher than the risk of average projects for a firm, then the firm should use the unadjusted WACC to evaluate the risky project.
False
An inventory loan is what kind of loan? a secured short-term loan an unsecured short term loan a secured long-term loan an unsecured long-term loan
a secured short-term loan
What is the best description of a line of credit among the choices below? a long term bank loan that is committed a short term bank loan that can be either committed or non-committed a short term loan secured by Accounts receivable (A/R) a short-term loan secured by Inventory
a short term bank loan that can be either committed or non-committed
The use of borrowing by an individual to adjust his or her overall exposure to financial leverage is referred to as: M&M Proposition I. capital restructuring. homemade leverage. M&M Proposition II. financial risk management.
homemade leverage.
Everything else being equal, the higher the weighted average cost of capital . . . the higher the present value of a project's cash flows the more likely the firm will use debt the lower the present value of a project's cash flows the more likely the firm will use equity
the lower the present value of a project's cash flows
Which of the following is a source of cash? i. borrow over long-term ii. increase current liabilities iii. decrease debt iv. buy long-term assets v. decrease current assets iii and iv only i, ii, iii and iv i, ii, and v only i and ii only
i, ii, and v only
Which of the following is a use of cash? i. increase long-term debt ii. decrease current liabilitites iii. decrease current assets iv. increase fixed assets v. increase equity i, ii and iii ii and iv only None of them are uses of cash i, iii and v only
ii and iv only
The amount of time a firm holds inventory in stock is referred to as the: inventory period. accounts receivable period. accounts payable period. operating cycle. cash cycle.
inventory period.
Glass Ornaments, Inc. is an all-equity firm with a total market value of $386,000 and 15,000 shares of stock outstanding. Management is considering issuing $75,000 of debt at an interest rate of 8 percent and using the proceeds on a stock repurchase. As an all-equity firm, management believes the earnings before interest and taxes (EBIT) will be $31,000 if the economy is normal, $11,000 if it is in a recession, and $37,000 if the economy booms. Ignore taxes. What will the earnings per share (EPS) be if the economy falls into a recession and the firm maintains its all-equity status? $0.73 $0.68 $1.21 $1.67 $2.07
11000/15000= $0.73
What is the standard deviation of the returns for a stock with the following probabilities and returns: Economy Probability Return Poor 10% -20% Sluggish 25% -5% Moderate 30% 12% Good 25% 24% Boom 10% 55% 19.89% 3.96% 21.45% 28.72% 25.69%
19.89% Economy X p pX x x2 px2 Poor -20 0.10 -2 -31.85 1014.4225 101.46225 Sluggish -5 0.25 -1.25 -16.85 283.9225 70.980625 Moderate 12 0.30 3.6 0.15 0.0225 0.00675 Good 24 0.25 6 12.15 147.6225 36.905625 Boom 55 0.10 5.5 43.15 1861.9225 186.19225 1.00 11.85 3307.9125 395.5475 SD = sqrt(395.5475) = 19.89%
What is the price of preferred stock if the cost of preferred stock is 9.5% and the dividend is $3 per share? 31.58 12.95 34.76 28.50
31.58
Titans has 7 percent bonds outstanding that mature in 16 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $1,015 each. What is the firm's pretax cost of debt? 6.97 percent 6.84 percent 7.14 percent 7.31 percent 6.40 percent
6.84 percent
What is the WACC if the weight of debt is 35%, the yield on the company's bonds is 6.5%, the corporate tax rate is 33% and the cost of equity is 12.9%? 9.91% 9.136% Not enough information 11.01% 10.66%
9.91%
Silverton Co. is comparing two different capital structures. Plan I would result in 8,700 shares of stock and $399,000 in debt. Plan II would result in 12,500 shares of stock and $239,400 in debt. The interest rate on the debt is 11 percent. The all-equity plan would result in 18,200 shares of stock outstanding. Ignore taxes for this problem. What is the price per share of equity under Plan I? What is the price per share of equity under Plan II?
?????????????????Price per share= debt/outstanding shares before debt-outstanding shares after debt
Consider the following information: Probability of State Rate of Return if State Occurs Economy of Economy Stock A Stock B Recession .22 .045 - .42 Normal .62 .125 .32 Boom .16 .310 .55 Calculate the expected return for the two stocks. Calculate the Standard deviation for the two stocks.
A B A B A B Recession0.99% -9.24% -12.71% -28.64% 1.62% 8.20% Normal 7.75% 19.84% -5.95% 0.44% 0.35% .0019% Boom 4.96% 8.80% -8.74% -10.60% 0.76% 1.12% Expected 13.7 19.4 Variance 2.73% 9.33% Return SD ??? ??? .....................................................
Which one of the following statements is accurate for a levered firm? WACC should be used as the required return for all proposed investments. A firm's WACC will decrease whenever the firm's tax rate decreases. An increase in the market risk premium will decrease a firm's WACC. The subjective approach totally ignores a firm's own WACC. A reduction in the risk level of a firm will tend to decrease the firm's WACC.
A reduction in the risk level of a firm will tend to decrease the firm's WACC.
Bob's Fireworks has the following current account values. These accounts represent a net _____ of cash for the period in the amount of __________ Account Beginning Balance Ending Balance Accounts Receivable 32,800 31,300 Accounts Payable 29,700 26,500 Inventory 52,600 54,200
Account Beginning Balance Ending Balance Accounts Receivable 32,800 31,300= -1500= Accounts Payable 29,700 26,500= 3,200 Inventory 52,600 54,200= 1600 ---------- USE 3300
If the Debt to Equity ratio is 350%, what is the Debt to Assets ratio? 250% 28.57% 77.78% 65.0%
Assets = Equity+Debt Here, Debt÷Equity = 3.5 Equity = Debt÷3.5 Assets = Debt÷3.5+Debt Assets÷Debt = 4.5÷3.5 Debt to assets = 3.5÷4.5 = 0.777778
State of Probability of State Rate of Return if State Occurs Economy of Economy Stock A Stock B Stock C Boom .74 .12 .06 .32 Bust .26 .21 .27 - .12 What is the expected return on an equally weighted portfolio of these three stocks? What is the variance of a portfolio invested 29 percent each in A and B and 42 percent in C?
Boom= (.12+.06+.32)/3=.1667 Bust= (.21+.27-.12)/3=.12 (.74*.1667)+(.26*.12)=.1234+.0312=.1546 Boom=(.29*.12)+(.29*.06)+(.42*.32)=.1866 Bust= (.29*.21)+(.29*.27)+(.42*-.12)=.0888 Expected Return= (.74*.1866)+(.26*.0888)=.1612 [.74*(.1866-.1612)^2+.26*(.0888-.1612)^2]=.0004774+.001363=.00184
Which one of the following is the equity risk arising from the daily operations of a firm? Strategic risk Financial risk Liquidity risk Industry risk Business risk
Business risk
What is the standard deviation for the following sample of asset returns: 4.5% 6.9% -13.2% 18.9% 24.9% -3.8% 14.2% -18.7% 1.9% 6.8% 14.1% 37.2%
Calculation of Standard Deviation N Return (X) (X-Y) (X-Y)^2 1 4.50 -3.31 10.95 2 6.90 -0.91 0.83 3 -13.20 -21.01 441.35 4 18.90 11.09 123.03 5 24.90 17.09 292.13 6 -3.80 -11.61 134.75 7 14.20 6.39 40.85 8 -18.70 -26.51 702.69 9 1.90 -5.91 34.91 10 6.80 -1.01 1.02 11 14.10 6.29 39.59 12 37.20 29.39 863.87 93.70 2685.95 Mean (Y) = ∑(X) /N =93.7%/12 =7.808 Standard Deviation = √(∑(Given Return - Average Return)^2) /N =√2685.95/12 =15.63 ...............................................
Here are some important figures from the budget of Marston, Inc., for the second quarter of 2016: April May June Credit sales 416,000 365,000 453,000 Credit purchases 193,000 181,000 214,000 Cash disbursements Wages, taxes, and expenses 81,100 76,600 105,300 Interest 10,800 10,800 10,800 Equipment purchases 40,000 12,500 161,000 The company predicts that 5 percent of its credit sales will never be collected, 25 percent of its sales will be collected in the month of the sale, and the remaining 70 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. In March 2016, credit sales were $343,000. Using this information, complete the following cash budget: April May June Beginning cash balance 123,000 Cash receipts Cash collections from credit sales Total cash available Cash disbursements Purchases 185,000 Wages, taxes, and expenses Interest Equipment purchases Total cash disbursements Ending cash balance
Collection A/R: Uncollectible: 5% Month of Sale: 25% Following Month: 70% Credit Purchases: Month of purchase: 0% Following Month: 100% April May June Credit sales 416,000 365,000 453,000 Credit purchases 193,000 181,000 214,000 Cash disbursements Wages, taxes, and expenses 81,100 76,600 105,300 Interest 10,800 10,800 10,800 Equipment purchases 40,000 12,500 161,000 April May June Beginning cash balance 123,000 150,200 239,750 Cash receipts ----------------------------------- Cash collections from credit sales (343000*70%)+(416000*25%)= 382,450 368,750 344,100 Total cash available 123000+344100= 467,100 532,650 608,500 Cash disbursements ------------------------------------- Purchases 185,000 193,000 181,000 Wages, taxes, and expenses 81,100 76,600 105,300 Interest 10,800 10,800 10,800 Equipment purchases 40,000 12,500 161,000 Total cash disbursements 316,900 292,900 458,100 Ending cash balance 467100-316900= 150,200 239,750 150,400
What is the cost of common stock if the dividend just paid was $2.00, the growth rate in dividends is expected to be 6.5% and the price of the stock is currently $35.50? 13.1% 6% 12.16% 12.5%
D1=$2.00*1.065=2.13 r=(2.13/35.50)+.065=.125= 12.5%
Which one of these is the best example of systematic risk? Discovery of a major gas field Decrease in textile imports Increase in agricultural exports Decrease in gross domestic product Decrease in management bonuses for banking executives
Decrease in gross domestic product
Which one of these will increase the operating cycle? Decreasing the accounts payable turnover rate Decreasing the accounts payable period Decreasing the inventory turnover rate Decreasing the days' sales in inventory
Decreasing the inventory turnover rate
A stock has a beta of 1.12, the expected return on the market is 10.6 percent, and the risk-free rate is 4.65 percent. Required: What must the expected return on this stock be? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Expected return %
E(R) = Rf + ß( Rmarket - Rf ) Rf= Risk free rate = 4.65 % ß = Beta = 1.12 Rmarket = Expected return of market = 10.6 % E(R) = 4.65 + 1.12 (10.6 - 4.65) E(R) = 4.65 + 6.664 E(R) = 11.31%
What is the expected return for an asset with a beta of 1.1 if the risk free rate is 1.5% and the required rate of return on the market is 9.5%? 9.9% 10.1% 10.3% 9.7% 10.4%
EXPECTED RETURN = RISK FREE RATE + BETA (MARKET RETURN - RISK FREE RATE) = 1.5% + 1.1 (9.5% - 1.5%) = 1.5% + 8.8% = 10.30%
What is the expected return for an asset with annual returns for the last 12 years of: 4.5% 6.9% -13.2% 18.9% 24.9% -3.8% 14.2% -18.7% 1.9% 6.8% 14.1% 37.2% Not enough information 8.7% 9.12% 7.81% 8.51%
Expected Return 4.5+6.9-13.2+18.9+24.9-3.8+14.2-18.7+1.9+6.8+14.1+37.2/12 7.808333 The Expected Return is 7.81%
What is the beta for an asset with an expected return of 12.5% if the risk free rate is 2.0% and the market risk premium is 7.5%?
Expected Return = 12.5% Risk Free Rate, Rf = 2% Market Risk Premium, Rm-Rf = 7.5% Expected Return = Rf + (Rm - Rm) beta 12.5 = 2 + (7.5 * beta) 7.5 * beta = 10.5 beta = 10.5 / 7.5 beta = 1.4
Consider the following information: Probability RoR .29 -.09 .71 .21 Calculate the expected return
Expected return = 0.29*-0.09 + 0.71*0.21 = -0.0261+0.1491 = 0.123 = 12.3 % Explanantion: Expected return for a portfolio is calculated by multiplying the rate of return with the prabability for each individual stock and then addiing the return derived from each individual stock to derive the expected return of the portfolio.
Which one of the following is the equity risk arising from the capital structure selected by a firm? Liquidity Risk Strategic Risk Financial Risk Business Risk Industry Risk
Financial Risk
Which one of the following terms is inclusive of both direct and indirect bankruptcy costs? Financial distress costs Capital structure costs Financial leverage Homemade leverage Cost of capital
Financial distress costs
Which one of the following statements concerning financial leverage is correct? Financial leverage increases profits and decreases losses. Financial leverage has no effect on a firm's return on equity. Financial leverage refers to the use of common stock. Financial leverage magnifies both profits and losses. Increasing financial leverage will always decrease the earnings per share.
Financial leverage magnifies both profits and losses.
Which one of the following is the equity risk arising from the capital structure selected by a firm? Strategic risk Financial risk Liquidity risk Industry risk Business risk
Financial risk
Which of the following are inversely related to increases in a firm's current assets? I. Reorder costs II. Shortage costs III. Restocking costs IV. Carrying costs I and III only II and IV only I, II, and III only II, III, and IV only I, III, and IV only
I, II, and III only
Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital? Decrease in the book value of a firm's equity Decrease in a firm's tax rate Increase in the market value of the firm's common stock Increase in the market risk premium Increase in the firm's beta
Increase in the market value of the firm's common stock
Which one of the following terms applies to the costs incurred by a firm that is trying to avoid filing for bankruptcy? Indirect bankruptcy costs Direct bankruptcy costs Static theory cost Optimal capital structure cost Reorganization costs
Indirect bankruptcy costs
Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship? Static theory of interest rates M&M Proposition I Financial risk Interest tax shield Homemade leverage
Interest tax shield
Which one of the following is a direct bankruptcy cost? Loss of customer goodwill resulting from a bankruptcy filing Legal and accounting fees related to a bankruptcy proceeding Management time spent on a bankruptcy proceeding Any financial distress cost Costs a firm spends trying to avoid bankruptcy
Legal and accounting fees related to a bankruptcy
Which one of the following is a direct bankruptcy cost? Any financial distress cost Management time spent on a bankruptcy proceeding Legal and accounting fees related to a bankruptcy proceeding Loss of customer goodwill resulting from a bankruptcy filing Costs a firm spends trying to avoid bankruptcy
Legal and accounting fees related to a bankruptcy proceeding
Which industry is most apt to have the shortest operating cycle? Furniture store Toy store Plastics manufacturer Local restaurant
Local restaurant
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with ten years to maturity that is quoted at 111.5 percent of face value. The issue makes semiannual payments and has an embedded cost of 8.8 percent annually. What is the company's pretax cost of debt? If the tax rate is 35 percent, what is the aftertax cost of debt?
Maturity: 10 Price % of Face Value: 111.5 Coupon Rate: 8.8 Tax Rate: 35 Price: 111.5%*1000=1,115 Coupon: 8.8*1000=88 N=yrs*2=20 I/Y=? PV=1115 PMT= Coupon/2=44 FV= 1000 I/YR= 3.5846 YTM= Semiannual yield*2=3.5846*2=7.1693 or 7.17 After-tax cost of debt=YTM*(1-tax rate)=7.1693*.65= 4.66 So, 7.17 and 4.66
What is the portfolio beta for a pool of investments as follows: Asset Investment Beta A $1,000 .75 B $2,000 1.20 C $3,000 1.95
Portfolio Beta = [Sum of (Beta of each investment x Amount of each investment)] / [Sum of Amount of each investment] = [(1000 x 0.75) + (2000 x 1.20) + (3000 x 1.95)] / [1000+2000+3000] = 1.50
Which one of the following is a use of cash? Selling inventory at cost Paying a supplier for inventory you purchased last month Borrowing money from a local bank Collecting payment from a customer Selling a fixed asset such as a piece of machinery
Paying a supplier for inventory you purchased last month
Halestorm Corporation's common stock has a beta of 1.27. Assume the risk-free rate is 5.2 percent and the expected return on the market is 12.7 percent. What is the company's cost of equity capital?
R=Rf+Beta*(Rm-Rf) Rf=5.2% Beta=1.27 Rm=12.7% =5.2+1.27*(12.7-5.2)=14.725
Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision? Amount of debt used to finance the project Use, or lack, of preferred stock as a financing option Mix of funds used to finance the project Risk level of the project Length of the project's life
Risk level of the project
Assume the economy has a 12 percent chance of booming, a 4 percent chance of being recessionary, and being normal the remainder of the time. A stock is expected to return 18.7 percent in a boom, 14.4 percent in a normal economy, and lose 12 percent in a recession. What is the expected rate of return on this stock? 8.78 percent 9.43 percent 9.97 percent 13.86 percent 11.48 percent References Multiple Choice
Scenarios Probability Returns Expected Return Booming 12 18.7 2.24 Recession 4 -12 -.48 Normal 84 14.4 12.10 13.86%
What is the expected return for an asset with the following probabilities and returns: Economy Probability Return Poor 10% -20% Sluggish 25% -5% Moderate 30% 12% Good 25% 24% Boom 10% 55% 11.85% 11.45% 12.00% 12.25% Not enough information
See pic "Quiz 11-2" Expected Return is 11.85% Economy Probability E(r) Weighted Return Poor 10% -20.0000% -2.00% Sluggish 25% -5.0000% -1.25% Moderate30% 12.0000% 3.60% Good 25% 24.0000% 6.00% Boom 10% 55.00% 5.50% 1.00 11.85%
You have a portfolio with the following: Stock Number of Shares Price Expected Return W 1,125 $ 62 14 % X 1,025 39 18 Y 775 75 16 Z 1,000 60 17 What is the expected return of your portfolio?
Stock # of shares $ value Weight E(r) Weight*E(r) W 1126 62 69750 0.30612245 14% 0.04285714 X 1025 39 39975 0.17544437 18% 0.03157999 Y 775 75 58125 0.25510204 16% 0.04081633 Z 1000 60 60000 0.26333114 17% 0.04476629 Total 227850 0.16001975 Expected return of portfolio 16%
Which one of the following is correct based on the static theory of capital structure? The costs of financial distress decrease the value of a firm. The more debt a firm assumes, the greater the incentive to acquire even more debt until such time as the firm is financed with 100 percent debt. A firm receives the greatest benefit from debt financing when its tax rate is relatively low. A debt-equity ratio of 1 is considered to be the optimal capital structure.
The costs of financial distress decrease the value of a firm.
Which one of the following statements concerning capital structure weights is correct? Target capital structure rates for a firm are irrelevant to individual projects. The weights are unaffected when a bond issue matures. An increase in the debt-equity ratio will increase the weight of the common stock. The repurchase of preferred stock will increase the weight of debt. The issuance of additional shares of common stock will increase the weight of both the common and preferred stock.
The repurchase of preferred stock will increase the weight of debt.
Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms? The levered firm has higher EPS than the unlevered firm at the break-even point. The levered firm will have higher EPS than the unlevered firm at all levels of EBIT. The unlevered firm will have higher EPS than the levered firm at relatively high levels of EBIT. The EPS for the unlevered firm will always exceed those of the levered firm. The unlevered firm will have higher EPS at relatively low levels of EBIT.
The unlevered firm will have higher EPS at relatively low levels of EBIT.
Suppose Hornsby Ltd. just issued a dividend of $2.59 per share on its common stock. The company paid dividends of $2.09, $2.16, $2.33, and $2.43 per share in the last four years. If the stock currently sells for $78, what is your best estimate of the company's cost of equity capital using arithmetic and geometric growth rates?
To use the dividend growth model, we first need to find the growth rate in dividends. So, the increase in dividends each year was: g =(2.16-2.09)/2.09 = 0.03 or 3.3% g =(2.33-2.16)/2.16 = 0.08 or 7.9% g=(2.43-2.33)/2.33 =0.04 or 4.3% g =(2.59-2.43)/2.43 = 0.07 or 6.6% So, the average arithmetic growth rate in dividends was: g = (0.03+0.08+0.04+0.07)/4= 0.055 or 5.5% Using this growth rate in the dividend growth model, we find the cost of equity is: RE = [$2.59(1.055)/$78 +0.055 = 0.090 or 9.00% Calculating the geometric growth rate in dividends, we find: $2.59 = $2.09(1 + g)4 g = .055or 5.5% The cost of equity using the geometric dividend growth rate is: RE = [$2.59(1.055)/$78] + .0.055 = 9.00%
Kaelea, Inc., has no debt outstanding and a total market value of $153,000. Earnings before interest and taxes, EBIT, are projected to be $9,500 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. The company is considering a $45,300 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,100 shares outstanding. Ignore taxes for this problem. a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. b. Calculate the percentage changes in EPS when the economy expands or enters a recession. Assume the company goes through with recapitalization. c. Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization. d. Calculate the percentage changes in EPS when the economy expands or enters a recession
Total MV: 153000 Debt issue at 5%:45300 Shares: 5100 Shares repurchased:45300/30=1510 Share $: 153000/5100=30 New Shares Outst: 5100-1510=3590 -35% 20% Recession Norm Expansion EBIT: 9500*(1-.35)=6175 9500 500*1.2=11400 Int: 0 0 0 NI: 6175 9500 11400 EPS:6175/5100=1.21 9500/5100 11400/5100=2.24 %Change: -.35 =1.86 .20 Recapitalization: Recession Norm Expansion EBIT: 9500*(1-.35)=6175 9500 500*1.2=11400 Int: 5%*45300=2265 2265 2265 NI: 3190 7235 9135 EPS: /3590=1.21 /5100=2.02 /5100=2.54 %Change: -.67 .264
You are considering a portfolio with the following investments: Investment Amount A 2,500 B 3,500 C 4,500 D 6,500 What is the portfolio weight of Investment "C" in the portfolio? Put your answer as a whole number with 2 decimal places to express the percentage and leave off the % symbol. That is, if the correct answer is 37.52%, enter 37.52; not .3752 or 37.52%.
Total Portfolio value= Investment in A+ Investment in B+ Investment in C+ Investment in D Total Portfolio value= 2,500 + 3,500 + 4,500 + 6,500 Total Portfolio value= 17,000 portfolio weight of Investment "C" in the portfolio = Investment in C/Total Portfolio value = 4,500/17,000 = 0.26470 =26.47 So weight of Investment "C" in the portfolio in % is 26.47
What are the portfolio weights for a portfolio that has 165 shares of Stock A that sell for $90 per share and 140 shares of Stock B that sell for $106 per share?
Total portfolio: (165*90) + (140*106) = 14850 + 14840 = 29690 Weight of Stock A: 14850 / 29690 = 0.7196 = 0.5002 Weight of Stock B: 14840 / 29690 = 0.2804 = 0.4998
Which one of the following is minimized when the value of a firm is maximized? Return on equity WACC Debt Taxes Bankruptcy costs
WACC
Which one of the following is minimized when the value of a firm is maximized? WACC Debt Taxes Bankruptcy costs Return on Equity
WACC
Bargeron Corporation has a target capital structure of 61 percent common stock, 6 percent preferred stock, and 33 percent debt. Its cost of equity is 13.6 percent, the cost of preferred stock is 6.6 percent, and the pretax cost of debt is 8.3 percent. The relevant tax rate is 34 percent. What is the company's WACC? What is the aftertax cost of debt?
WACC = 10.50% After tax cost of debt = 5.48% Weight of common stock = 61% Weight of Preferred stock = 6% Weight of Debt = 33% Cost of Equity = 13.60% Cost of Preferred stock = 6.6% Cost of Debt = 8.3% Tax rate = 34% Weighted Average Cost of Capital (WACC) = Weight of equity * cost of equity + weight of preferred stock * cost of preferred stock + weight of debt * cost of debt * (1-tax rate) WACC = 0.61 * 0.136 + 0.06*0.066 + 0.33 * 0.083 * (1-0.34) = 0.08296 + 0.00396 + 0.0180774 = 0.1049974 or 10.50% (rounded off) After tax cost of debt = 0.083 * (1-0.34) = 0.05478 or 5.48% (rounded off)
Bonaime, Inc., has 7.9 million shares of common stock outstanding. The current share price is $62.90, and the book value per share is $5.90. The company also has two bond issues outstanding. The first bond issue has a face value of $71.9 million, a coupon rate of 7.4 percent, and sells for 88.5 percent of par. The second issue has a face value of $36.9 million, a coupon rate of 8.4 percent, and sells for 87.5 percent of par. The first issue matures in 18 years, the second in 10 years. The most recent dividend was $3.80 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 40 percent. What is the company's WACC?
WACC= (E/V)*Re+(P/V)*Rp+(D/V)*Rd*(1-Tc) .....................???
What is the weighted average cost of capital for a firm with a debt to equity ratio of 1.0 if their bonds yield 8.5%, the stock has a required rate of return of 14.5% and the marginal tax rate for the firm is 40%? 9.8% 11.5% 12.8% 8.8%
Weight of debt = 1/(1+1) = 0.50 Weight of equity = 1/(1+1) = 0.50 WACC = [8.5 x (1-0.40) x 0.5)] + [14.5 x 0.50] 9.8%
What is the after tax cost of debt if the marginal tax rate is 30% and the yield to maturity on long-term bonds is 8.0%? 2.4% 8.0% 8.1% 5.60%
YTM= 8% Tax rate= 30% After tax cost of debt= 8*(1-.3)= 5.60%
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $7.67 million after taxes. In five years, the land will be worth $7.97 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.28 million to build. The following market data on DEI's securities are current: Debt: 45,700 7 percent coupon bonds outstanding, 22 years to maturity, selling for 94.3 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 757,000 shares outstanding, selling for $94.70 per share; the beta is 1.27. Preferred stock: 35,700 shares of 6.3 percent preferred stock outstanding, selling for $92.70 per share. Market: 7.1 percent expected market risk premium; 5.3 percent risk-free rate. DEI's tax rate is 30 percent. The project requires $860,000 in initial net working capital investment to get operational. a)Calculate the project's Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. b)The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +3 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. c)The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.57 million. What is the aftertax salvage value of this manufacturing plant? d)The company will incur $2,370,000 in annual fixed costs. The plan is to manufacture 13,700 RDSs per year and sell them at $11,100 per machine; the variable production costs are $10,300 per RDS. What is the annual operating cash flow, OCF, from this project? e)Calculate the project's net present value f)Calculate the project's internal rate of return.
a) Cost of land: 7,000,000 Cost of plant: NWC: 860,000
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following: Pay 1.99 percent per quarter on any funds actually borrowed. Maintain a 2 percent compensating balance on any funds actually borrowed. Pay an up-front commitment fee of 0.21 percent of the amount of the line. Based on this information, answer the following: a. Ignoring the commitment fee, what is the effective annual interest rate on this line of credit? b. Suppose your firm immediately uses $229 million of the line and pays it off in one year. What is the effective annual interest rate on this $229 million loan?
a) EAR=(1+interest rate)^4-1/1-compensating balance %= (1+0.0199)^4-1/1-.02=8.37% b)Calculate amount received Interest paid=amount borrowed* annual interest rate= 229000000*((1.0199^4)-1)= 18,779,772 Amount received= (1-compensating balance %)*Amount borrowed-commitment fee*line of credit= (1-.02)*229000000-.0021*400000000=223580000 EAR=interest paid/amount received 18779772/223580000=8.40%
Malkin Corp. has no debt but can borrow at 6.5 percent. The firm's WACC is currently 10 percent, and there is no corporate tax. a. What is the company's cost of equity? b. If the firm converts to 30 percent debt, what will its cost of equity be? c. If the firm converts to 55 percent debt, what will its cost of equity be? d. What is the company's WACC in parts (b) and (c)? WACC 30 percent: 55 percent:
a) WACC = Wd×Rd+We×Ke W is weights of respective portfolios R is return on respective portfolios Wd+We = 1 Ke = (WACC-Wd×Rd)÷We a) Ke = 10%% b) Ke = (10%-0.30×6.5%)÷0.70= 11.5% c) Ke = (10%-0.55×6.5%)÷0.45= 14.28% d) WACC = Wd×Rd+We×Ke W is weights of respective portfolios R is return on respective portfolios Wd+We = 1 30% debt: WACC = Wd×Rd+We×Ke = 0.30×6.5%+0.7×11.5% = 10% 55% debt: WACC = Wd×Rd+We×Ke = 0.55×6.5%+0.4×11.5% = 8.18%
Crosby Industries has a debt-equity ratio of 1.7. Its WACC is 8 percent, and its cost of debt is 3 percent. There is no corporate tax. a. What is the company's cost of equity capital? b. What would the cost of equity be if the debt-equity ratio were 2? c. What would the cost of equity be if the debt-equity ratio were .4? d. What would the cost of equity be if the debt-equity ratio were zero?
a)Cost of equity =( WACC - D/E ratio/(1+ D/E Ratio)*Cost of Debt)*(1+D/E Ratio) Cost of equity = (8%-1.7/(1+1.7)*3%)*(1+1.7) Cost of equity = 16.5% b)Cost of equity =( WACC - D/E ratio/(1+ D/E Ratio)*Cost of Debt)*(1+D/E Ratio) Cost of equity = (8%-2/(1+2)*3%)*(1+2) Cost of equity = 18% c)Cost of equity =( WACC - D/E ratio/(1+ D/E Ratio)*Cost of Debt)*(1+D/E Ratio) Cost of equity = (8%-0.4/(1+0.4)*3%)*(1+0.4) Cost of equity = 10% d)Cost of equity =( WACC - D/E ratio/(1+ D/E Ratio)*Cost of Debt)*(1+D/E Ratio) Cost of equity = (8%-0/(1+0)*3%)*(1+0) Cost of equity = 8%
The Jallouk Company has projected the following quarterly sales amounts for the coming year: Q1 Q2 Q3 Q4 Sales $630 $660 $720 $870 a. Accounts receivable at the beginning of the year are $390. The company has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following: Q1 Q2 Q3 Q4 Beginning receivables 390 Sales 630 660 720 870 Cash collections Ending receivables b. Accounts receivable at the beginning of the year are $390. The company has a 60-day collection period. Calculate cash collections in each of the four quarters by completing the following: Q1 Q2 Q3 Q4 Beginning receivables Sales 630 660 720 870 Cash collections Ending receivables c. Accounts receivable at the beginning of the year are $390. The company has a 30-day collection period. Calculate cash collections in each of the four quarters by completing the following: Q1 Q2 Q3 Q4 Beginning receivables Sales 630 660 720 870 Cash collections Ending receivables
a. Accounts receivable at the beginning of the year are $390. The company has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following: Q1 Q2 Q3 Q4 Beginning receivables 390 315 330 360 Sales 630 660 720 870 Cash collection A/R+(Sales* 645 690 795 45/90) =705 Ending receivables 390+630 330 360 435 -705=315 b. Accounts receivable at the beginning of the year are $390. The company has a 60-day collection period. Calculate cash collections in each of the four quarters by completing the following: Q1 Q2 Q3 Q4 Beginning receivables 390 420 440 480 Sales 630 660 720 870 Cash collections A/R+(Sales* 640 680 770 30/90) = 600 Ending receivables 420 440 480 580 c. Accounts receivable at the beginning of the year are $390. The company has a 30-day collection period. Calculate cash collections in each of the four quarters by completing the following: Q1 Q2 Q3 Q4 Beginning receivables 390 210 220 240 Sales 630 660 720 870 Cash collections A/R+(Sales* 60/90) = 810 650 700 820 Ending receivables 210 220 240 290
You've worked out a line of credit arrangement that allows you to borrow up to $60 million at any time. The interest rate is .577 percent per month. In addition, 2 percent of the amount that you borrow must be deposited in a noninterest-bearing account. Assume that your bank uses compound interest on its line-of-credit loans. a. What is the effective annual interest rate on this lending arrangement? b. Suppose you need $18.62 million today and you repay it in four months. How much interest will you pay?
a. EAR= [(1+r)^t]-1/(1-compensating balance) (1+.00577)^12 -1/(1-.02)=.07148/.98=.0729389 =7.29% b. Amount to Borrow= Amount required/(1-compensating balance)= 18,620,000/(1-.02)=18,620,000/.98= 19,000,000 Interest amount= [amount to borrow (1+monthly interest rate)^t]-amount to borrow= [19,000,000(1.00577)^4]-19,000,000=442,330
The length of time a retailer owes its supplier for an inventory purchase is called the: inventory period. accounts receivable period. accounts payable period. operating cycle. cash cycle.
accounts payable period.
The operating cycle is equal to the: inventory period plus the accounts payable period. accounts receivable period plus the cash cycle. inventory period minus the accounts payable period plus the accounts receivable period. accounts receivable period plus the inventory period. inventory period plus the cash cycle.
accounts receivable period plus the inventory period.
Systematic risk is defined as: any risk that affects a large number of assets. the total risk of an individual security. diversifiable risk. asset-specific risk. the risk unique to a firm's management
any risk that affects a large number of assets.
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the: squared deviation. beta coefficient. standard deviation. mean. variance.
beta coefficient.
Calvani, Inc., has a cash cycle of 40 days, an operating cycle of 56 days, and an inventory period of 23.5 days. The company reported cost of goods sold in the amount of $354,000, and credit sales were $577,000. What is the company's average balance in accounts payable and accounts receivable?
cost of goods sold = $354,000 Payables period = Operating cycle - Cash Cycle = 56 days - 40 days = 16 days Paybles Turnover = 365/Paybles period = 365/16= 22.8125 times accounts payable = COGS/Paybles Turnover = $354,000/22.8125= $15,517.81 ------------------------ Recievables period = Operating cycle - inventory period = 56 days - 23.5 days = 32.5 days credit sales = $577,000 Recievables Turnover = 365/Recievables period = 365/32.5 = 11.230769 times accounts Recievable = credit sales/Recievables Turnover = $577,000/11.230769= $51,376.71
The level of financial risk to which a frim is exposed is dependent on the firm's: level of EBIT return on assets debt to equity ratio operational risk
debt to equity ratio
The cash cycle is equal to _______ operating cycle minus the A/P period operating cycle minus the A/R period inventory period plus the A/R period inventory period minus the A/P period
operating cycle minus the A/P period
A stock has an expected return of 12.8 percent and a beta of 1.19, and the expected return on the market is 11.8 percent. What must the risk-free rate be?
rf risk-free rate ? rm 11.8 beta 1.19 12.8 = rf+1.19*(11.8-rf) Solve we get risk-free rate =6.53%
The account receivables period is the amount of time that elapses between the ____________ and the ___________. sale of inventory , collection of the account receivable purchase of inventory , payment to the supplier sale of inventory, billing to customer purchase of inventory, collection of the receivable
sale of inventory , collection of the account receivable