FINANCIAL MANAGEMENT 3210 PROBLEMS

Over the past four years, the annual percentage returns on large-company stocks were 15, 7, 4, and 18 percent. For the same time period, U.S. Treasury bills produced the returns of 6, 3, 2, and 4 percent. Inflation averaged 2.8 percent over the four-year period. The average real rate of return on large-company stocks was _____________ percent as compared to _____________percent for Treasury bills.

7.98;0.92

Free Trade Partners needs to raise $22.4 million to expand its operations into South America. The company will sell new shares of common stock using a general cash offering. The underwriters will charge a spread of 7.6 percent, the administrative costs will be $631,000, and the offer price will be $32 per share. How many shares of stock must be sold if the firm is to raise the funds it desires?

778,916 shares

The Food Network needs to raise $16.8 million to expand its operations nationally. The company will sell new shares of common stock using a general cash offering. The underwriters spread will be 7.85 percent, the administrative costs will be $515,000, and the offer price will be $20 per share. How many shares of stock must be sold for the company to receive the expansion funds it needs?

939,501 shares

Which one of the following statements related to the static theory of capital structure is correct?

A firm's value is maximized when a firm operates at its optimal debt level.

Which one of the following best defines legal bankruptcy?

A legal proceeding for liquidating or reorganizing a business

A stock has had returns of −19.8 percent, 29.8 percent, 33.6 percent, −10.9 percent, 35.6 percent, and 27.8 percent over the last six years . What are the arithmetic and geometric returns for the stock?

AAR: 16.02: Geo: 13.58% Arithmetic average return = (−.198 + .298 + .336 − .109 + .356 + .278) ÷ 6 Arithmetic average return = .1602, or 16.02% Geo: [(1−.198)(1+.298)(1+.336)(1−.109)(1+.356)(1+.278)]16/−1 Geometric average return=[1−.1981+.2981+.3361−.1091+.3561+.278]16−1 Geometric average return=.1358,or13.58%

The Meadows Corporation needs to raise $66 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $60 per share and the company's underwriters charge a spread of 9 percent. The SEC filing fee and associated administrative expenses of the offering are $460,000. How many shares need to be sold?

Amt Needed: 66,000,000 Add: Admin Exp 460,000 Net Proceeds required after underwriters commission = 66,460,000 Underwriting spread: 9% Total Value of IPO= (net proceeds/(1-underwriters spread): 73,032,967 offer price per share: 60 Number of Shares= Amt to be received from IPO/offer price Numbers of Shares need to be sold to raise $66M is: 1,217,216.12

Global Traders is offering 130,000 shares of stock to the public in a general cash offer. The offer price is $36 a share and the underwriter's spread is 8 percent. The administrative costs are estimated at $865,000. How much will Global Traders receive from this stock offering as net proceeds assuming the issue is completely sold?

$3,440,600 130,000*36 - 130,000*36*8% - 865,000 = 3440600

Countess Corporation is expected to pay an annual dividend of $4.45 on its common stock in one year. The current stock price is $72.55 per share. The company announced that it will increase its dividend by 3.60 percent annually. What is the company's cost of equity?

$4.45/$72.55+3.60% =9.73%

Derry Corporation is expected to have an EBIT of $3,350,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $270,000, $175,000, and $275,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $22,000,000 in debt and 885,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.7 percent, indefinitely. The company's WACC is 9.1 percent and the tax rate is 23 percent. What is the price per share of the company's stock?

$48.68

Farmington Company can borrow at 6.55 percent. The company currently has no debt and the cost of equity is 10.95 percent. The current value of the firm is $610,000. The corporate tax rate is 23 percent. What will the value be if the company borrows $325,000 and uses the proceeds to repurchase shares?

$684,750

One year ago, you purchased a 7 percent coupon bond with a face value of $1,000 when it was selling for 102.5 percent of par. Today, you sold this bond for 104 percent of par. What is your total dollar return on this investment?

$85

Debbie's Cookies has a return on assets of 9.8 percent and a cost of equity of 11.3 percent. What is the pretax cost of debt if the debt-equity ratio is .92? Ignore taxes.

.113=.098+((.098-Rd)*.92) Rd= 8.17%

You currently own a portfolio valued at $76,000 that is equally as risky as the market. Given the information below, what is the beta of Stock C? Stock Value Beta A $ 13,800 1.21 B 48,600 1.08 C 8,400 ? Risk-free ? ?

.81

Asset W has an expected return of 13.6 percent and a beta of 1.37. If the risk-free rate is 4.62 percent, complete the following table for portfolios of Asset W and a risk-free asset.

0% 4.62% 0 25% 6.87% 0.343 50% 9.11 0.685 75% 11.36% 1.028 100% 13.60% 1.370 125% 15.85% 1.713 150% 18.05% 2.055

Given the following information, what is the variance of the returns on a portfolio that is invested 40 percent in both Stocks A and B, and 20 percent in Stock C? State of EconomyProbability of State OccurringRate of Return if State Occurs:Stock A (%)Stock B (%)Stock C (%)Boom.0815.89.421.2Normal.9210.68.610.4

0.000153

A stock had returns of 17.93 percent, −5.19 percent, and 20.42 percent for the past three years. What is the variance of the returns?

0.01994

Dani Corporation has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon rate of 7 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, has a coupon rate of 6 percent, and sells for 107 percent of par. The first issue matures in 25 years, the second in 8 years. Both bonds make semiannual coupon payments. What are the company's capital structure weights on a book value basis? What are the company's capital structure weights on a market value basis? Which are more relevant, the book or market value weights?

0.2105 0.7895 0.6740 0.3260 market value

Fama's Llamas has a WACC of 9.2 percent. The company's cost of equity is 11 percent, and its pretax cost of debt is 6.5 percent. The tax rate is 25 percent. What is the company's target debt-equity ratio?

0.4162

You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.19 and the total portfolio is equally as risky as the market. What must the beta be for the other stock in your portfolio?

1.81

You own a stock that had returns of 11.92 percent, −16.70 percent, 21.50 percent, 25.30 percent, and 9.10 percent over the past five years. What was the arithmetic average return for this stock?

10.22%

A stock has a beta of 1.04, the expected return on the market is 11.75 percent, and the risk-free rate is 3.75 percent. What must the expected return on this stock be?

12.07%

The Woods Company and the Koepka Company have both announced IPOs at $44 per share. One of these is undervalued by $11.00, and the other is overvalued by $5.25, but you have no way of knowing which is which. You plan on buying 1,200 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. Assuming you could get 1,200 shares in Koepka and 1,200 shares in Johnson, what would your profit be? What profit do you actually expect? What principle have you illustrated?

1200*11= 13,200 1200*(-5.25)= -6300 13,200-6300=6,900 b. 1300/2 = 600 600*11=6,600 6,600-6,300= 300 c. winner's curse

Ariana, Incorporated, is considering a project that will result in initial aftertax cash savings of $5.5 million at the end of the first year, and these savings will grow at a rate of 3 percent per year, indefinitely. The firm has a target debt-equity ratio of .54, a cost of equity of 13.4 percent, and an aftertax cost of debt of 6.8 percent. The cost-saving proposal is somewhat riskier than the usual project the firm undertakes; management uses the subjective approach and applies an adjustment factor of +3 percent to the cost of capital for such risky projects. Calculate the required return for the project. What is the maximum cost the company would be willing to pay for this project?

14.09% $49,613,402.07

Alpha Industries stock had returns of 17 percent, −11 percent, 9 percent, and 2 percent for four of the last five years, respectively. The average return of the stock over this period was 8.7 percent. What is the standard deviation of the stock's returns?

14.31%

Which statement is correct? 1. Straight bonds are more costly to issue than convertible bonds. 2. Seasoned equity offerings (SEOs) tend to be less costly than IPOs. 3. Taxes are an indirect underwriting cost. 4.The underwriters pay the spread. 5. The total direct cost as a percentage of gross proceeds for an IPO tends to decrease as the size of the offer decreases.

2. Seasoned equity offerings (SEOs) tend to be less costly than IPOs.

You purchased 400 shares of stock at a price of $55.77 per share. Over the last year, you have received total dividend income of $455. What is the dividend yield?

2.0%

Assume that, historically, U.S. Treasury bills had an average return of 3.5 percent as compared to 6.1 percent on long-term government bonds. During this same time period, assume inflation averaged 3.0 percent. What was the average nominal risk premium on the long-term government bonds?

2.6%

Northern Air would like to sell 5,500 shares of stock using Dutch auction underwriting. The bids received are: Bidder Quantity Price A 1,200 $ 29.75 B 1,300 29.40 C 1,700 29.25 D 1,900 28.90 E 2,100 28.70 How much will the company raise in its offer? Ignore all flotation and transaction costs.

28,90*5,500= 158,950 in order of ranking, we would give shares to A,B,C,D the price offered by D is last successful bid. since E has offered the lowest price & no shares given to E

An asset has an average return of 11.33 percent and a standard deviation of 24.18 percent. What is the most you should expect to earn in any given year with a probability of 2.5 percent?

59.69% Maximum gain = 11.33% + (2 × 24.18%) Maximum gain = 59.69%

Great Lakes Packing has two bond issues outstanding. The first issue has a coupon rate of 8 percent, matures in 6 years, has a total face value of $5 million, and is quoted at 101.2 percent of face value. The second issue has a 7.5 percent coupon, matures in 13 years, has a total face value of $18 million, and is quoted at 99 percent of face value. Both bonds pay interest semiannually. What is the firm's weighted average aftertax cost of debt if the tax rate is 21 percent?

6.04%

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below. If the corporate tax rate is 21 percent, what is the aftertax cost of the company's debt?

6.46%

Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6. The bonds mature in 8 years and pay an annual coupon payment of $90. What is the firm's aftertax cost of debt if the applicable tax rate is 21 percent?

6.89%

Three years ago, the Fairchildress Company issued 20-year, 7.75 percent semiannual coupon bonds at par. Today, the bonds are quoted at 102.6. What is this firm's pretax cost of debt?

7.48%

Which one of these is the best example of systematic risk?

Decrease in gross domestic product

Which term best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Diversification

Draiman Guitars is offering 190,000 shares of stock in an IPO by a general cash offer. The offer price is $28 per share and the underwriter's spread is 8.5 percent. The administrative costs are $430,000. What are the net proceeds to the company?

Net proceeds = [190,000 × $28 × (1 − .085)] − $430,000 Net proceeds = $4,437,800

The Elkmont Corporation needs to raise $52.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $44 per share and the company's underwriters charge a spread of 7 percent. How many shares need to be sold?

Numbers of shares to be issues = (44*x)-(44*x*0.07)-(

Dickson Corporation is comparing two different capital structures. Plan I would result in 38,000 shares of stock and $106,500 in debt. Plan II would result in 32,000 shares of stock and $319,500 in debt. The interest rate on the debt is 6 percent. Assume that EBIT will be $155,000. An all-equity plan would result in 41,000 shares of stock outstanding. Ignore taxes. What is the price per share of equity under Plan I? Plan II?

Plan I $35.50 Plan II $35.50

You have $18,200 to invest and would like to create a portfolio with an expected return of 11.25 percent. You can invest in Stock K with an expected return of 10.4 percent and Stock L with an expected return of 14.3 percent. How much will you invest in Stock K?

Portfolio return=Respective return*Respective weight 11.25=(x/18200*10.4)+(18200-x)/18200*14.3 (11.25*18200)=10.4x+260260-14.3x 204750=10.4x+260260-14.3x x=(260260-204750)/(14.3-10.4) =$14233.33

The Woods Company and the Koepka Company have both announced IPOs at $44 per share. One of these is undervalued by $11.00, and the other is overvalued by $5.25, but you have no way of knowing which is which. You plan on buying 1,200 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. Assuming you could get 1,200 shares in Koepka and 1,200 shares in Johnson, what would your profit be? What profit do you actually expect? What principle have you illustrated?

Profit: 1,200*11 -1,200*5.25= 6,900 Expected Profit: 600*11-1,200*5.25= 6,300 =300 Winner;s Curse

The Woods Company and the Koepka Company have both announced IPOs at $57 per share. One of these is undervalued by $17.50, and the other is overvalued by $8.50, but you have no way of knowing which is which. You plan on buying 1,850 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. Assuming you could get 1,850 shares in Koepka and 1,850 shares in Johnson, what would your profit be? . What profit do you actually expect? What principle have you illustrated?

Profit=1,850(17,50)-1,50(8.50) = 16,650 Expected Profit: 925*(17,50)-1850*(8,50)= 462.5 winner's curse

Consider the following table for a period of six years: Yr Large Company Stock T-Bill 1 -15.49% 7.45% 2 -26.71 8.07 3 37.39 6.03 4 24.09 5.87 5 -7.48 5.53 6 6.73 7.88 a-1. Calculate the arithmetic average returns for large-company stocks and T-bills over this time period. Calculate the standard deviation of the returns for large-company stocks and T-bills over this time period.

a-1. Large: 3.09% T-Bills: 6.81% a-2. Large: 24.40 T-Bills: 1.12%

Use the following returns for X and Y . Year Returns: X Y 1 21.3% 24.9% 2 −16.3 −3.3 3 9.3 26.9 4 18.6 −13.6 5 4.3 30.9

a. X: 7.44% Y: 13.16% b. X: 0.022399 Y: 0.040709 C. X: 14.95% Y: 20.18%

Consider the following information on Stocks I and II: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock IStock II Recession. .21. 015 −.31 Normal .56 .325 .23 irrational exuberance .23 .185 .41 The market risk premium is 11.1 percent, and the risk-free rate is 4.1 percent. Calculate the beta and standard deviation of Stock I.

a. 1.68 12.34 b. 1.05 25.2% c. stock 1 stock 2 stock 1

Consider the following information on large-company stocks for a period of years. Arithmetic Mean Large-company stocks 13.1% Inflation 3.6 What was the arithmetic average annual return on large-company stocks in nominal terms? What was the arithmetic average annual return on large-company stocks in real terms?

a. 13.10% the nominal return is the stated return, which is 13.15 b. 9.17% Fisher Equation (1+R)=(1+r)(1+h) r=1.1310/1.036-1 r= 9.17%

Consider the following information: State of Economy Probability of State of Economy Rate of Return if State Occurs Stock AStock BStock 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? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. What is the variance of a portfolio invested 29 percent each in A and B and 42 percent in C?

a. 15.45% b. 0.00184

Consider the following information for a period of years: Arithmetic Mean Long-term government bonds 7.1% Long-term corporate bonds 7.2 Inflation 4.2 What is the real return on long-term government bonds? What is the real return on long-term corporate bonds?

a. 2.78% 1.071/1.042-1=2.78% Fisher b. 2.88% 1.072/1.042-1= 2.88% Fisher

You own 400 of the 21,000 outstanding shares of DLK stock. The firm just announced that it will be issuing an additional 3,000 shares to the general public in a cash offer at $16 per share. What type of event are you participating in if you opt to purchase 100 of these additional shares?

seasoned equity offering

Which one of the following is the most apt to have the largest risk premium in the future based on the historical record for 1926-2020?

small-company stocks

All else constant, an increase in a firm's cost of debt:

will result in an increase in the firm's cost of capital.

The Tree House has a pretax cost of debt of 6.9 percent and a return on assets of 10.2 percent. The debt-equity ratio is .48. Ignore taxes. What is the cost of equity?

Re= .012+((.102-.069)*.48 Re=11.78%

Caitlyn is interested in purchasing 1,500 shares of ABC, Incorporated, when the shares are issued. Her broker just gave her a preliminary prospectus to review as she waits for the shares to be cleared for sale. What is the name of this prospectus?

Red herring

Which one of the following categories has the widest frequency distribution of returns for the period 1926-2020

Small-company stock s

What are the portfolio weights for a portfolio that has 170 shares of Stock A that sell for $91 per share and 145 shares of Stock B that sell for $110 per share?

Stock A: 0.4924 Stock B: 0.5076 Total value = 170($91) + 145($110) Total value = $31,420 The portfolio weight for each stock is: WeightA=170($91)$31,420WeightA=170($91)$31,420 WeightA=.4924, or 49.24% WeightA=.4924, or 49.24% WeightB=145($110)$31,420 WeightB=145($110)$31,420 WeightB=.5076, or 50.76%

Stock Y has a beta of 1.50 and an expected return of 16.0 percent. Stock Z has a beta of .95 and an expected return of 12.5 percent. If the risk-free rate is 4.95 percent and the market risk premium is 7.45 percent, are these stocks overvalued or undervalued?

Stock Y: overvalued Stock Z: Undervalued

Which statement is true? An increase in the market value of preferred stock will increase a firm's weighted average cost of capital. The cost of preferred stock is unaffected by the issuer's tax rate. Preferred stock is generally the cheapest source of capital for a firm. Preferred stock is valued using the capital asset pricing model. The cost of preferred stock remains constant from year to year.

The cost of preferred stock is unaffected by the issuer's tax rate.

Assume the SEC approved the registration statement for a new securities issue this morning. Which one of the following statements must be true about this issue?

The issuer is following all the required rules and regulations in regard to this issue.

Which one of the following correctly states a qualification an issuer must meet to be qualified to use Rule 415 for shelf registration?

The issuer must have an investment grade rating.

Assume the securities markets are strong form efficient. Given this assumption, you should expect which one of the following to occur?

The price of each security in that market will frequently fluctuate.

Suppose a stock had an initial price of $84 per share, paid a dividend of $1.50 per share during the year, and had an ending share price of $71.50. Compute the percentage total return. What was the dividend yield? What was the capital gains yield?

Total Return: -13.10% R = [($71.50 − 84) + 1.50] ÷ $84 R = −.1310, or −13.10% Div: 1.79% 1.50/84=.0179 Cap: -14.88% (71.50-84)/84= -.1488

The historical record for the period 1926-2020 shows that the annual nominal rate of return on:

U.S. Treasury bills has, on average, been positive for the period.

The Elkmont Corporation needs to raise $52.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $44 per share and the company's underwriters charge a spread of 7 percent. How many shares need to be sold?

Using X to stand for the required sale proceeds, the equation to calculate the total sale proceeds, including flotation costs is: X(1 − .07) = $52,800,000 X = $56,774,194 required total proceeds from sale So the number of shares offered is the total amount raised divided by the offer price, which is: Number of shares offered = $56,774,194 ÷ $44 Number of shares offered = 1,290,323

The Meadows Corporation needs to raise $66.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $68 per share and the company's underwriters charge a spread of 9 percent. How many shares need to be sold?

X(1 − .09) = $66,800,000 X = $73,406,593 So the number of shares offered is the total amount raised divided by the offer price, which is: Number of shares offered = $73,406,593 ÷ $68 Number of shares offered = 1,079,509

According to the efficient markets hypothesis, professional investors will earn:

a dollar return equal to the value paid for an investment.

Northern Wood Products is an all-equity firm with 18,700 shares of stock outstanding and a total market value of $360,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $30,000 if the economy is normal, $17,200 if the economy is in a recession, and $42,800 if the economy booms. Ignore taxes. Management is considering issuing $90,400 of debt with an interest rate of 6 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?

$.84 Shares repurchased = $90,400 ÷ ($360,000 ÷ 18,700) Shares repurchased = 4,695.78 shares Shares outstanding = 18,700 shares − 4,695.78 shares Shares outstanding = 14,004.22 shares EPS = [$17,200 − 90,400(.06)] ÷ 14,004.22 EPS = $.84

A stock has a beta of 1.24 and a reward-to-risk ratio of 5.97 percent. If the risk-free rate is 3.9 percent, what is the stock's expected return?

Reward to risk ratio = ( Expected return - risk free rate) / beta 0.0597 = ( Expected return - 0.039) / 1.24 0.074028 = Expected return - 0.039 Expected return = 0.1130 or 11.30%

Which one of the following represents the present value of the interest tax shield?

Tc * D

Lemansky Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 30 percent debt. There are currently 2,150 shares outstanding at a price per share of $70. EBIT is expected to remain constant at $20,000. The interest rate on new debt is 10 percent and there are no taxes. a) Rebecca owns $30,100 worth of stock in the company. If the firm has a 100 percent payout, what is her cash flow? b) What would her cash flow be under the new capital structure assuming that she keeps all of her shares? c) Suppose the company does convert to the new capital structure. Show how Rebecca can maintain her current cash flow.

a) $4,000 b) $4,24.29 c) 129

Modern Art Online is preparing to sell new shares of stock to the general public. As part of this process, the firm just filed the required paperwork with the SEC that contains the material information related to this issue of stock. What is the name associated with this paperwork?

registration statement

A stock has an expected return of 10.29 percent. Based on the following information, what is the stock's return in a boom state of the economy?

25.96%

Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. EBIT are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. Assume the firm has a tax rate of 23 percent. c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Calculate the percentage changes in ROE when the economy expands or enters a recession.

8.02% 10.03% 11.43% -20.00% 14.00

You are given the following information on Parrothead Enterprises: Debt:9,300 7.4 percent coupon bonds outstanding, with 21 years to maturity and a quoted price of 108.75. These bonds pay interest semiannually and have a par value of $2,000.Common stock:320,000 shares of common stock selling for $66.40 per share. The stock has a beta of 1.09 and will pay a dividend of $4.60 next year. The dividend is expected to grow by 5.4 percent per year indefinitely.Preferred stock:9,900 shares of 4.7 percent preferred stock selling at $95.90 per share. The par value is $100 per share.Market:10.1 percent expected return, risk-free rate of 4.55 percent, and a 24 percent tax rate.

8.22%

Regulation Insurance has a beta of .90, a dividend growth rate of 2.5 percent for the foreseeable future, a stock price of $47 per share, and an expected annual dividend of $.60 per share next year. The market rate of return is 13.9 percent, and the risk-free rate is 3.4 percent. What is the firm's average cost of equity?

8.31%

A firm has a cost of debt of 5.4 percent and a cost of equity of 14.9 percent. The debt-equity ratio is 1.20. There are no taxes. What is the firm's weighted average cost of capital?

9.72% WACC = .149(1 ÷ 2.20) + .054(1.20 ÷ 2.20) WACC = .0972, or 9.72%

Which one of the following is the equity risk arising from the daily operations of a firm?

business risk

Kurt, who is a divisional manager, continually brags that his division's required return for its projects is one percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division?

Kurt's division is less risky than the other divisions.

The Bert Corporation and Ernie, Incorporated, have both announced IPOs. You place an order for 750 shares of each IPO. One of the IPOs is underpriced by $16.00 and the other is overpriced by $6.75. You will receive all of the shares you ordered of the overpriced IPO, but only one-half of the shares you ordered of the underpriced IPO. What profit do you expect?

Loss from overpriced share: 750*6.76= -5,062.5 Gain from underpriced share: 750*16/2=6,000 overall profit: -5,062.5+6,000 = 937.5

There is 12 percent probability of recession, 13 percent probability of a poor economy, 45 percent probability of a normal economy, and 30 percent probability of a boom. A stock has returns of −19.4 percent, 3 percent, 10.8 percent, and 26.5 percent in these states of the economy, respectively. What is the stock's expected return?

expected return= respective return * respective probability .12*-19.4 .13*3 .45*10.8 .30*26.5 =10.87%

Which one of the following will decrease the aftertax cost of debt for a firm?

increase in tax rates

A firm that uses its weighted average cost of capital as the required return for all of its investments will:

increase the risk level of the firm over time.

a prepack:

is the joint filing of both a bankruptcy filing and a creditor-approved reorganization plan.

Venture capital is most apt to be the source of funding for a:

new, high-risk venture

You purchased shares of stock one year ago at a price of $64.13 per share. During the year, you received dividend payments of $2.09 and sold the stock for $71.25 per share. If the inflation rate during the year was 2.71 percent, what was your real return?

nominal rate of return = (71.25 + 2.09)/64.13 - 1 = 14.36% real rate = 1.1436/1.0271 - 1 = 11.34%

Farmer's Supply is considering opening a clothing store, which would be a new line of business for the firm. Management has decided to use the cost of capital of a similar clothing store as the discount rate to evaluate this proposed expansion. Which one of the following terms describes this evaluation approach?

pure play approach

Diversifying a portfolio across various sectors and industries might do more than one of the following. However, this diversification must do which one of the following?

reduce the portfolio's unique risk

Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process. Which one of the following terms best applies to this situation?

reorganization

The Meadows Corporation needs to raise $66 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $60 per share and the company's underwriters charge a spread of 9 percent. The SEC filing fee and associated administrative expenses of the offering are $460,000. How many shares need to be sold?

$1,217,216 X(1 − .09) = $66,000,000 + 460,000 X = $73,032,967 required total proceeds from sale Number of shares offered = $73,032,967 ÷ $60 Number of shares offered = 1,217,216

Mushroom Veggie Meats would like to sell 3,000 shares of stock using a Dutch auction. The bids received are as follows: Bidder Quantity Price A 500 45 B 700 44 C 1,000 43 D 1,500 42 What is the total amount the issuer will receive from this auction? Ignore costs.

$126,000

The Woods Company and the Koepka Company have both announced IPOs at $54 per share. One of these is undervalued by $16.00, and the other is overvalued by $7.75, but you have no way of knowing which is which. You plan on buying 1,700 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. Assuming you could get 1,700 shares in Koepka and 1,700 shares in Johnson, what would your profit be? What profit do you actually expect? What principle have you illustrated?

1,700 * $16.00 = $27,200. 1,700 * (-$7.75) = -$13,175 total profit = 27,200-13,175= $14,025. b. 1700/2 = 850 850*16= 13,600 13,600-13,175= 425 Winner's Curse

A stock has an expected return of 15.8 percent, the risk-free rate is 6.3 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

1.270 .158=.063+0.75B

You have compiled the following information on your investments. What rate of return should you expect to earn on this portfolio? Stock Shares Price Expected Re A 500 $ 51 13.6% B 200 66 14.8% C 300 42 7.5% D 250 29 2.1%

11.13%

A stock produced returns of 14 percent, 17percent, and −1 percent over three of the past four years, respectively. The arithmetic average for the past four years is 6 percent. What is the standard deviation of the stock's returns for the four-year period?

11.23%

Stock J has a beta of 1.06 and an expected return of 12.3 percent, while Stock K has a beta of .74 and an expected return of 6.7 percent. If you create portfolio with the same risk as the market, what rate of return should you expect to earn?

11.25%

Derry Corporation is expected to have an EBIT of $3,350,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $270,000, $175,000, and $275,000, respectively. All are expected to grow at 20 percent per year for four years. The company currently has $22,000,000 in debt and 885,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 2.7 percent, indefinitely. The company's WACC is 9.1 percent and the tax rate is 23 percent. What is the price per share of the company's stock?

48.68

You bought a share of 7.5 percent preferred stock for $91.60 last year. The market price for your stock is now $89.10. What is your total return to date on this investment?

5.46%

Casper's is analyzing a proposed expansion project that is much riskier than the firm's current operations. Thus, the project will be assigned a discount rate equal to the firm's cost of capital plus 2.5 percent. The proposed project has an initial cost of $18.1 million that will be depreciated on a straight-line basis to a zero book value over 20 years. The project also requires additional inventory of $428,000 over the project's life. Management estimates the facility will generate cash inflows of $2.46 million a year over its 20-year life. After 20 years, the company plans to sell the facility for an aftertax amount of $1.4 million. The company has 58,000 shares of common stock outstanding at a market price of $52 a share. This stock just paid an annual dividend of $2.84 a share. The dividend is expected to increase by 3.6 percent annually. The firm also has 15,000 shares of 9 percent preferred stock with a market

Accept; The NOV is $.7 million.

Tim's Tools just issued a dividend of $2.22 per share on its common stock. The company is expected to maintain a constant 2.8 percent growth rate in its dividends indefinitely. If the stock sells for $19 a share, what is the company's cost of equity?

Cost of equity=(D1/P0)+g where D1=dividend payable next year=(2.22*102.8%)=$2.28216 P0=current market price g=growth rate Hence cost=(2.28216/19)+0.028 =0.1481 =14.81%

The 5.25 percent preferred stock of Robert Bruce Security is selling for $50.26 a share. What is the firm's cost of preferred stock if the tax rate is 21 percent and the par value per share is $100?

Cost of preferred stock = Annual dividend / Price Cost of preferred stock = ($100 * 0.0525) / $50.26 Cost of preferred stock = 0.1045 or 10.45%

The Bert Corporation and Ernie, Incorporated, have both announced IPOs. You place an order for 750 shares of each IPO. One of the IPOs is underpriced by $16.00 and the other is overpriced by $6.75. You will receive all of the shares you ordered of the overpriced IPO, but only one-half of the shares you ordered of the underpriced IPO. What profit do you expect?

Expected profit = (750 × ½ × $16.00) − (750 × $6.75) Expected profit = $937.50

Northern Air would like to sell 5,500 shares of stock using Dutch auction underwriting. The bids received are: Bidder Quantity Price A 1,200 $ 29.75 B 1,300 29.40 C 1,700 29.25 D 1,900 28.90 E 2,100 28.70 How much will the company raise in its offer? Ignore all flotation and transaction costs.

Including Bidder D, the total number of shares bid is: Shares including Bidder D = 1,200 + 1,300 + 1,700 + 1,900 Shares including Bidder D = 6,100 All shares will be sold at Bidder D's price, so: Amount raised = $28.90 × 5,500 Amount raised = $158,950

Which one of these represents systematic risk?

Increase in consumption created by a reduction in personal tax rates

The stock in Bowie Enterprises has a beta of 1.14. The expected return on the market is 12.20 percent and the risk-free rate is 3.33 percent. What is the required return on the company's stock?

Required rate of return = Risk free rate + Beta x (Market rate of return - Risk free rate) = 3.33% + 1.14 x (12.20 - 3.33) % = 3.33% + 1.14 x 8.87% = 3.33% + 10.1118% = 13.44 %

Cross Town Cookies is an all-equity firm with a total market value of $4,187,100. The firm has 127,500 shares of stock outstanding. Management is considering issuing $300,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. The projected earnings before interest and taxes are $251,600. What are the anticipated earnings per share if the debt is issued? Ignore taxes. (Round the number of shares repurchased down to the nearest whole share.)

Shares repurchased = $300,000 ÷ ($4,187,100 ÷ 127,500) = 9,135 shares Shares outstanding = 127,500 − 9,135 = 118,365 shares EPS = [$251,600 − ($300,000 × .06)] ÷ 118,365 = $1.97 =$1.97

The Elkmont Corporation needs to raise $52.2 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $38 per share and the company's underwriters charge a spread of 7 percent. The SEC filing fee and associated administrative expenses of the offering are $1,462,000. How many shares need to be sold?

We include the $1,462,000 of expenses in the amount the company needs to raise, so: X(1 − .07) = $52,200,000 + 1,462,000 X = $57,701,075 required total proceeds from sale Number of shares offered = $57,701,075 ÷ $38 Number of shares offered = 1,518,449

The Telwar Company has just gone public. Under a firm commitment agreement, the company received $33.70 for each of the 4.27 million shares sold. The initial offering price was $36.10 per share, and the stock rose to $44.40 per share in the first few minutes of trading. The company paid $922,000 in legal and other direct costs and $284,000 in indirect costs. What was the flotation cost as a percentage of funds raised?

We need to calculate the net amount raised and the costs associated with the offer. The net amount raised is the number of shares offered times the price received by the company, minus the costs associated with the offer, so: Net amount raised = (4,270,000 shares)($33.70) − 922,000 − 284,000 Net amount raised = $142,693,000 The company received $142,693,000 from the stock offering. Now, we can calculate the direct costs. Part of the direct costs are given in the problem, but the company also had to pay the underwriters. The stock was offered at $36.10 per share, and the company received $33.70 per share. The difference, which is the underwriters spread, is also a direct cost. The total direct costs were: Total direct costs = $922,000 + ($36.10 − 33.70)(4,270,000 shares) Total direct costs = $11,170,000 We are given part of the indirect costs in the problem. Another indirect cost is the immediate price appreciation. The total indirect costs were: Total indirect costs = $284,000 + ($44.40 − 36.10)(4,270,000 shares) Total indirect costs = $35,725,000 This makes the total costs: Total costs = $11,170,000 + 35,725,000 Total costs = $46,895,000 The flotation cost as a percentage of the amount raised is the total cost divided by the amount raised, so: Flotation cost percentage = $46,895,000 ÷ $142,693,000 Flotation cost percentage = .3286, or 32.86%

When is a firm insolvent from an accounting perspective?

When the firm has a negative net worth

Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Assume for a certain time period, long-term corporate bonds had an average return of 6.8 percent and a standard deviation of 9.8 percent. For the same period, T-bills had an average return of 5.3 percent and a standard deviation of 4 percent. Use the NORMDIST What is the probability that in any given year, the return on long-term corporate bonds will be greater than 10 percent? Less than 0 percent? What is the probability that in any given year, the return on T-bills will be greater than 10 percent? Less than 0 percent? In one year, the return on long-term corporate bonds was −5.5 percent. How likely is it that such a low return will recur at some point in the future? T-bills had a return of 11.82 percent in this same year. How likely is it that such a high return on T-bills will recur at some point in the future?

a. 37.20% 24.39% b. 12% 9.26% c. 10.47% 5.16%

Consider the following table for an eight-year period: Year T-bill return Inflation 1 7.44% 8.56% 2 8.79 12.19 3 6.02 6.79 4 5.82 5.01 5 5.60 6.55 6 8.39 8.87 7 10.71 13.14 8 12.85 12.37 Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period. Calculate the standard deviation of Treasury bill returns and inflation over this time period. Calculate the real return for each year. What is the average real return for Treasury bills?

a. 8.20% 9.19 b. 2.57% 3.06 c. -1.03 -3.03 -0.72 0.77 -0.89 -0.44 -2.15 0.43 d. -0.88

A stock has a beta of 1.3 and an expected return of 12.8 percent. A risk-free asset currently earns 4.3 percent. What is the expected return on a portfolio that is equally invested in the two assets? If a portfolio of the two assets has a beta of .90, what are the portfolio weights? If a portfolio of the two assets has an expected return of 12 percent, what is its beta? If a portfolio of the two assets has a beta of 2.5, what are the portfolio weights?

a. 8.55% b. 0.6923 0.3077 c 1.18 d. 1.9231 -0.9231

You've observed the following returns on Pine Computer's stock over the past five years: −25.2 percent, 13.8 percent, 30.6 percent, 2.4 percent, and 21.4 percent. The average inflation rate over this period was 3.24 percent and the average T-bill rate over the period was 4.3 percent. What was the average real return on the stock? What was the average nominal risk premium on the stock?

a. 8.60% Arithmetic average return = (−.252 + .138 + .306 + .024 + .214) ÷ 5 Arithmetic average return = .0860, or 8.60% then (1 + R) = (1 + r)(1 + h) r¯�¯ = 1.0860 ÷ 1.0324 − 1 r¯�¯ = .0519, or 5.19% b. 4.30% Rp=.0860-.043= 4.30%

Use the following table: Average return Large stocks 12.02% Small stocks 16.72 Long-term corporate bonds 6.36 Long-term government bonds 6.10 U.S. Treasury bills 3.96 Inflation 3.10 Determine the return on a portfolio that was equally invested in large-company stocks and long-term corporate bonds.

a. 9.19% R = (12.02% + 6.36%) ÷ 2 R = 9.19% b. 10.34% R = (16.72% + 3.96%) ÷ 2 R = 10.34%

Over a particular period, an asset had an average return of 12.1 percent and a standard deviation of 20.5 percent. What range of returns would you expect to see 68 percent of the time for this asset? What about 95 percent of the time?

a. expect range of returns: -8.40%-32.60 b. expected range of returns: -28.90%-53.10%

A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. By doing so, the firm:

automatically gives preferential treatment in the allocation of funds to its riskiest division.

Fujita, Incorporated, has no debt outstanding and a total market value of $230,400. EBIT are projected to be $39,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $125,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,200 shares outstanding. The company has a tax rate of 22 percent, a market-to-book ratio of 1.0, and the stock price remains constant. Calculate earnings per share, EPS, under each of the three economic scenarios assuming the company goes through with recapitalization. Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession.

b) 5.24 7.46 8.66 -29.71% 16.10

The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:

beta coefficient

Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive?

cost of capital

A stock has a beta of 1.48 and an expected return of 17.3 percent. A risk-free asset currently earns 4.6 percent. If a portfolio of the two assets has a beta of .98, then the weight of the stock must be _____________ and the risk-free weight must be_____________.

stock expected return = 17.3% stock beta value = 1.48 risk free asset beta value is = 0 risk free asset return = 4.6 portfolio beta is = 0.98 let taken weight of the stock is X so weight of the risk free asset is = 1-X portfolio beta = stock weight*beta+riskfree weight*beta 0.98 = X*1.48+(1-X)*0 0.98= 1.48X+0 1.48X= 0.98 X = 0.66 66% weight of the risk free asset is = 1-0.66 = 0.34 = 34%

What range of returns should you expect to see with a 99 percent probability on an asset that has an average return of 11.03 percent and a standard deviation of 24.73 percent?

−63.16% to 85.22%

Cross Road Realty is an all-equity firm with 50,000 shares of stock outstanding and a total market value of $744,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $126,560 if the economy is normal, $74,000 if the economy is in a recession, and $156,000 if the economy booms. Ignore taxes. Management is considering issuing $200,000 of debt at a coupon rate of 6.5 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession? (Round the number of shares repurchased down to the nearest whole share.)

$1.67

Bluff City Sushi Distributors would like to issue new equity shares if its cost of equity declines to 16.5 percent. The company pays a constant annual dividend of $2.11 per share. What does the market price of the stock need to be for the firm to issue the new shares?

$12.79

You own a portfolio that has a total value of $180,000 and it is invested in Stock D with a beta of .90 and Stock E with a beta of 1.32. The beta of your portfolio is equal to the market beta. What is the dollar amount of your investment in Stock D?

$137,142.86

Vonte Company has a 21 percent tax rate. Its total interest payment for the year just ended was $15.1 million. What is the interest tax shield?

$3,171,000

Byrd Enterprises has no debt. Its current total value is $48.6 million. Assume debt proceeds are used to repurchase equity. Ignoring taxes, what will the company's value be if it sells $19.2 million in debt? Suppose now that the company's tax rate is 23 percent. What will its overall value be if it sells $19.2 million in debt?

$48,600,000 $53,016,000

You own a portfolio that is invested as follows: $22,575 of Stock A, $3,750 of Stock B, $12,500 of Stock C, and $5,800 of Stock D. What is the portfolio weight of Stock B?

22,575+3,750+12,500+5,800= 44,625 3,750/44,625*100 = 8.40%

An all-equity firm has a return on assets of 17.5 percent. The firm is considering converting to a debt-equity ratio of .40. The pretax cost of debt is 7.5 percent. Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?

.1750+((0.175-0.075)*.40) =21.50%

Here I Sit Sofas has 6,300 shares of common stock outstanding at a price of $86 per share. There are 830 bonds that mature in 22 years with a coupon rate of 6 percent paid semiannually. The bonds have a par value of $1,000 each and sell at 104.5 percent of par. The company also has 5,200 shares of preferred stock outstanding at a price of $39 per share. What is the capital structure weight of the debt?

.5381 CS: 6300*86=541,800 PS: 5200*39=202,800 Debt: 830*1000*1.045=867,350 541,800+202,800+867,350=1,611,950 867,350(debt)/1,611,950(total) = .5381

Kountry Kitchen has a cost of equity of 11.3 percent, a pretax cost of debt of 5.9 percent, and the tax rate is 24 percent. If the company's WACC is 8.80 percent, what is its debt-equity ratio?

.58 WACC = 0.880 = (1-Xd)(.113)+(Xd)(0.59)(1.24) .3668 .3668/(1-.3668) =.58

Occam Industrial Machines issued 125,000 zero coupon bonds 9 years ago. The bonds originally had 30 years to maturity with a yield to maturity of 6 percent. Interest rates have recently decreased, and the bonds now have a yield to maturity of 5.1 percent. The bonds have a par value of $2,000 and semiannual compounding. If the company has a $77.8 million market value of equity, what weight should it use for debt when calculating the cost of capital?

0.5274

Byrd Enterprises has no debt. Its current total value is $48.8 million. Assume the company sells $19.3 million in debt. Ignoring taxes, what is the debt-equity ratio? Assume the company's tax rate is 24 percent. What is the debt-equity ratio?

0.65 0.57

Salem Pet Supply would like to sell 1,400 shares of stock using the Dutch auction method. The bids received are as follows: Bidder C will receive _________shares and pay a price per share of _________.

0; $0 Since this exceeds the available shares, Bidder C will not receive any shares either.

Which of the following are important factors to consider when seeking a venture capitalist? 1. Exit strategy 2. Management style 3. Personal contacts 4. Financial strength

1, 2, 3, & 4

Northwestern Lumber Products currently has 23,000 shares of stock outstanding. Patricia, the financial manager, is considering issuing $168,000 of debt at an interest rate of 7.5 percent. Given this, how many shares of stock will be outstanding once the debt is issued if the break-even level of EBIT between these two capital structure options is $76,000? Ignore taxes.1

19,186.84 shares $76,000 ÷ 23,000 = [$76,000 − 168,000(.075)] ÷ X X = 19,186.84 shares

The Meadows Corporation needs to raise $66.2 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $62 per share and the company's underwriters charge a spread of 8 percent. How many shares need to be sold?

1,160,589 Using X to stand for the required sale proceeds, the equation to calculate the total sale proceeds, including flotation costs is: X(1 − .08) = $66,200,000 X = $71,956,522 So the number of shares offered is the total amount raised divided by the offer price, which is: Number of shares offered = $71,956,522 ÷ $62 Number of shares offered = 1,160,589

The Elkmont Corporation needs to raise $52.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $44 per share and the company's underwriters charge a spread of 7 percent. The SEC filing fee and associated administrative expenses of the offering are $1,468,000. How many shares need to be sold?

1,326,197 We include the $1,468,000 of expenses in the amount the company needs to raise, so: X(1 − .07) = $52,800,000 + 1,468,000 X = $58,352,688 required total proceeds from sale Number of shares offered = $58,352,688 ÷ $44 Number of shares offered = 1,326,197

The Elkmont Corporation needs to raise $52.7 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $43 per share and the company's underwriters charge a spread of 9.5 percent. How many shares need to be sold?

1,354,234 Using X to stand for the required sale proceeds, the equation to calculate the total sale proceeds, including flotation costs is: X(1 − .095) = $52,700,000 X = $58,232,044 required total proceeds from sale So the number of shares offered is the total amount raised divided by the offer price, which is: Number of shares offered = $58,232,044 ÷ $43 Number of shares offered = 1,354,234

The Meadows Corporation needs to raise $65.3 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $53 per share and the company's underwriters charge a spread of 9.5 percent. The SEC filing fee and associated administrative expenses of the offering are $453,000. How many shares need to be sold?

1,370,854 we include the $453,000 of expenses in the amount the company needs to raise, so: X(1 − .095) = $65,300,000 + 453,000 X = $72,655,249 required total proceeds from sale Number of shares offered = $72,655,249 ÷ $53 Number of shares offered = 1,370,854

Cross Town Cookies is an all-equity firm with a total market value of $775,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $194,000 of debt at an interest rate of 8 percent and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $70,400. What is the EPS if the debt is issued? Ignore taxes.

1.59 Shares repurchased = $194,000 ÷ ($775,000 ÷ 46,000) Shares repurchased = 11,514.84 shares Shares outstanding = 46,000 − 11,514.84 Shares outstanding = 34,485.16 shares EPS = [$70,400 − 194,000(.08)] ÷ 34,485.16 EPS = $1.59

Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. Earnings before interest and taxes, EBIT, are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Calculate the percentage changes in ROE when the economy expands or enters a recession.

10.42% 13.02% 14.84% -20.00% 14.00%

Musical Charts just paid an annual dividend of $1.84 per share. This dividend is expected to increase by 2.1 percent annually. Currently, the firm has a beta of 1.12 and a stock price of $31 a share. The risk-free rate is 4.3 percent, and the market rate of return is 12.3 percent. What is the cost of equity capital for this firm?

10.71%

You have gathered the following information on your investments. What is the expected return on the portfolio?

10.90%

Paneer Asphalt Materials pays a constant annual dividend of $1.26 per share on its stock. Last year at this time, the market rate of return on this stock was 14.9 percent. Today, the market rate has fallen to 12.5 percent. What would your capital gains yield have been if you had purchased this stock one year ago and then sold the stock today?

19.20%

The Woodworker has a pretax cost of debt of 6.25 percent and a return on assets of 15.5 percent. The debt-equity ratio is .41. Ignore taxes. What is the cost of equity?

19.29%

Western Electric has 27,000 shares of common stock outstanding at a price per share of $69 and a rate of return of 13.50 percent. The firm has 6,800 shares of 6.80 percent preferred stock outstanding at a price of $90.00 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $374,000 and currently sells for 106 percent of face. The yield to maturity on the debt is 7.78 percent. What is the firm's weighted average cost of capital if the tax rate is 24 percent?

11.19% CS: 27000*69=1,863,000 PS:6,800*90=612,000 debt: 1.060*374,000=369,440 total: 2,871,440 Rp=6.80/90= 7.56% WACC= 13.50%($1,863,000 ÷ $2,871,440) + 7.56%($612,000 ÷ $2,871,440) + 7.78%($396,440 ÷ $2,871,440)(1 − .24) WACC= 11%

The common stock of Pedestrian Automotive has a beta of .89 and a standard deviation of 15.8 percent. The market rate of return is 12.25 percent, and the risk-free rate is 2.9 percent. What is the cost of equity for this firm?

11.22%

Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. EBIT are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. Calculate the ROE under each of the three economic scenarios assuming the firm goes through with the recapitalization. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.

11.23% 15.12% 17.85% -25.76% 18.03%

Judy's Boutique just paid an annual dividend of $3.49 on its common stock. The firm increases its dividend by 3.60 percent annually. What is the company's cost of equity if the current stock price is $43.00 per share?

12.01% Ke=(D1/P0)+g

Stock in Eduardo Industries has a beta of 1.09. The market risk premium is 7.4 percent, and T-bills are currently yielding 4.4 percent. The most recent dividend was $3.30 per share, and dividends are expected to grow at an annual rate of 5.4 percent, indefinitely. If the stock sells for $55 per share, what is your best estimate of the company's cost of equity?

12.10%

Country Cook's cost of equity is 16.2 percent and its aftertax cost of debt is 5.8 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is .42 and the tax rate is 21 percent?

13.12%

You purchased a stock at a price of $42.90. The stock paid a dividend of $1.59 per share and the stock price at the end of the year is $48.55. What is the capital gains yield?

13.17%

The Tribiani Company just issued a dividend of $2.40 per share on its common stock. The company is expected to maintain a constant 8 percent growth rate in its dividends indefinitely. If the stock sells for $43.20 a share, what is the company's cost of equity?

14.00%

Fujita, Incorporated, has no debt outstanding and a total market value of $422,400. EBIT, are projected to be $55,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 14 percent higher. If there is a recession, then EBIT will be 20 percent lower. The company is considering a $205,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,800 shares outstanding. Ignore taxes for questions (a) and (b). Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant. Assume the firm goes through with the proposed recapitalization. Calculate the ROE, under each of the three economic scenarios. Assume the firm goes through with the proposed recapitalization. Calculate the percentage changes in ROE when the economy expands or enters a recession.

14.58% 19.64% 23.18% -25.76% 18.03%

Piedmont Hotels is an all-equity firm with 48,000 shares of stock outstanding. The stock has a beta of 1.19 and a standard deviation of 14.8 percent. The market risk premium is 7.8 percent, and the risk-free rate of return is 4.1 percent. The company is considering a project that it considers riskier than its current operations so has assigned an adjustment of 1.35 percent to the project's discount rate. What should the firm set as the required rate of return for the project?

14.73%

The common stock of Shaky Building Supply has a beta that is 22 percent greater than the overall market beta. Currently, the market risk premium is 9.56 percent while the U.S. Treasury bill is yielding 3.3 percent. What is the cost of equity for this firm?

14.96%

Fujita, Incorporated, has no debt outstanding and a total market value of $230,400. EBIT are projected to be $39,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 13 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $125,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,200 shares outstanding. The company has a tax rate of 22 percent, a market-to-book ratio of 1.0, and the stock price remains constant. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Calculate the percentage changes in EPS when the economy expands or enters a recession.

3.21 4.23 4.77 -24.00% 13%

the Telwar Company has just gone public. Under a firm commitment agreement, the company received $32.50 for each of the 4.15 million shares sold. The initial offering price was $34.90 per share, and the stock rose to $42.00 per share in the first few minutes of trading. The company paid $910,000 in legal and other direct costs and $260,000 in indirect costs. What was the flotation cost as a percentage of funds raised?

30.36% Net amount raised = (4,150,000 shares)($32.50) − 910,000 − 260,000 Net amount raised = $133,705,000 Total direct costs = $910,000 + ($34.90 − 32.50)(4,150,000 shares) Total direct costs = $10,870,000 We are given part of the indirect costs in the problem. Another indirect cost is the immediate price appreciation. The total indirect costs were: Total indirect costs = $260,000 + ($42.00 − 34.90)(4,150,000 shares) Total indirect costs = $29,725,000 This makes the total costs: Total costs = $10,870,000 + 29,725,000 Total costs = $40,595,000 The flotation cost as a percentage of the amount raised is the total cost divided by the amount raised, so: Flotation cost percentage = $40,595,000 ÷ $133,705,000 Flotation cost percentage = .3036, or 30.36%

Savers has an issue of preferred stock with a $6.00 stated dividend that just sold for $122 per share. What is the bank's cost of preferred stock?

4.92%

Chick 'N Fish is considering two different capital structures. The first option is an all-equity firm with 22,500 shares of stock. The second option consists of 18,750 shares of stock plus $120,000 of debt at an interest rate of 7.8 percent. Ignore taxes. What is the break-even level of earnings before interest and taxes (EBIT) between these two options?

56,150 EBIT/22,500= (EBIT-(120,000*.078))/18,750 EBIT=56,150

Kelso Electric is an all-equity firm with 53,000 shares of stock outstanding. The company is considering the issue of $360,000 in debt at an interest rate of 6 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 33,000 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans?

57,240 EBIT/53,000= (EBIT-360,000(.06))/33,000 EBIT=57,240

Dee's Dress Emporium has 50,000 shares of common stock outstanding at a price of $27 a share. It also has 1,000 shares of preferred stock outstanding at a price of $20 a share. There are 800 bonds outstanding that have a semiannual coupon payment of $25. The bonds mature in four years, have a face value of $1,000, and sell at 97 percent of par. What is the capital structure weight of the common stock?

62.19%

A stock has an expected return of 8.23 percent and its reward-to-risk ratio is 7 percent. If the risk-free rate is 2.25 percent, what is the stock's beta?

Reward to risk ratio = (expected return - risk free rate) / beta 0.07 = (0.0823 - 0.0225) / beta 0.07beta = 0.0598 beta = 0.0598 / 0.07 beta = 0.854 or 0.85 (Approx)

Alpha Industries is considering a project with an initial cost of $7.9 million. The project will produce cash inflows of $1.87 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.43 percent and a cost of equity of 11.15 percent. The debt-equity ratio is .65 and the tax rate is 21 percent. What is the net present value of the project?

WACC=(weight of equity*cost of equity)+(weight of debt*after tax cost of debt) weight of debt=0.65/(1+0.65)=39.39% weight of equity=1/(1+0.65)=60.61% after tax cost of debt=pre tax cost of debt*(1-tax rate)=5.43%*(1-21%)=4.29% WACC=(60.61%*11.15%)+(39.39%*4.29%)=8.45% WACC 8.45% Cashflows Year0 -7900000 Year1 1870000 Year2 1870000 Year3 1870000 Year4 1870000 Year5 1870000 Year6 1870000 NPV 628,680

Kendall Corporation has no debt but can borrow at 6 percent. The firm's WACC is currently 11 percent, and there is no corporate tax. a) What is the company's cost of equity? b) If the firm converts to 15 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)?

a) 11% b) 11.88% c) 17.11% d) 11% 11%

Foundation, Incorporated, is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $2.4 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes. If EBIT is $450,000, what is the EPS for each plan? If EBIT is $700,000, what is the EPS for each plan? What is the break-even EBIT?

a) 2.65 2.35 b) 4.12 4.43 c) $571,200

Dani Corporation has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $9. The company also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon rate of 7 percent, and sells for 95 percent of par. The second issue has a face value of $60 million, has a coupon rate of 6 percent, and sells for 107 percent of par. The first issue matures in 25 years, the second in 8 years. Both bonds make semiannual coupon payments. What are the company's capital structure weights on a book value basis? What are the company's capital structure weights on a market value basis? Which are more relevant, the book or market value weights?

a. Equity/Value 0.2105 Debt/Value 0.7985 b. Equity/Value 0.6740 Debt/Value 0.3260 c. Market Value

Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?

cost of equity

Gabella's is an all-equity firm that has 36,000 shares of stock outstanding at a market price of $27 a share. The firm has earnings before interest and taxes of $57,600 and has a 100 percent dividend payout ratio. Ignore taxes. Gabella's has decided to issue $125,000 of debt at a rate of 9 percent and use the proceeds to repurchase shares. Terry owns 500 shares of Gabella's stock and has decided to continue holding those shares. How will Gabella's debt issue affect Terry's annual dividend income?

decrease from $800 to $739

The lower the standard deviation of returns on a security, the _____________the expected rate of return and the _____________ the risk.

lower; lower