FINA Final
Edison Inc. has annual sales of $54,750,000, or $150,000 a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has $13,500,000 in inventory and $12,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.
Reduce the cash conversion cycle by 22 days.
Calculate the present values for the perpetuity: (1) Annual amount $20000, discount rate 8% (2) Annual amount $10000, discount rate 10% .
$250000, $100000
Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $676,000 per year. On average, how much "free" trade credit does the firm receive during the year?
$27,740
The A. J. Croft Company (AJC) currently has $300,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $150,000, and it is a zero-growth company. AJC's current cost of equity is 8.8 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $90.00. What is AJC's current total market value and weighted average cost of capital?
$1,200,000; 7.5%
Columbia Industries is planning its operations for next year, and Merle Smith, the CEO, wants you to forecast the firm's additional funds needed (AFN). The firm is operating at full capacity. Data for use in your forecast are shown below, Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.
$239.8
Allied Services is now at the end of the final year of a project. The equipment originally cost $45,000, of which 75% has been depreciated. The firm can sell the used equipment today for $12,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis?
$11,700
Michaely Inc. is an all-equity firm with 200,000 shares outstanding. It has $3,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%. The company is considering issuing $7,500,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 9.75%, the market risk premium is 7.5%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs. Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would the price be following the recapitalization?
$120.00
Your company, LBNC Inc., is considering a new project whose data are shown below. The requirement equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life. What is the project's Year 4 cash flow?
$13,580
Madura Inc. wants to increase its free cash flow by $270 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?
$135
Cook Industries is considering the replacement of one of its old drill presses. The alternative presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm's cost of capital is 15%. Calculate the NPV of each press and evaluate their acceptability based on NPV; rank them from best to worst using NPV.
$18,804.87 Accept 3,230.42 Accept -5,285.27 Reject
Based on the corporate valuation model, the value of a company's operations is $1,700 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $230 million in notes payable, $700 million in long-term debt, $130 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 40 million shares of stock outstanding, what is the best estimate of the stock's price per share?
$18.50
Consider the balance sheet and selected data from the income statement of Akita Co. that appears below. Calculate the firm's new operating profit after taxes (NOPAT), operating cash flow (OCF), and free cash flow (FCF) for the year ended December 31, 2012
$2,430, $4,830, $780
Lawrence Industries' most recent annual dividend was $1.80 per share (D0=$1.80), and the firm's required return is 11%. Find the market value of Lawrence's shares when dividends are expected to grow at 8% annually for 3 years, followed by a 0% constant growth from year 4 to infinity.
$20.19
Margetis Inc. carries an average inventory of $1,125,000. Its annual sales are $15 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $970,890 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?
$205,479
Hand Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable cost should risk with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. This is just one of many projects for the firms, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV?
$215,670
McCoy Group's stock price had bee lagging its industry averages Using the following new assumptions to answer the questions below: (1) Operating ratios are listed as below. (2) Sales will grow by 10%, 8% 5%, and 5% for the next four years. (3) The target weighted average cost of capital (WACC) is 10%.
$33.3 the company is overvalued
Lawrence Industries' most recent annual dividend was $1.80 per share (D0=$1.80), and the firm's required return is 11%. Find the market value of Lawrence's shares when dividends are expected to grow at 8% annually for 3 years, followed by a 5% constant growth from year 4 to infinity.
$34.13
Elk County Telephone has paid the dividends shown in the following table over the past 5 years. The firm's dividend per share next year is expected to be $3.02. If you can earn 13% on similar-risk investments, what is the most you would be willing to pay per share?
$37.75
Laramay Corp.'s projected net income is $370.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 60%. Laramay had more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio was raised to 75%m other things held constant, (2) the target payout ratio were lowered to 20%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts.
$400, $200, $1000
Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value, The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 11%, and it has $1,500,000 of debt at market value and $400,000 of preferred stock at its assumed market value. The estimated free cash flows over the next 5 years, 2016 through 2020 are given below: beyound 2020 to infinity, the firm expects its free cash flow to grow by 3% annually. A. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your findings in part a, along with the data provided above, to find Nabor Industries' common stock value. C. If the firm plans to issue 200,000 shares of common stock, what is its estimated value per share?
$4051624, $2151624, $10.76
Nico. Inc is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV?
$47,705
Dabney Electronics currently has no debt. Its operating income is $30 million and its tax rate is 40%. It pays out all of its net income as dividends and has a zero growth rate. The current stock price is $60 per share, and it has 3.75 million shares of stock outstanding. If it moves to a capital structure that has 40 percent debt and 60 percent equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10 percent. What would its stock price be if it changes to the new capital structure?
$48.00
Bradley Industries' most recent annual dividend was $2.70 per share (D0 = $2.70), and the firm's required return is 13%. Find the market value of Bradley's shares when the dividends are expected to grow at 6% annually for 3 years, followed by a 8% constant growth from year 4 to infinity.
$55.28
Shelley Inc. is considering a new project whose data is shown below. What is the project's Year 1 cash flow?
$64,250
Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $675,000 per year. On average, what is the amount of costly trade credit firms receives during the year?
$64,726
Aurora Baking is preparing its cash budget and expects to have sales of $60,000 in January, $70,000 in February, and $70,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?
$66,000
Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has an $80 par value and pays an annual dividend of $6.40 per share. Similar-risk preferred stocks are currently earning a 9.3% annual rate of return. What is the market value of the outstanding preferred stock?
$68.82
Xanadu Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 12% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?
$746.22
Roy Harper forecasts the free cash flows (in millions) for a company shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?
$772.26
Brau Auto, a national auto parts chain, is considering purchasing a smaller chain, South Georgia Parts (SGP). Brau's analysts projects that the merger will result in the following incremental free cash flows, tax shields, and horizon values: Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SGP would retain its current $22.5 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of SGP to Brau?
$92.95 million
The A. J. Croft Company (AJC) currently has $300,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $150,000, and it is a zero-growth company. AJC's current cost of equity is 8.8 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $90.00. Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50% debt and 50% equity. If it makes this change, its resulting market value would be $1,230,000. What would be its new stock price per share?
$93
The following data apply to Hill's Hiking Equipment: (in millions) 1. The company plans on distributing $2000 million as dividend payments. What will the intrinsic per share stock price be immediately after the distribution? 2. Alternatively, the company planes on distributing $2,000 million by repurchasing stock. What will the intrinsic per share stock price be immediately after the repurchase?
$93.33 $100.00
In exchange for a $20000 payment today, a well-known company will allow you to choose one of the alternatives: (1) $28500 at end of 3 years, (2) $54000 at end of 9 years, (3) $160000 at end of 20 years. Find the value today of each alternative. Your opportunity cost is 11%. Are all the alternatives acceptable (worth $20000 today)? Why? Which alternative, if any, will you take?
(1) 20839 (2) 21110 (3) 19845 Alternatives (1) and (2) are both greater than the $20,000 initial payment in terms of present value. The best alternative is (2) because the present value of (2) is the largest of the three and is also greater than the $20,000 payment.
Giovanni Corp.'s projected net income is $375.0 million, its target capital structure is 30% debt and 70% equity, and its target payout ratio is 35%. Giovanni has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by changes in the capital structure policy and/or the target dividend payout policy. Versus the current policy, how much larger could the capital budget be if (1) the target debt ratio were raised to 70%, other things held constant, (2) the target payout ratio were lowered to 15%, other things held constant, and (3) the debt ratio and payout were both changed by the indicated amounts
(1) 464.29 (2) 107.14 (3) 714.29
Sexton Inc. is considering Projects S and L, whose cash flows are sown below. These projects are mutually exclusive, equally risky, and not repeatable. (1) Assuming current WACC is 10.25%, which project should be chosen? (2) If the Federal Reserve changed interest rates and therefore increase the firm's WACC by 325 basis points (3.25%). The Fed's action did not affect the forecasted cash flows, which project should be chosen? (3) What is the crossover rate for the two projects? (where NPV profiles of the two projects intersect with each other)
(1) Project L, (2) Project S, (3) Crossover rate = 13.27%
Serendipity Inc. is re-evaluating its debt level. Its current capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 35%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity?
-5.78%
Last month, Lloyd's Systems analyzed the project whose cash flows are shown below. However, before the decision to accept or reject the project, the Federal Reserve took actions that changed interest rates and therefore the firm's WACC. The Fed's action did not affect the forecasted cash flows. By how much did the change in the WACC affect the project's forecasted NPV and the firm's decision?
-59.03 Reject
Calculate the corporate bond yield spread for the following securities:
0.59%, 0.69%, 1.08%
Riverside Bank offers to lend you $75,000 at a nominal interest rate of 9%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $75,000, but it will charge an annual rate of 10%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?
0.62%
The risk free rate on T-bill is 1.23%, the expected level of inflation is 0.43%, what is the real rate of interest?
0.80
Joe Brown borrowed $45,000 at a 12% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments. Prepare an amortization schedule showing the interest & principal break-down of each of the three loan payments.
1 $5,400,0000 $13,335.7041 2 $3,799.7155 $14,935.9886 3 $2,007.3969 $16,728.3073
For each of the case shown in the following table, calculate the future value of the single cash flow deposited today at the end of the deposit period if the interest is compounded annually at the rate specified.
1. $167,460.6321 2. 116,370.2693 3. 260,071.3860
Jake is searching for a project for his company to invest in. He is interested in VR Headsets, Inc. He has been impressed with the product and believes VR Headsets is an innovative product. However, Jake realizes that any time you consider a project, risk is a major concern. The rule he follows is to only invest in projects with a coefficient of variation of returns below 1.55. Jake has obtained the following NPV information and associated probabilities for VR Headset, Inc. Calculate (1) the expected NPV (2) the standard deviation of NPV and (3) the coefficient variation. (4) Finally, should Jake invest in VR?
1. 16,025 2. 22,951 3. 1.43 4. YES
Alex Weldon, a 20-year-old graduate, wished to retire at age 65. In order to supplement other sources of retirement income, he can deposit $3,000 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will earn a 12% return over the next 45 years. 1. If Alex makes an annual end-of-year $3,000 deposit into the IRA, how much will he have by the end of his 65th year? 2. If he decides to wait until he's 40 to start depositing $3,000 yearly, how much will he have by the end of his 65th year? 3. How much must the 40-year old deposit annually to catch up with the 20-year old?
1. 4,074,690 2. 400,002 3. 30,560
Oxy Corporation uses debt, preferred stock, and common stock to raise capital. The firm's capital structure targets the following proportion: debt, 55%; preferred stock, 10%; and common stock, 35%. If the after-tax cost of debt is 8.38%, preferred stock costs 11.50%, and common stock costs 13.25%, what is Oxy's weighted average cost of capital (WACC)?
10.40%
Depaul Inc. paid the dividends, shown in the table below, over the past 5 years. The firm's dividend per share next year is expected to be $6.04 If you could earn 11% on a similar-risk investment, what is the most you would be willing to pay per share?
100.50
Calculate (1) the future value at the end of the specified deposit period (2) the effective annual rate, EAR
101994, 12.62%
CC Inc. expects to have the following data during the coming year. What is CC's expected ROE?
11.9%
Find the present value of the following mixed streams of cash flows using the given discount rates
11806, 109856
Using the following information, calculate the yield to maturity for the bond and discuss whether it sells at par, discount, or premium.
13.82% Premium
Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it should be rejected.
16.56%
J&M Corporation's common stock has a beta, b, of 1.5. The risk free rate is 7.50%, and the market return is 13.75%. Determine J&M's cost of common stock equity using the CAPM.
16.8875%
Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?
2.22 years
Firms HD and LD are identical except for their use of debt and the interest rates they pay--HD has more debt and pays a higher interest rate on that debt. Based on the data given below, what is the difference between the two firms' ROEs?
2.41%
Stephens Electronics is considering a change in its target capital structure, which currently consists of 40% debt and 60% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRF, is 8.0%, the market risk premium, RPM, is 11.0%, and the firm's tax rate is 35%. Currently, the cost of equity, rs, is 15% as determined by the CAPM. What would be the estimated cost of equity if the firm used 70% debt?
20.29%
Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values (ITS D/S ratio is .25). The risk- free rate is 9% and the market risk premium, RM - RF, is 7.5% . the company's cost of equity, which is based on the CAPM, is 18% and its tax rate is 40%. What would Simon's estimated cost of equity be if it were to change its capital structure to 50 percent debt and 50% equity?
21.52%
Stephens Electronics is considering a change in its target capital structure, which currently consists of 25% debt and 75% equity. The CFO believes the firm should use more debt, but the CEO is reluctant to increase the debt ratio. The risk-free rate, rRF, is 7.5%, the market risk premium, RPM, is 9%, and the firm's tax rate is 40%. Currently, the cost of equity, rs, is 17.25% as determined by the CAPM. What would be the estimated cost of equity if the firm used 60% debt?
22.94%
Stern Associates is considering a project that has the following cash flow data. What is the project's payback?
3.52 years
McCormick Corp. is forecasting an EPS of $4.20 for the coming year on its 750,000 outstanding shares of stock. Its capital budget is forecasted at $1,200,000 and it is committed to maintaining a $3.10 dividend per share. It finances with debt and common equity, but it wants to avoid issuing any new common stock during the coming year. Given these constraints, what percentage of the capital budget must be financed with debt?
31.25%
Farmlend Inc. projects the following data. If the firm follows the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?
39.29%
The A. J. Croft Company (AJC) currently has $300,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $150,000, and it is a zero-growth company. AJC's current cost of equity is 8.8 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $90.00. Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $96 per share. The resulting capital structure would have a $504,000 total market value of equity and a $756,000 market value of debt. How many shares would AJC repurchase in the recapitalization?
4,750
Famous Abe's payable deferral period (PDP) is 61 days (on a 365-day basis), accounts payable are $250 million, and its balance sheet shows inventory of $312.5 million. What is the inventory turnover ratio?
4,79%
McCoy Group's stock price had bee lagging its industry averages Assume that McCoy Group's sale growth rate is 10% from 2017 to 2018. Assume that the firm's 2017 ratios will remain the same in 2017. What is McCoy Group's self supporting growth rate? How the self-supporting growth rate be affected by an increase in capital intensity ratio?
4.3%, lower
Dentaltech Inc. projects the following data for the coming year. If the firm follows the residual the residual dividend policy and also maintains its target capital structure, what will its payout ratio be?
43.33%
For each of the case shown in the following table, calculate the present value of the cash flow, discounting at the rate given and assuming that the cash flow is received at the end of the period noted.
4449, 6007, 2076
Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $600,000; its fixed assets are $150,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $52,500; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
5.25%
Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days. Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost of its costly trade credit, using a 365-day year?
63.5%
Joan Messineo borrowed $15000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments. Calculate the annual, end-of-year loan payment and prepare a loam amortization schedule showing the interest & principal break-down of each of the three loan payments. Explain why the interest portion of each payment declines with the passage of time.
6461
Last year Eggs Inc. had $1,700 million of sales, and it had $850 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?
66.67%
Keys Financial has done extremely well in recent years, and its stock now sells for $182 per share. Management wants to get the price down to a more typical level, which it thinks is $26 per share. What stock slit would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares would be given per one old share?
7
Find the value of a bond maturing in 18 years, with a $1,000 par value and a coupon interest rate of 15% (7.5% paid semi-annually) if the required return on a similar-risk bond is 21% annual interest (10.5% paid semiannually).
722.14
McCoy Group's stock price had bee lagging its industry averages Using the following new assumptions to answer the questions below: (1) Operating ratios are listed as below. (2) Sales will grow by 10%, 8%, 5%, and 5% for the next four years. (3) The target weighted average cost of capital (WACC) is 10%.
8.4%, Underperformance
Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. The stock is currently selling for $14.00 per share, and its noncallable $1,000 par value, 20-year, 8.25% bonds with semiannual payments are selling for $905.00. The beta is 1.1, the yield on a 6-month Treasury bill is 2.50%, and the yield on a 20-year Treasury bond is 5.25%. The required return on the stock market is 9.00%, but the market has had an average annual return of 14.50% during the past 5 years. The firm's tax rate is 40%. What is the best estimate of the firm's WACC?
8.60%
Hal Thomas, a 25-year-old college graduate, wished to retire at age 65. To supplement other sources of retirement income, he can deposit $2000 each year into a tax-deferred individual retirement arrangement (IRA). The IRA will earn a 10% return over the next 40 years. 1. If Hal makes annual end-of-year $2000 deposit into the IRA, how much will he have by the end of his 65th year? 2. If Hal decide wait until age 35 to start depositing $2000 yearly, how much will he have by the end of his 65th year? 3. How much must the 35-year old deposit annually to catch up with the 25-year old?
885185, 328988, 5381
Using the data for each firm, calculate (1) the cost of retained earnings, rf (2) the cost of new common stock, rn
9.00%, 9.56%
McCracken Roofing, Inc., common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future. What required rate of return for the stock would result in a price of $28 per share?
9.5%
Magiclean Corporation is considering the acquisition of Dustvac Company. Dustvac has a capital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Dustvac's pre-merger beta is 1.36. Magiclean's beta is 1.02, and both it and Dustvac face a 40% tax rate. Magiclean's capital structure is 40% debt and 60% equity. The free cash flows from Dustvac are estimated to be $3.0 million for each of the next 4 years and a horizon value of $10.0 million in Year 4. Tax savings are estimated to be $1 million for each of the next 4 years and a horizon value of $5 million in Year 4. New debt would be issued to finance the acquisition and retire the old debt, and this new debt would have an interest rate of 8%. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%. What is Dustvac's pre-merger WACC? What discount rate should you use to discount Dustvac's free cash flows and interest tax savings? What is the value of Dustvac's equity to Magiclean?
9.83% 11.29% 25.66 million
Calculate the value of each bond and discuss whether it sells at par, discount, or premium. (Annual interest rate)
A $1,149.39 Premium B $1,000.00 Par C $85.60 Discount
Millennium Car Wash is considering a new project whose data are shown below. The equipment to be used has a 3-year tax life, would be depreciated on a straight-line basis over the project's 3-year life, and would have a zero salvage value after Year 3. No new working capital would be required. Revenues and other operating costs will be constant over the project's life, and this is just one of the firm's many projects, so any losses on it can be used to offset profits in other units. If the number of cars washed declined by 40% from the expected level, by how much would the project's NPV decline?
Decline by $27,156.42
Gemini Inc. is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:
Equity = 75% Debt = 25% WACC = 15.51%
Using the constant-growth model (Gordon growth model) to find the value of each firm shown in the following table.
Firm Share Price A $ 24.25 B $ 40.00 C $ 16.25
Last year Lyon Industries had $1350 million of sales and $675 million of fixed assets, so its FA/Sales ratio was 50%. However, its fixed assets were used at an only 65% of capacity. If the company had been able to sell off enough of its fixed assets at book value, so that it was operating at full capacity, with sales at $825 million, how much cash (in millions) would it have generated?
Generated $406.875
Last year Omar Industries had $1200 million of sales and $450 million of fixed assets, so its FA/Sales ratio was 37.5%. However, its fixed assets were used at only 75% of capacity. If the company had been able to sell off enough of its fixed assets at book value, so that it was operating at full capacity, with sales increase to $1300 million, how much cash (in millions) would it have generated?
Generated $84.38
Eric just won $13 million in the state lottery. He's been given the option of receiving a total of $6.6 million now, or he can elect to bee paid $600,000 at the end of each of the next 35 years. If Eric can earn 9% annually on his investments, which option should he take?
He should take the lump sum ($6.6 million)
Tom Alexander has an opportunity to purchase any of the investments shown in the following. The purchase price, the amount of the single cash inflow, and is year of receipt are given for each investment. Which purchase recommendations would you make, assuming that Tom can earn 10% on his investment. Investment A: today price—$18000, single cash inflow— $30000, year of receipt —5 Investment B: today price—$600, single cash inflow— $3000, year of receipt —20 Investment C: today price—$3500, single cash inflow— $10000, year of receipt —10 Investment D: today price—$1000, single cash inflow— $15000, year of receipt —40
Investment A and C
You have $100 to invest. If you can earn 12% interest, about how long does it take for your $100 investment to grow to $200? Suppose the interest rate is just half that, at 6%. At half the interest rate, does it take twice as long to double your money? How long does it take?
No, it takes not quite twice the length of time to double in value.It takes about 11.90 years.
Calculate the present value of the annuity assuming that is is (1) an ordinary annuity and then (2) an annuity due. Comparing the two types of annuities, all else being equal, which type is more preferable? Why?
Ordinary annuity = 1,304,056.700, Annuity due = 1,382,300.102, Annuity due is better because it discounts for one less year.
Calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? 30,000 20% 5
Ordinary annuity = 223248, annuity due = 267898, annuity due is better because it compounds for one more year.
Calculate the present value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? 700 20% 9
Ordinary annuity = 2822, annuity due = 3386, annuity due is better because it discounts for one less year.
Calculate the present value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? 12,000 7% 3
Ordinary annuity = 31492, annuity due = 33696, annuity due is better because it discounts for one less year.
Calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? 2,500 8% 10
Ordinary annuity = 36216, annuity due = 39114, annuity due is better because it compounds for one more year.
Calculate the present value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? 55000 12 15
Ordinary annuity = 374598, annuity due = 419549, annuity due is better because it discounts for one less year.
Calculate the future value of the annuity assuming that it is (1) an ordinary annuity (2) an annuity due. Comparing the two types of annuities, all else equal, which type is more preferable? Why? 500 12% 6
Ordinary annuity = 4058, annuity due = 4545, annuity due is better because it compounds for one more year.
Using the following ratio information for Precision International as well as the industry averages to calculate ROA & ROE for both Precision and the industry
Precision's ROA = 11.47%, Industry's ROA = 8.82% Precision's ROE = 21.21%, Industry's ROE = 15.43%
Shao Airlines is considering two alternative lanes. Plane A has an expected life of 5 years, will cost $150 million, and will produce net clash flows of $40 million per year. Plane B has a life of 10 years, will cost $123 million, and will produce a net cash flow of $28 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares is expected to be zero, and the company's cost of capital is 12%. By how much would the value of the company increase if it accepted the better project (plane)? What is the equivalent annual annuity for each plane?
Project B is the better project and will increase the company's value by $35.21 million. Project A EAA = $1.61 million Project B EAA = $6.23 million
Bell Manufacturers is attempting to choose the better of two mutually exclusive projects for expanding the firm's warehouse capacity. The relevant cash flows for the projects are shown below. The firm's cost of capital is 18.75%. Calculate the IRR for the project and assess the acceptability of each project based on the IRR. Which once is preferred?
Project X IRR = 15.67% Project Y IRR = 17.29%; Neither is preferred, both are unacceptable.
Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, which option should she take?
She should take the ordinary annuity because the present value of the ordinary annuity is greater than $1.3 million.
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $25,000, ad it is expected to generate net after-tax operating cash flows, including depreciation, of $7,300 per year. The truck had a 5-year expected life. The expected salvage values after tax adjustments for the truck are given below. The company's cost of capital is 10%.
The firm should operate the truck for 5 years, NPV = $2672.74
The A. J. Croft Company (AJC) currently has $300,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $150,000, and it is a zero-growth company. AJC's current cost of equity is 8.8 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $90.00. The firm is considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values. The new fund would be used to replace the old debt to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 7%, while the required rate of return on equity would rise to 9.5%. If this plan were carried out, what would be AJC's new WACC and total value?
WACC = 7.38%., Total Value = $1,219,512.
