Finance 307 Exam 3

Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent. Free cash flow: What is Champagne's NOPAT for 2008?

$1,750,000

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? (Do not round intermediate calculations. Round final answer to two decimal places.)

$10.76 Expected dividends for Cortez, Inc., and their present value: D2 = D1(1 + g) = $2.50(1 + 0.07) = $2.675 D3 = D2(1 + g) = $2.675(1.07) = $2.862 D4 = D3(1 + g) = $2.862(1.07) = $3.063 D5 = D4(1 + g) = $3.063(1.07) = $3.277 Present value of the dividends = PV(D1) + PV(D2) + PV(D3) + PV(D4) + PV(D5) =$2.50(1.10)+$2.675(1.10)2+$2.862(1.10)3+$3.063(1.10)4+$3.277(1.10)5=$2.27+$2.21+$2.15+$2.09+$2.03=$10.76

Lincoln, Inc. expects to pay no dividends for the next four years. It has projected a growth rate of 35 percent for the next four years. After four years, the firm will grow at a constant rate of 6 percent. Its first dividend to be paid in year 5 will be worth $4.25. If your required rate of return is 20 percent, what is the stock worth today? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $32.18 B. $21.82 C. $14.64 D. $36.43

$14.64 gconstant = 6%; R = 20%; D5 = $4.25; D1 - D4 = 0 PV (D1) + PV(D2) + PV(D3) + PV(D4) = 0 P4=D5/(R-g)=$4.25/(0.20-0.06)=$30.36 P0= PV of dividends+P4 /(1+R)^4=0+($30.36/2.0736)=$14.64

FITCO is considering the purchase of new equipment. The equipment costs $331000, and an additional $104000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $271000, and it will have annual cash operating expenses of $81000. The equipment will be sold for $80000 after 5 years. An inventory investment of $75000 is required during the life of the investment. FITCO is in the 40 percent tax bracket, and its cost of capital is 9 percent. What is the project NPV?

$148,721.

Suppose a firm's expected dividends for the next three years are as follows: D1 = $1.10, D2 = $1.20, and D3 = $1.30. After three years, the firm's dividends are expected to grow at 5 percent per year. What should the current price of the firm's stock (P0) be today if investors require a rate of return of 12 percent on the stock? (Do not round intermediate calculations. Round off final answer to the nearest $0.01)

$16.74 P0 =$0.98 + $0.96 + $0.93 + $13.38 = $16.74

Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of equipment during the year while increasing its inventory by $300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent. Free cash flow: What is Provo's NOPAT for 2008?

$2,400,000

Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent. Free cash flow: What is Champagne's cash flow from operations for 2008?

$3,250,000

Provo, Inc., had revenues of $10 million, cash operating expenses of $5 million, and depreciation and amortization of $1 million during 2008. The firm purchased $500,000 of equipment during the year while increasing its inventory by $300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent. Free cash flow: What is Provo's cash flow from operations for 2008?

$3,400,000

Miles Cyprus Corp. purchased a truck that currently has a book value of $1,000. If the firm sells the truck for $5,000 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 30 percent marginal tax rate?

$3,800

A firm is considering taking a project that will produce $12 million of revenue per year. Cash expenses will be $5 million, and depreciation expenses will be $1 million per year. The project would also reduce the cash revenues of an existing project by $2 million. What is the free cash flow on the project, per year, if the firm is in the 40 percent marginal tax rate?

$3.4 million

Metasteel Limited Co. has a stable track record with sales that are not expected to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.) A. $13.50 B. $103.50 C. $39.30 D. $31.94

$31.94 D0 = $5.75; g = 0; R = 18% P0=D/R=$5.75/0.18=$31.94

BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

$36.86 g1 = 30%; g2 = 25%, g4 = 20%, g = 7%, D0 = $2.00, R = 16% D1 = $2.00(1.30) = $2.60, D2 = $2.60(1.25) = $3.25, D3 = $3.25(1.20) = $3.90 D4 = $3.90(1.07) = $4.173 P3 =(D4)/(R−g)=$4.1730.16-0.07=$46.37 P0 =D1/(1+R)^1+D2/(1+R)^2+D3/(1+R)^3+P3/(1+R)^3 P0 =$2.60/1.16+$3.25/(1.16)^2+($3.90+46.37)/(1.16)^3 P0 =$2.24 + $2.42 + $32.20 P0 =$36.86

Babaloo Nightclubs purchased a disco mirror that currently has a book value of $10,000. If Babaloo sells the disco mirror for $500 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 39 percent marginal tax rate?

$4,205

Jacob Suppliers has not paid out any dividend in the last three years. It does not expect to pay dividends in the next two years either as it recovers from an economic slowdown. Three years from now it expects to pay a dividend of $2.50 and then $3.00 in the following two years. What is the present value of the dividends to be received over the next five years if the discount rate is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.)

$4.85 Expected dividends for Jacobs Suppliers and their present value: D0 = D1 = D2 = $0; D3 = $2.50; D4 = $3.00; D5 = $3.00 Present value of the dividends = PV(D1) + PV(D2) +............+ PV(D5) =$0+$0+$2.50(1.15)3+$3.00(1.15)4+$3.00(1.15)5=$0+$0+$1.64+$1.72+$1.49=$4.85

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 P0 = D ÷ R = $4.50 ÷ 0.11 = $40.91.

The XYZ Corporation is expected to grow at a rate of 30% for the next two years and then settle at the industry median constant growth rate of 10%. If the company's last paid dividend was $1.50 per share, and the required rate of return is 15%, how much is the stock worth today? (Round your intermediate calculations and final answer to two decimal places.)

$44.01 D1:$1.5 × (1 + 0.30) 1.95 D2:$1.5 × (1 + 0.30)^2 2.54 D3:$2.53 × (1 + 0.10) 2.79 D4:$2.53 × (1 + 0.10)^2 3.07 P3:$3.07 ÷ (0.15 - 0.10) 61.40 Value of stock = ($1.95 ÷ 1.15) + ($2.53 ÷ 1.152) + ($61.40 ÷ 1.153) = $44.01

Operating Cash Flow: Premier Steel, Inc. is considering the purchase of a new machine for $100,000 that has a useful life of 3 years. The firm's cost of capital is 11.0% and the tax rate is 40%. This machine will be sold for its salvage value of $20,000 at the end of 3-years. The machine will require an investment of $2,500 in spare parts inventory upon installation. The machine will cost $8,000 to ship and $4,000 to install and modify it. Sales are as follows: year 1 = $90,000; year 2 = $97,500; year 3 = $105,000. Operating expenses are year 1 = $25,000; year 2 = $27,000; year 3 = $29,000. The investment in working capital will be liquidated at termination of the project at the end of year 3. MACRS Rates 33% 45% 15% 7% Using MACRS, what is the operating cash flow in year 1?

$53,784

What is the book value of a $1M asset at the end of Year 5? Use 5-Year MARCS class?

$57,600

A company's earnings and dividends are growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? (Do not round intermediate calculations. Round final answer to two decimal places.)

$58.31 R = 15%; D0 = $3.00; g= 8% P3 =D4/(R−g)=D0(1+g)^4/R-g= 3.00(1.08)^4/(0.15-0.08)= $58.31

Post Modern Distillery had purchased a truck that has a current book value of $10,000. If PoMo sells the truck for $4,000 today, find the impact of the sale on the cash flows. Assume a marginal tax rate of 39%?

$6,340

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? (Round the answer to two decimal places.)

$6.33 P0 = $63.25; g = 7%; R = 17% P0 =D1/R−g D1 =P0(R - g)=$63.25(0.17 - 0.07) = $6.325

The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end of next year. The firm expects the dividend to continue growing at the rate of 8% per year for the foreseeable future. If you require a return of 13% per year, the most you should pay for this stock is ______.

$63.00 P0 = D1 ÷ (R - g) = $3.15 ÷ (0.13 - 0.08) = $63.00

Amsted, Inc. is considering a project that will increase revenues by $2.5 million, cash operating expenses by $700,000, and depreciation and amortization by $300,000 during 2011. For this project, the firm will purchase $800,000 of equipment during the year while decreasing its inventory by $200,000 (with no corresponding decrease in current liabilities). The marginal tax rate for Amsted is 35 percent. What is this project's incremental after-tax free cash flow for 2011?

$675,000

Givens, Inc., is a fast-growing technology company that paid a $1.25 dividend last week. The company's expected dividend 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? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $6.46 B. $1.25 C. $8.37 D. $7.23

$7.23 Expected dividends for Givens, Inc., and their present value: D0 = $1.25 D1 = D0(1 + g) = $1.25(1.25) = $1.563 D2 = D1(1 + g) = $1.563(1.30) = $2.031 D3 = D2(1 + g) = $2.031(1.35) = $2.742 D4 = D3(1 + g) = $2.742(1.30) = $3.565 Present value of the dividends = PV(D1) + PV(D2) + PV(D3) + PV(D4) =$1.563/(1.12)+$2.031/(1.12)^2+$2.742/(1.12)^3+$3.565/(1.12)^4=$1.40+$1.62+$1.95+$2.27=$7.23

Marginal and average tax rates: Use the tax rate taken from Exhibit 11.6 to calculate the total taxes paid for Lansing, Inc., this year. Lansing's pretax income was $275,000.

$90,500

What is the depreciation tax savings formula:

(Depreciable Basis*MARCS%)*t

Dividends grow at different rate. What are the three different rates?

-Constant growth rate -Zero Growth Rate -Supernormal Growth Rate/Multiple Growth Phases

What are two Stock Market Indexes?

-Dow Jones Industrial Average -Standard & Poor's 500 Index

Why is common stock more difficult to value?

-The size and timing of dividends are less certain compared to coupon payments -The rate of return on common stock cannot be observed directly from the market -Common stock is a true perpetuity because it has no maturity date

Lululemon is considering the purchase of a new machine that makes yoga mats for $1M that has a useful life of 3 years(this is a 3-year project). The new machine is depreciated using the MARCS schedule. The machine costs $30,000 to ship, and another $20,000 to install it. The new yoga mat machine will be sold for its salvage value of $250,000(at the end of three years). The machine requires an investment of $10,000 in spare parts inventory upon installation. The firm's tax rate is 35%. 1. What is the machine's depreciable basis? 2. What is the machine's ICO? 3. What is the after-tax operating cash flows for interim years? 4. What is the after-tax salvage value at the end of year 3? 5. What is the terminal year, after-tax, non operating cash flow? 6. What is the NPV?

1. $1,050,000 2. $-1,060,000 3. Year 1: $135,488, Year 2: $176354, Year 3: $67,427 4. $189,732 5. $199,732 6. $-590,631.47

Starbucks is planning to buy a new espresso machine for $200,000. This new machine is expected to have a useful life of 5 years. It will cost $4,000 for delivery and $9,000 to have the new espresso machine fully operational. The espresso machine will require an investment of $3,000 in inventory upon installation. The new espresso machine will replace an older machine which was purchased 3 year ago for $100,000. It also had a useful life of 5 years. Assume a marginal tax rate of 34% 1. Calculate the initial cash outlay for the new machine,assuming the company will sell the old machine for $50,000 2. Now calculate the initial cash outlay for the new machine, but assume the company will sell the old machine for $20,000

1. -173,140 2.-192,940

Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.) A. 20% B. 16% C. 21% D. 13%

16% R =6.1115/37.35 = 16.4%

Use the tax rate taken from Exhibit 11.6 to calculate the average tax rate for Lansing, Inc., this year. Lansing's pretax income was $275,000.

32.9%

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? A. $42.64 B. $32.76 C. $29.17 D. $63.28

A. $42.64 The price in year two is [$1.75 (1.25)2(1.06)]/ (0.12-0.06) = $48.31. The present value in year two after which there is constant growth is $48.31/(1.12)2= $38.51 the present value of the mixed dividend growth cash streams is $2.1875/(1.12) + $2.7344/ (1.12)2 = $4.13. The total value is today's stock price = $4.13 + $38.51 = $42.64.

Like bonds preferred stocks.....

A. Dividends are fixed in amount B. Do not have voting rights C. Price movement is similar due to interest rate sensitivity

Like common stocks preferred stocks....

A. Have no fixed maturity date B. Failure to pay dividends does not lead to bankruptcy C. Dividends are not a tax-deductible expense

Which of the following is the best example of a sunk cost? A. Historical research and development costs. B. Future research and development costs. C. Future payments on a leased building. D. Historical noncash expenses.

A. Historical research and development costs.

Which of the following statements is NOT true about common stock? A. Owners of common stock are guaranteed dividend payments by the firm. B. Common-stock holders have the right to vote on the election of the board of directors of their company. C. Common-stock holders have limited liability toward the obligations of the corporation. D. Common stock is considered to have no fixed maturity.

A. Owners of common stock are guaranteed dividend payments by the firm.

The proper time to harvest an asset is when the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is: A. greater than the cost of capital. B. less than the cost of capital. C. 10 percent greater than the cost of capital. D. none of the above.

A. greater than the cost of capital.

The tax rate that should be used when forecasting cash flows from operations is the _____. A. marginal tax rate B. total tax rate C. average tax rate D. investment-related tax rate

A. marginal tax rate

A firm purchased an asset for $100,000, of which 70%, has been depreciated. Tax rate=40%. If the firm sells the asset for $10,000, calculate the firm's offsetting deduction and find the after-tax salvage value of the asset,

ATSV-$18,000

A firm purchased an asset for $100,000, of which 70% has been depreciated. Tax rate=40%. If the firm sells the asset for $40,000, calculate the firm's tax bill and find the after-tax salvage value of the asset.

ATSV-$36,000

Fifth Second Banc Corp. has issued preferred stock with no maturity date. It has a par value of $100 and pays a quarterly dividend of $3 per share. If the required rate of return is 10%, this stock is currently worth: A. $100. B. $30. C. $300. D. $120.

Annual dividend payments = $3 × 4 = $12; Value of preferred stock = $12 ÷ 0.10 = $120.

What does supernormal growth rate/Multiple growth phases assume?

Assumes dividends grow at 2 or more different growth rate.

What does the constant growth rate assume?

Assumes dividends will grow forever at a rate, g% is fixed

What does the zero growth rate assume?

Assumes dividends will grow forever at a rate, g% is zero, does not mean dividends

Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project? A. Variable costs. B. Sunk costs. C. Fixed costs. D. Depreciation and amortization.

B. Sunk costs.

Which of the following is the most typical example of a zero-growth dividend stock? A. The common stock of a firm in the biotechnology industry. B. The preferred stock of a utility company. C. The common stock of a firm in the information technology industry. D. The common stock of a firm in the health care industry.

B. The preferred stock of a utility company.

Preferred stock is sometimes treated like a debt security because: A. legally preferred stock is a debt security. B. preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings. C. preferred dividends are deductible from taxable income just like interest payments on bonds. D. preferred stock holders receive a residual value and not a stated value.

B. preferred dividend payments are similar to bond interest payments and are fixed in nature regardless of the firm's earnings.

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 percent? (Round off to two decimal places.) A. $23.06 B. $43.25 C. $65.88 D. $37.57

C. $65.88 Quarterly dividend = $1.40 Required rate of return = R = 8.5% P0=(1.40×4)/0.085=$65.88

Next year Jenkins Traders will pay a dividend of $3.00. It expects to increase its dividend by $0.25 in each of the following three years. If their required rate of return is 14 percent, what is the present value of their dividends over the next four years? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $11.63 B. $13.50 C. $9.72 D. $12.50

C. $9.72 Expected dividends for Jenkins Traders and their present value: D1 = $3.00; D2 = $3.25; D3 = $3.50; D4 = $3.75 Present value of the dividends = PV(D1) + PV(D2) + PV(D3) + PV(D4) =$3.00/(1.14)+$3.25/(1.14)^2+$3.50/(1.14)^3+$3.75/(1.14)^4=$2.63+$2.50+$2.36+$2.22=$9.72

General Mills just is undertaking an analysis on a new cereal. The firm realizes that if they come out with a new product it would affect sales of existing products? What is the best course of action for General Mills in this analysis? A. Ignore the fact that sales of other products will be affected. B. Include the allocated costs of the new cereal in the sales of the pre-existing products. C. Account for the reduction of sales from existing cereals in the projection of cash flows on the new product. D. Treat the reduction of sales from existing cereals as a sunk cost.

C. Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

Which of the following statements is true about secondary markets in the United States? A. In the United States, most secondary market transactions are done over the counter. B. In terms of total stock value of the firms listed, the NASDAQ is the largest in the world and the NYSE is the second largest. C. NASDAQ is an OTC (over-the-counter) market. D. Firms listed on the NASDAQ tend to be, on average, larger in size, and their shares trade more frequently than those traded on NYSE.

C. NASDAQ is an OTC (over-the-counter) market.

Whenever a project has a negative impact on an existing project's cash flows, then that effect should: A. be included if the impact is limited to noncash expenditures. B. be ignored. C. be included as a negative revenue amount on the new project's cash flow analysis. D. be ignored if the project is evaluated using the correct cost of capital.

C. be included as a negative revenue amount on the new project's cash flow analysis.

The value of a share of stock depends on A. an investor's risk tolerance limit. B. the credit rating of the firm. C. how often it will pay a dividend. D. how long an investor intends to keep it.

C. how often it will pay a dividend.

The term free cash flows refers to the fact that: A. the cash flows have been raised from the firm's retained earnings. B. the cash flows are not subject to any transactions costs. C. the cash flows are left over after the firm has made the necessary investments in working capital and long-term assets. D. all financial costs have been deducted from the cash flows.

C. the cash flows are left over after the firm has made the necessary investments in working capital and long-term assets.

The Smart Start Corporation recently paid a dividend of $3.00 per share. Management expects dividends to grow at a constant rate of 10% per year. If the required rate of return on the company's stock is 14%, how much would the stock be worth at the end of three years from today? (Do not round intermediate calculations. Round final answer to two decimal places) A. $82.50 B. $99.82 C. $21.42 D. $109.81

D. $109.81 P3 = D4 ÷ (R - g) = $3 × (1.10)4 ÷ (0.14 - 0.1) = $109.81

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.) A. $245 B. $100 C. $186 D. $112

D. $112

Starskeep, Inc., is a fast-growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return for such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $22.68 B. $30.30 C. $4.70 D. $15.63

D. $15.63 g1 = g2 = 40%, g3 = g4 = 20%, g = 8%, D1 = $1.25, R = 20% D1 = $1.25, D2 = $1.25(1.40) = $1.75, D3 = $1.75(1.20) = $2.10 D4 = $2.10(1.20) = $2.52, D5 = $2.52(1.08) = $2.722 P4 =D5/R−g=$2.722/(0.20-0.08)=$22.68 P0 =D1/(1+R)^1+D2/(1+R)^2+D3/(1+R)^3+D4/(1+R)^4+P4/(1+R)^4 P0 =$1.25/1.20+$1.75/(1.20)^2+$2.10/(1.20)^3+($2.52+22.68)(1.20)^4 P0 =$1.04 + $1.22 + $1.22 + $12.15 P0 =$15.63

Which of the following statements is true? A. In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R. B. a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy. C. The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock. D. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

D. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

Which of the following is an example of an OTC market? A. New York Stock Exchange B. London Stock Exchange C. Futures market D. NASDAQ

D. NASDAQ

Depreciation expense _____. A. increases taxable income and increases taxes B. decreases taxable income and increases taxes C. increases taxable income and decreases taxes D. decreases taxable income and decreases taxes

D. decreases taxable income and decreases taxes

The least efficient of all the different types of secondary markets is the: A. broker market. B. auction market. C. dealer market. D. direct search market.

D. direct search market.

The cash flows used in capital budgeting calculations are based on: A. historical estimates. B. forecasts of retained earnings available for financing projects. C. forecasts of net income. D. forecasts of future cash revenues, expenses, and investment outlays.

D. forecasts of future cash revenues, expenses, and investment outlays.

Preferred stock is sometimes considered to be a special type of debt rather than equity because A. if preferred stock dividends are not paid it would be legally viewed as a default. B. preferred stocks often have maturity. C. regular preferred stock confers voting rights. D. preferred stockholders receive a fixed dividend.

D. preferred stockholders receive a fixed dividend.

Assume a company just paid a dividend of $2 on its common stock and dividends are expected to decline at a constant rate of 4% a year,indefinitely. What is today's value of the company's stock, assuming a required rate of return of 13%?

D0=$2 g=-4% R=13% Do(1+g)/(R-g)=$2(1-4%)/(13%-(-4%))=$11.29

Ace, Inc.paid a dividend of $2.50 today. Similar stocks yield 15% and g is 5%. Estimate the stock price five years from today.

D0=$2.50 R=15% g=5% P5=(D6)/(R-g) N=6 I=5% PV=PV FV=3.35 P5=3.35/(15%-5%)=$33.5

Big Red Automotive paid a dividend pf $4.81 this year. The dividend is expected to increase by 4% annually and investors who own stock in similar firms require a return of 18%. What is the market value of the firm's stock?

D0=$4.81 g=4% R=18% P0=(D0(1+g))/(R-g) P0=($4.81(1+4%))/(18%-4%) P0=35.73

Del Mar Corporation pays $5 dividend per year, and the board of directors has no plans to change the dividend. The firm's investors require a 20% return on investment. What is the expected market price on the stock?

D=$5 g=0% R=20% P0=$5/20% P0=$25

Perpetual Preferred Stocks mean that......

Dividends are fixed,g=0$, and dividend payments go on forever

What is the difference between Dow Jones Industrial Average and Standard & Poor's 500 Index.

Dow Jones is top heavy representing 30 top company's (Blue Chip Stocks) while Standard & Poor's 500 Index uses 500 stocks as a representative and is used as a proxy to represent health of the market. Represents 75% of the total market value of all stocks.

Stock prices can be negative(True or False)

False

_______hold the largest share of equity securities, more than 36% of corporate equity

Households

We are analyzing the common stock a company called Sports Treasures, which specializes in selling sports memorabilia. We believe that they will have two distinct growth phases. For the next four years they will grow at a rate of 7% at which time they will begin to grow at a rate of 4% for the foreseeable future. The last dividend they paid was $5.50 per share of stock. The market's required rate of return is 12%. Estimate the market value of a share of stock.

NPV=$79.22

Preferred stock is often referred to as a _________ security because.......

Often referred to as a hybrid security because it has many characteristics of both common stock and bonds

Which of the following statements is true about common stock?

Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.

What is the formula for a constant growth dividend model?

P0=D1/(R-g)

What is the generalized constant growth model to find the value of a share of stock at any point in time?

Pt=D(t+1)/(R-g) to get D(t+1) you have to do D0(1+g)^(t+1)

The constant-growth dividend model is only valid when______

R>g

What do stocks represent?

They represent certificates of ownership in a corporation

Cash flows over a project's life should include depreciation and amortization expenses.(True or False)

True

Incremental cash flow from operations refers to the cash flow that a project is expected to generate after all operating expenses and taxes have been paid.(True or False)

True

If________, the denominator is ZERO and the value of the stock is INFINITE, which cannot occur.

g=R

If________, the denominator is NEGATIVE and the value of the stock is NEGATIVE, which cannot occur.

g>R

The constant-growth dividend model yields __________solutions when the dividend growth rate equals or exceeds the _________

invalid; discount rate

Preferred stock has __________over common stock in the payment of dividends and claims on assets.

preference

The US has a ______________ tax system.

progressive

Most preferred stocks make _______dividend payments

quarterly,so m=4

Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities). The marginal tax rate for Champagne is 30 percent. Free cash flow: What are Champagne's cash flows associated with investments for 2008?

$1,200,000 Cash flows associated with investments equal the purchase of tangible and intangible assets as well as increases in working capital. Therefore, the cash flows associated with investments equal $700,000 + $500,000 = $1,200,000.

The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

$2,092,432

A machine costs $1,000 and has a 3-year life. The estimated salvage value at the end of three years is $100. The project is expected to generate after tax-cash flows of $600 per year. If the required rate of return is 10%, what is the NPV of the project? (Do not round intermediate computations. Round final answer to the nearest whole number.)

$567

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? (Do not round intermediate computations. Round final answer to nearest dollar.)

$580,785

An investment of $115 generates after-tax cash flows of $50 in Year 1, $80 in Year 2, and $140 in Year 3. The required rate of return is 20 percent. The net present value is closest to

$63.24.

Juniper, Inc., is evaluating a new, independent project. The financial manager for has determined that the after-tax cash flows for the project will be as follows: Year 0:-$30,000 Year 1:$10,000 Year 2:$12,000 Year 3:$15,000 The firms discount rate is 13%. What is the NPV for this project?

-$1,356.92

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? (Do not round intermediate computations. Round final answer to nearest dollar.)

-$197,446

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? (Do not round intermediate computations. Round final answer to the nearest percent.)

15%

Boomer Biscuit Inc. needs to automate its production line. The project costs $275,000 and is expected to provide after-tax cash flows of $73,306 for eight years. Management estimates its cost of capital as 12 percent. What is the project's MIRR? (Do not round intermediate computations. Round final answer to the nearest whole percent.)

16%

The Easton manufacturing Company is looking to replace its conveyor belt system. A new system will cost $345,000, and will result in cost savings of $220,000 in the first year, followed by savings of $100,000 per year over the following 3 years. The payback period for this project is closest to: Round your answer to two decimal places.

2.25 years.

Initial Outlay Cash Flow in Period CF0--20,0007 CF1--730.857 CF2--730.857 CF3--730.857 CF4--730.857 The IRR is approximately:

20%.

Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Do not round intermediate computations. Round final answer to the nearest percent.)

23%

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 its acceptance period is three years, will this project be accepted? (Round your answer to two decimal places.)

3.33 years; no

Jackson Inc. is considering two mutually exclusive, equally risky projects S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates for the NPV method. What is the modified IRR (MIRR) for project S? WACC:7.50%Year01234 CFS-Year 0:-$1,100 Year 1:$550 Year 2:$600 Year 3:$100 Year 4:$100 CFL-Year 0:-$2,700 Year 1:$650 Year 2:$725 Year 3:$800 Year 4:$1,400

9.55%

Which of the following is one of the steps necessary for conducting a capital budgeting analysis of a project? A. Estimating the project's future cash flows B. Computing the debt-to-equity ratio of the firm C. Determining the systematic risk of the project D. Deciding on how the capital required will be raised

A. Estimating the project's future cash flows

Contingent projects would imply that: A. both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional. B. the projects can be either mandatory or optional. C. the acceptance of one project is dependent on the acceptance of the other. D. none of these.

A. both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional.

In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if: A. both the cash flows pattern is unconventional the projects are mutually exclusive. B. the cash flows pattern is unconventional. C. the projects are mutually exclusive. D. the projects are independent.

A. both the cash flows pattern is unconventional the projects are mutually exclusive.

Two projects are considered to be mutually exclusive if A. selecting one would automatically eliminate accepting the other. B. both selecting one would automatically eliminate accepting the other and the projects perform the same function. C. none of these. D. the projects perform the same function.

B. both selecting one would automatically eliminate accepting the other and the projects perform the same function.

Capital budgeting is the process of: A. determining how much capital a firm should raise. B. determining which capital investments a firm should make. C. keeping track of all the revenues and expenses incurred by a firm during the year. D. determining how much debt a firm should budget for in its capital structure.

B. determining which capital investments a firm should make.

Which of the following is a disadvantage of the payback method? A. It ignores cash flows beyond the payback period. B. It ignores the time value of money. C. It is inconsistent with the goal of maximizing shareholder wealth. D. All of these.

D. All of these.

What is the formula for perpetual preferred stocks?

P0=D/R

Which of the following is an advantage of the payback method? A. The technique is simple for managers to compute and interpret. B. It is a good measure of liquidity risk. C. Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk. D. None of the above

C. Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.

A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. If both projects are positive-NPV projects, then the firm should A. accept both projects because they are contingent projects. B. select the higher NPV project because they are mutually exclusive. C. accept both projects because they are independent projects. D. not enough information is given to make a decision.

C. accept both projects because they are independent projects.

The net present value: A. uses the discounted cash flow valuation technique. B. is consistent with the shareholder wealth maximization goal. C. all of these. D. will provide a direct measure of how much a firm's value will change because of the capital project.

C. all of these.

The internal rate of return is: A. both the discount rate that makes the NPV greater than zero and the discount rate that makes the NPV less than zero. B. the discount rate that makes the NPV less than zero. C. the discount rate that makes the NPV equal to zero. D. the discount rate that makes the NPV greater than zero.

C. the discount rate that makes the NPV equal to zero.

The capital budgeting process starts with a firm's: A. business plan. B. financial plan. C. sales forecast. D. strategic plan.

strategic plan.

Which of the following is a key disadvantage of the IRR method? A. The IRR method ignores all cash flows after the arbitrary cutoff period. B. With conventional cash flows, the IRR method can yield multiple answers. C. The IRR method is not based on a discounted cash flow technique. D. With mutually exclusive projects, the IRR method can lead to incorrect investment decisions.

D. With mutually exclusive projects, the IRR method can lead to incorrect investment decisions.

Capital rationing implies that: A. the available capital will be allocated equally to all available projects. B. none of these. C. funding needs are equal to funding resources. D. a firm has constraints to fund all of the available projects.

D. a firm has constraints to fund all of the available projects.

How do you find D1 from D0?

D0(1+g)

Juniper, Inc., is evaluating a new, independent project. The financial manager for has determined that the after-tax cash flows for the project will be as follows: Year 0:-$30,000 Year 1:$10,000 Year 2:$12,000 Year 3:$15,000 What is the project's IRR? The firms cost of capital is 13%, should you accept or reject this project?

IRR:10.49% REJECT

Assume a project will cost $100 today and will generate $10 in cash flows next year, $60 in year 2, and $80 in year 3. What is the rate of return on this project?

IRR:18.13%

Juniper, Inc., is evaluating a new, independent project. The financial manager for has determined that the after-tax cash flows for the project will be as follows: Year 0:-$30,000 Year 1:$10,000 Year 2:$12,000 Year 3:$15,000 If the firm's cost of capital is 13%, find the MIRR for this project

MIRR: 11.27%

E-Corp preferred has a par value of $100, a dividend of $10($2.50 quarterly), and an effective maturity of 20 years. If similar stocks yield 8%, what is the value of the stock?

N=20*4 I=8%/4 PV=?-($119.87) PMT=$2.50(10/4) FV=$100 par value M=4

You work for a company that manufactures frozen pizzas. A proposed project is to make lunch pizzas. The project would require an initial investment of $300,000 and an ongoing increase in expense of $220,000 per year. The project would generate $300,000 per year and the machine would have a salvage value of $30,000 in year 5. Assume that the company's cost of capital is 15%. What is the NPV of this project? Would you recommend that your company pursue this project?

NPV= $-16,912.29 Reject project

A company recently paid a dividend of $3.70 and this dividend is expected to grow by 2% next year, 4% the following year,6% the following year, and then grow at a constant rate of 8% every year after that. The investor's annual required rate of return is 15%. Find the intrinsic value of the stock.

NPV=$51.13

Which secondary market ranks #1 in total volume and total capitalization

NYSE

Northwest Airlines has perpetual preferred stock that pays a dividend of $5 per year. Investors required an 18% return on similar investments. What is the value of Northwest's preferred?

P0=D/R P0=$5/18% P0=$27.78

A company acquires an asset for $1M which falls in the MARCS three-year property class. If the tax rate is 35%, find the amount of depreciation tax savings for years 1-4

Year 1: $116,655 Year 2: $155,575 Year 3: $51,835 Year 4: $25,935

What does the bond valuation model do?

adds the present value of the dividend payments to the present value of the par value

Chipotle will increase revenues by $500,000 and operating expenses by $200,000 per year by selling Breakfast Burritos. The project will be depreciated over 3 years at $100,000 per year. If the firm accepts the project, it will reduce cash flows from their current Burrito project by $100,000. Capital expenditures will be $30,000 annually but no additional working capital will be needed. The firm's marginal tax rate is 35%. Calculate the after-tax cash flow from operations. Calculate FCF.

after-tax cash flow from operations: $165,000 FCF: 135,000

Preferred stock with a fixed maturity is prices using a___________

bond valuation model

Stocks are _______securities

equity

Bonds are _______securities

fixed income