Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some combination of long-term debt and common equity. What is its debt ratio?
> The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser’s after-tax co
> Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $97.00; but flotation costs will be 5% of the market price, so the net price will be $92.15 per share. What is the cost of the preferr
> Gamma Medical’s stock trades at $90 a share. The company is contemplating a 3-for-2 stock split. Assuming that the stock split will have no effect on the market value of its equity, what will be the company’s stock price following the stock split?
> Is the following equation correct for finding the value of a constant growth stock? Explain. Do Po r, +g 6.
> Martell Mining Company’s ore reserves are being depleted, so its sales are falling. Also, because its pit is getting deeper each year, its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 5% per ye
> What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?
> Ezzell Corporation issued perpetual preferred stock with a 10% annual dividend. The stock currently yields 8%, and its par value is $100. a. What is the stock’s value? b. Suppose interest rates rise and pull the preferred stock’s yield up to 12%. What is
> What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 8% of par, and a current market price of (a) $60, (b) $80, (c) $100, and (d) $140?
> Fee Founders has perpetual preferred stock outstanding that sells for $60 a share and pays a dividend of $5 at the end of each year. What is the required rate of return?
> Harrison Clothiers’ stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share (that is, D0 = $1.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the requ
> Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, rs, is 15%. What is the stock’s curren
> Why do U.S. corporations build manufacturing plants abroad when they can build them at home?
> Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of –0.3, and a beta coefficient of –0.5. Stock B has an expected return of 12%, a standard deviation of returns of 10%, a 0.7
> The probability distribution of a less risky expected return is more peaked than that of a riskier return. What shape would the probability distribution be for (a) Completely certain returns and (b) Completely uncertain returns?
> Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?
> Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3,000,000. If Axel reports net income of $2,000,000 and it follows a residual
> Harley Motors has $10 million in assets, which were financed with $2 million of debt and $8 million in equity. Harley’s beta is currently 1.2, and its tax rate is 40%. Use the Hamada equation to find Harley’s unlevered beta, bU.
> Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the required rate of return on a stock with a beta of 0.7?
> An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio’s beta?
> A stock’s returns have the following distribution: Calculate the stock’s expected return, standard deviation, and coefficient of variation. Demand for the Probability of This Demand Occurring Rate of Return If Th
> You have been managing a $5 million portfolio that has a beta of 1.25 and a required rate of return of 12%. The current risk-free rate is 5.25%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of 0.75, what will b
> Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk-free rate is 2.5%, and the market risk premium is 6.5%. Manning has a beta of 1.7, and its realized rate of
> Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate of return is 7%. By how much does the required return on the riskier stock exceed the required return on the less risky
> Suppose the exchange rate between the U.S. dollar and the Swedish krona was 6 krona = $1 and the exchange rate between the dollar and the British pound was £1 = $2. What was the exchange rate between Swedish kronas and pounds?
> Given the following information, determine the beta coefficient for Stock J that is consistent with equilibrium: ^rJ = 12.5%; rRF = 4.5%; rM = 10.5%.
> A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%. a. What is the stock’s beta? b. If the market risk premium increased to 6%, what would happen to the stock’s required rate of return? Assume that the risk-
> Is it true that the following equation can be used to find the value of a bond with N years to maturity that pays interest once a year? Assume that the bond was issued several years ago. Annual interest Par value V8 %3D (1 + ra) (1 + ra)N t3=
> A company has an EPS of $2.00, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0×. What is its P/E ratio?
> An investor purchased the following 5 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell and each then had a new YTM of 7%. What is the percentage
> Changes in sales cause changes in profits. Would the profit change associated with sales changes be larger or smaller if a firm increased its operating leverage? Explain your answer.
> An investor has two bonds in her portfolio, Bond C and Bond Z. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6%. Bond C pays a 10% annual coupon, while Bond Z is a zero coupon bond. a. Assuming that the yield
> Nungesser Corporation’s outstanding bonds have a $1,000 par value, a 9% semiannual coupon, 8 years to maturity, and an 8.5% YTM. What is the bond’s price?
> Callaghan Motors’ bonds have 10 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 8%, and the yield to maturity is 9%. What is the bond’s current market price?
> Suppose a new process was developed that could be used to make oil out of seawater. The equipment required is quite expensive; but it would, in time, lead to low prices for gasoline, electricity, and other types of energy. What effect would this have on
> An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. A 6-year security with no maturity, default, o
> Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0.20. If the krone appreciated 10% tomorrow against the dollar, how many krones would a dollar buy tomorrow?
> The real risk-free rate, r*, is 2.5%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield o
> The real risk-free rate is 3%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.05 × (t – 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note?
> Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $32 per s
> Interest rates on 4-year Treasury securities are currently 7%, while 6-year Treasury securities yield 7.5%. If the pure expectations theory is correct, what does the market believe that 2-year securities will be yielding 4 years from now?
> One-year Treasury securities yield 5%. The market anticipates that 1 year from now, 1-year Treasury securities will yield 6%. If the pure expectations theory is correct, what is the yield today for 2-year Treasury securities?
> An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 5% and inflation
> If a firm goes from zero debt to successively higher levels of debt, why would you expect its stock price to rise first, then hit a peak, and then begin to decline?
> The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.2%. What is the maturity risk premium for the 2-year security?
> You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.5%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: ● Inflation premium ¼ 3.25% ● Liquid
> The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, I: PV − PMT/I. What is the future value of a perpetuity of PMT dollars per year? (Hint: The answer is infinity, but explain why.)
> To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even when some of the cash flows constitute an annuity because the entire series is
> A television costs $500 in the United States. The same television costs 312.5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
> Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
> Baker Brothers has a DSO of 40 days, and its annual sales are $7,300,000. What is its accounts receivable balance? Assume that it uses a 365-day year.
> The H.R. Pickett Corp. has $500,000 of debt outstanding, and it pays an annual interest rate of 10%. Its annual sales are $2 million, its average tax rate is 30%, and its net profit margin is 5%. What is its TIE ratio?
> A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?
> Edmund Enterprises recently made a large investment to upgrade its technology. While these improvements won’t have much effect on performance in the short run, they are expected to reduce future costs significantly. What effect will this investment have
> What is meant by the following statement: Our tax rates are progressive.
> If a “typical” firm reports $20 million of retained earnings on its balance sheet, could its directors declare a $20 million cash dividend without having any qualms about what they were doing? Explain your answer.
> Who are some of the basic users of financial statements, and how do they use them?
> A company’s fixed operating costs are $500,000, its variable costs are $3.00 per unit, and the product’s sales price is $4.00. What is the company’s breakeven point; that is, at what unit sales volume will its income equal its costs?
> What four financial statements are contained in most annual reports?
> Identify and briefly compare the two leading stock exchanges in the United States today.
> Early in September 1983, it took 245 Japanese yen to equal $1. Nearly 25 years later, in May 2008, that exchange rate had fallen to 103.5 yen to $1. Assume that the price of a Japanese-manufactured automobile was $9,000 in September 1983 and that its pri
> Computer World Inc. paid out $22.5 million in total common dividends and reported $278.9 million of retained earnings at year-end. The prior year’s retained earnings were $212.3 million. What was the net income? Assume that all dividends declared were ac
> In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in dividends were paid to shareholders during the year? Assume tha
> What would happen to the U.S. standard of living if people lost faith in the safety of the financial institutions? Explain.
> INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?
> Is an initial public offering an example of a primary or a secondary market transaction? Explain.
> If most investors expect the same cash flows from Companies A and B but are more confident that A’s cash flows will be closer to their expected value, which company should have the higher stock price? Explain.
> Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint: Write out the headings for an income statement and fill in the known values. Then divide $3 million of
> Evaluate the following statement: Issuing convertible securities represents a means by which a firm can sell common stock at a price above the existing market price.
> Marble Construction estimates that its WACC is 10% if equity comes from retained earnings. However, if the company issues new stock to raise new equity, it estimates that its WACC will rise to 10.8%. The company believes that it will exhaust its retained
> Why would a company choose to issue floating-rate as opposed to fixed-rate preferred stock?
> In the spot market, 10.5 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same disc in Mexico?
> Suppose a firm is considering two mutually exclusive projects. One project has a life of 6 years; the other, a life of 10 years. Both projects can be repeated at the end of their lives. Might the failure to employ a replacement chain or EAA analysis bias
> The exercise price on one of Flanagan Company’s call options is $15, its exercise value is $22, and its premium is $5. What are the option’s market value and the stock’s current price?
> A call option on Bedrock Boulders stock has a market price of $7. The stock sells for $30 a share, and the option has an exercise price of $25 a share. a. What is the exercise value of the call option? b. What is the premium on the option?
> Certain liability and net worth items generally increase spontaneously with increases in sales. Put a check mark (3) next to those items that typically increase spontaneously. Accounts payable Notes payable to banks Accrued wages Accrued taxes Mortga
> Would you agree that computerized corporate planning models were a fad during the 1990s but that because of a need for flexibility in corporate planning, they are no longer used by most firms?
> Assume that an average firm in the office supply business has a 6% profit margin, a 40% debt/assets ratio, a total assets turnover of 2 times, and a dividend payout ratio of 40%. Is it true that if such a firm is to have any sales growth (g > 0), it will
> Charlie’s Cycles Inc. has $110 million in sales. The company expects that its sales will increase 5% this year. Charlie’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of
> Edwards Industries has $320 million in sales. The company expects that its sales will increase 12% this year. Edwards’ CFO uses a simple linear regression to forecast the company’s receivables level for a given level of projected sales. On the basis of r
> Jasper Furnishings has $300 million in sales. The company expects that its sales will increase 12% this year. Jasper’s CFO uses a simple linear regression to forecast the company’s inventory level for a given level of projected sales. On the basis of rec
> Carter Corporation’s sales are expected to increase from $5 million in 2008 to $6 million in 2009, or by 20%. Its assets totaled $3 million at the end of 2008. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the e
> Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting analysis are calculated?
> Operating cash flows rather than accounting income are listed in Table 12-1. Why do we focus on cash flows as opposed to net income in capital budgeting?
> Huang Industries is considering a proposed project who’s estimated NPV is $12 million. This estimate assumes that economic conditions will be “average.” However, the CFO realizes that conditions could
> Kennedy Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Kennedy can sell the used equipment today for $5 million, and its tax rate is 40%. What is the equipment’s after-tax
> Why is the NPV of a relatively long-term project (one for which a high percentage of its cash flows occurs in the distant future) more sensitive to changes in the WACC than that of a short-term project?
> NPV Project K costs $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its WACC is 12%. What is the project’s NPV?
> Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects: Assume that each of these projects is just as risky as the firm’s existing assets and that the firm may accept al
> Javits & Sons’ common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 = $3.00), and the constant growth rate is 5% a year. a. What is the company’s cost of common equity if a
> After a 5-for-1 stock split, Strasburg Company paid a dividend of $0.75 per new share, which represents a 9% increase over last year’s pre-split dividend. What was last year’s dividend per share?
> What is an “equivalent annual annuity (EAA)?” When and how are EAAs used in capital budgeting?
> Accrued salaries owed to employees for October 30 and 31 are not considered in preparing the financial statements for the year ended October 31. Indicate which items will be erroneously stated, because of the error, on (a) The income statement for the ye
> The wages payable and wages expense accounts at May 31, after adjusting entries have been posted at the end of the first month of operations, are shown in the following T accounts: Determine the amount of wages paid during the month. Wages Payable
> The adjusting entry for accrued fees was omitted at the end of the current year. Indicate which items will be in error, because of the omission, on (a) The income statement for the current year and (b) The balance sheet at the end of the year. Also indic
> If the effect of the debit portion of an adjusting entry is to increase the balance of an asset account, which of the following statements describes the effect of the credit portion of the entry? a. Increases the balance of a revenue account. b. Increase
> Identify the four different categories of adjusting entries frequently required at the end of an accounting period.
> The comparative temporary investments and inventory balances of a company follow. Based on this information, what is the amount and percentage of increase or decrease that would be shown on a balance sheet with horizontal analysis? Current Year Pre
> What is the difference between adjusting entries and correcting entries?
> Why are adjusting entries needed at the end of an accounting period?
> Is the matching concept related to (a) The cash basis of accounting or (b) The accrual basis of accounting?
