Question: Calculate BWP’s DFL and DTL before

> You are a securities salesperson. Many of your clients are elderly people who want very secure investments. They remember the days when interest rates were very stable (before the 1970s) and bond prices hardly fluctuated at all regardless of their term

> Annuities are attractive investment vehicles for retirement savings as many people prefer an income stream in retirement to a lump sum in the bank. It’s easy to trade one for the another by purchasing an annuity for its discounted value from a bank or a

> What would you pay for an annuity of $2,000 paid every six months for 12 years if you could invest your money elsewhere at 10% compounded semiannually?

> The Winthrop Company is constructing a five-year plan. The firm's ACP is currently 90 days, while its inventory turnover ratio is 3 × based on COGS. The company has forecast aggressive revenue growth along with efficiency improvements in man

> What causes maturity risk? In other words, why do long-term bonds respond differently to interest rate changes than short-term bonds? (Hint: Think about how the present value formulas work.)

> Go to a currency exchange site on the internet and look up today's exchange rates for the currencies in problem 1. Resolve the problems using today's rates. Analyze how the rates have changed since May 6, 2015.

> Livetree Ltd. is developing a detailed financial plan for next year, and expects to have the following fixed asset accounts by the end of this year ($000) The capital plan already completed calls for expenditures of $7,042,000 on new equipment next yea

> How many years will it take for $850 per year to amount to $20,000 if the interest rate is 8%?

> Emmons Motors is a distributor of electric motors. The firm projects product demand next year of 25,000 units. It costs $320 to place an order with suppliers. Management has determined that the EOQ is 1,000 units. How much per year does it cost Emmon

> Zuker Distributors handles the warehousing of perishable foods and is considering replacing one of its primary cold storage units. One supplier has offered a unit for $250,000 with an expected life of 10 years. The unit is projected to reduce electrici

> How much will $650 per year be worth in eight years at interest rates of a. 12% b. 8% c. 6%

> The Longenes Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions follow. * The costs of debt and preferred stock are already adjusted for taxes and/o

> Suppose the strategic options available to the Rollins Company in the last problem result in temporarily enhanced growth. Each option can be associated with a super normal growth rate that lasts for some period after which growth returns to the firm's n

> Suppose Hammell of the previous problem needs to issue new stock to raise additional equity capital. What is its cost of new equity if and flotation costs are 12%?

> The Framingham Company expects to grow at 4% indefinitely. Economists are currently asserting that investment opportunities in short term government securities (treasury bills) are readily available at a risk-free rate of 5%. The stock market is returni

> What is interest rate or price risk? Why is it sometimes called maturity risk? Explain fully.

> The Longlife Insurance Company of the preceding problem has several bonds outstanding that are currently selling to yield 9%. What does this imply about the cost of the firm's equity?

> Grandma's Cookies Inc. is considering acquiring Mother's Baked Goods Inc. After consideration of all benefits, synergies and tax effects, Grandma (originally a finance major) has estimated that the incremental cash flows from the acquisition will be abo

> The Longlife Insurance Company has a beta of .8. The average stock currently returns 15% and short-term treasury bills are offering 6%. Estimate Longlife's cost of retained earnings.

> Schoen Industries pays interest of $3 million each year on bonds with an average coupon rate of 7.5%. The firm has 4.5 million shares of stock outstanding and pays out 100% of earnings in dividends. Earnings per share (EPS) is $3.50. Schoen’s cost of

> Klints Inc. paid an annual dividend of $1.45 last year. The firm’s stock sells for $29.50 per share, and the company is expected to grow at about 4% per year into the foreseeable future. Estimate Klints’ cost of retained earnings.

> Assume that Meade Metals Inc of the previous problem is replacing an old truck with a new one instead of replacing an outside delivery service. The old truck was purchased 8 years ago for $120,000. It has been depreciated straight line based on a ten-y

> A few years ago Hendersen Corp issued preferred stock paying 8% of its par value of $50. The issue is currently selling for $38. Preferred stock flotation costs are 15% of the proceeds of the sale. What is Hendersen's cost of preferred stock?

> The York Company has an average receivables balance of $55,000, which turns over once every 30 days. It offers all of its receivables to its bank as collateral for short-term borrowing (pledging). The bank generally accepts 60% of the accounts offered

> Harris Inc.’s preferred stock was issued five years ago to yield 9%. Investors buying those shares on the secondary market today are getting a 14% return. Harris generally pays flotation costs of 12% on new securities issues. What is Harris’s cost of

> Jenkins Appliances has cash flow problems and needs to borrow between $50,000 and $60,000 for approximately sixty (60) days. Because the business is small and relatively new, unsecured loans are very hard to get and are expensive when they are available.

> What is valuation, and why are we interested in the results?

> Calculate the effective interest rate on loans with the following minimum compensating balance requirements: Compensating Balance 20% Loan Rate a. 6.5% b. 12.0% 10% с. 10.5% 15% d. 14.0% 25% е. 8.5% 30%

> Hampshire Motors Ltd., a British manufacturing company, wants to buy a production machine that isn’t available in England. Comparable products are made by an American company and a French firm. The Americans have quoted Hampshire a price of $175,000 whil

> An American importer owes vendors the following sums a. 140,560 Canadian dollars b. 392,000 Australian dollars c. 1,362,000 Mexican pesos d. 680,540 British (U.K.) pounds e. 14,673 Euros State each debt in U.S. dollars.

> In the situation at Wachusett Window outlined in the last question, do you think a higher prompt payment discount alongside the new sales program would have kept receivables down? Why?

> You're interested in investing in the Peters Company, which has shown a remarkable increase in EPS over the last three years. You investigate and find that the company's debt-to-equity ratio has increased dramatically over the same period and is now fou

> The Cranston Company would like to acquire the Lamont Company, but overtures made to management have been emphatically rebuffed. Five investors who were involved in the company's founding and continue to be active in its management own 45% of Lamont's st

> Shelton Pharmaceuticals Inc. is planning to introduce a new drug for pain relief. Management expects to sell 3 million units in the first year at $8.50 each, and anticipates 10% growth in sales per year thereafter. Operating costs are estimated at 70%

> The Grass Ridge Company has the following current asset accounts Its current ratio is 2.5:1. The bank is willing to lend the company enough to finance its working capital needs under a $10 million revolving credit arrangement at a base rate of 12% wi

> Using the information from the previous problem, randomly select four NPV outcomes from the data. (Select one cash flow from each year and compute the project NPV and the probability of that NPV implied by those selections.) Do your selections give a sen

> The Montauk Company has a dividend reinvestment plan in which shareholders owning 25% of its common stock participate. Last year the firm’s EPS was $4.20 and its payout ratio was 50%. There are 2 million shares of common stock outstanding. How much ne

> The amount formulas share a closer relationship than the annuity formulas. Explain and interpret this statement.

> Calculate the effective interest rate implied by the following terms of sale, using a 365-day year. 2/10, net 30 1/5, net 15 .5/10, net 30 2.5/10, net 25 1/5, net 20

> Moser Materials Inc. is considering acquiring Newkirk Products, which produces a number of products that would enhance Moser’s product line. Last year Newkirk reported a $30 million loss. Moser has estimated that Newkirk will break even in the fourth y

> What is the effective interest rate on a $750,000 loan at 8% for 120 days if a 20% minimum compensating balance is required?

> Scherbert Industries has the following balance sheet accounts as of 12/31/x3 (not a complete balance sheet): Calculate gross and net working capital. Accounts Payable. $650,000 Accounts Receivable 845,000 Accruals. 257,500 Cash .. 137,200 Common S

> Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/x3: Calculate Willerton’s capital structure based on book values. Long Term Debt $65,000,000 Preferred Stock $15,000,000 Common Stock $40,000

> Southport Inc. has an inventory turnover of 10X, an ACP of 45 days, and turns over its payables once a month. How long are Southport's operating and cash conversion cycles? (Use a 360-day year.)

> The Manning Company's stock is currently selling for $23. It has the following prospects for next year: Calculate Manning's expected return for a one-year holding period. Next year's Stock Price Dividend $1.00 $1.50 $2.00 Probability $25 $30 $35 .

> Watson Waterbed Works Inc. has an EBIT of $2.75 million, can borrow at 15% interest, and pays combined state and federal income taxes of 40%. It currently has no debt and is capitalized by equity of $12 million. The firm has 1.5 million shares of common

> What interest rate would you need to get to have an annuity of $7,500 per year accumulate to $279,600 in 15 years?

> The Aztec Corporation has the following capital components and costs. Calculate Aztec's WACC. Value $23,625 $ 4,350 $52,275 Component Debt Cost 12.0% Preferred Stock Common Equity 13.5% 19.2%

> What is a sinking fund? How is it related to time value?

> The Alligator Lock Company is planning a two-for-one stock split. You own 5,000 shares of Alligator's common stock that is currently selling for $120 a share. a. What is the value of your Alligator stock now, and what will it be after the split? b. Alli

> The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite’s marginal tax rate including both federal and state taxes is 38%. What is the firm’s cost of debt?

> Asbury Corp. issued 30-year bonds 11 years ago with a coupon rate of 9.5%. Those bonds are now selling to yield 7%. The firm also issued some 20-year bonds two years ago with an 8% coupon rate. The two bond issues are rated equally by Standard and Poor

> Blazingame Inc.'s capital components have the following market values: Calculate the firm's capital structure and show the weights that would be used for a weighted average cost of capital (WACC) computation. Debt . $35,180,000 Preferred Stock.

> Sanville Quarries is considering acquiring a new drilling machine which is expected to be more efficient than their current machine. The project is to be evaluated over four years. The initial outlay required to get the new machine operating is $675,000

> The Olson Company plans to replace an old machine with a new one costing $85,000. The old machine originally cost $55,000, and has six years of its expected 11-year life remaining. It has been depreciated straight line assuming zero salvage value, and

> Kleig Inc.'s bonds are selling to yield 9%. The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%. The company's marginal tax rate is 42%. a. What is Kleig's cost of debt with respect to the new bonds? (H

> Mitech Corp’s stock has been growing at approximately 8% for several years and is now $30. Based on past growth rate performance, what would you expect the stock’s price to be in five years?

> The Pepperpot Company's stock is selling for $52. Its last dividend was $4.50, and the firm is expected to grow at 7% indefinitely. Flotation costs associated with the sale of common stock are 10% of the proceeds raised. Estimate Pepperpot's cost of e

> What's an opportunity cost interest rate?

> Fuller, Inc. issued $100, 8% preferred stock five years ago. The shares are currently selling for $84.50. Assuming Fuller has to pay floatation costs of 10%, what is Fuller’s cost of preferred stock?

> Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, so

> Haley Motors is considering a maintenance contract for its heavy equipment. One firm has offered Haley a four-year contract for $100,000 to be paid in advance. Another firm has offered an eight-year contract for $165,000 also to be paid in advance. Both

> The Paxton Homes Co. is a successful builder of moderate to high-priced houses. The firm is currently considering an expansion into light commercial construction in which it would build shopping centers and small office buildings. Management considers t

> Calculate IRRs for the projects in the previous problem. Problem 19: Initial Outlay (C) Project Length (in years) Annual Cost of NPV Cash Flow Сapital ($100,000) ($200,000) ($300,000) ($400,000) ? 5 $35,000 8% ? $35,000 $15,000 $20,000 $25,000 4

> Auburn Concrete Inc. is considering the purchase of a new concrete mixer to replace an inefficient older model that is completely worn out. If purchased, the new machine will cost $90,000 and is expected to generate savings of $40,000 per year for five

> Blue & Noble is a small law firm that does all of its business through billings (no cash sales). Historically the firm has collected 40% of its revenue in the month of billing, 50% during the first month after billing and 8% during the second month after

> Fox Woodworking Inc. issued preferred shares at a face value of $50 to yield 9% 10 years ago. The shares are currently selling at $60. What return are they earning for investors who buy them today?

> Olson-Jackson Corp. (OJC) is considering replacing a machine that was purchased only two years ago because of dramatic improvements in new models. The old machine has been depreciated straight line anticipating a ten years life based on a cost of $240,0

> Meade Metals Inc plans to start doing its own deliveries instead of using an outside service for which it has been paying $150,000 per year. To make the change Meade will purchase a $200,000 truck that it will depreciate straight line over ten years to

> Deferred payment terms are equivalent to a cash discount. Discuss and explain this idea.

> Harrington Inc. is introducing a new product in its line of household appliances. Household products generally have ten-year life cycles and are viewed as capital budgeting projects over that period. Harrington’s working capital forecast for the projec

> How many years will it take for $850 per year to accumulate to $20,000 if the interest rate is 8%?

> Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two years. However, software products have short lives, a

> Laurel Wilson has a portfolio of five stocks. The stocks’ actual investment performance last year is given below along with an estimate of this year’s performance. Compute the actual return on Laurelâ€&

> Harry and Flo Simone are planning to start a restaurant. Stoves, refrigerators, other kitchen equipment, and furniture are expected to cost $50,000 all of which will be depreciated straight line over five years. Construction and other costs of getting

> A project that is expected to last six years will generate a profit and cash flow contribution before taxes and depreciation of $23,000 per year. It requires the initial purchase of equipment costing $60,000, which will be depreciated straight line over

> Voxland Industries purchased a computer for $10,000, which it will depreciate straight line over five years to a $1,000 salvage value. The computer will then be sold at that price. The company’s marginal tax rate is 40%. Calculate the cash flows assoc

> A four-year project has cash flows before taxes and depreciation of $12,000 per year. The project requires the purchase of a $50,000 asset that will be depreciated over five years, straight line. At the end of the fourth year the asset will be sold for

> Flextech Inc. is considering a project that will require new equipment costing $150,000. It will replace old equipment with a book value of $35,000 that can be sold on the second-hand market for $75,000. The company’s marginal tax rate is 35%. Calcula

> Imagine making choices in the following situation to test your degree of risk aversion. Someone offers you the choice between the following game and a sure thing. The Game: A coin is tossed. If it turns up heads, you get a million dollars. If tails,

> Write a brief, verbal description of the logic behind the development of the time value formulas for annuities.

> Why might the government be interested in influencing exchange rates from time to time? How would it go about moving the exchange rate?

> Calculate the IRR for the following projects. a. An initial outflow of $15,220 followed by inflows of $5,000, $6,000, and $6,500. b. An initial outflow of $47,104 followed by inflows of $16,000, $17,000, and 18,000.

> Calculate an IRR for the project in problem 2 using an iterative technique. (Hint: Start by guessing 15%.)

> Conestoga Ltd. has the following estimated probability distribution of returns. Calculate Conestoga’s expected return, the variance and standard deviation of its expected return and the return’s coefficient of variat

> Fred Tibbits has made a detailed study of the denim clothing industry. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for children and teenagers. Fred has done a forecast of Denhart's earnings and look

> The Habender Company just issued a two-year bond at 12%. Inflation is expected to be 4% next year and 6% the year after. Habender estimates its default risk premium at about 1.5% and its maturity risk premium at about .5%. Because it's a relatively sma

> A project has the following cash flows a. What is the project’s payback period? b. Calculate the projects NPV at 12%. c. Calculate the project’s PI at 12%. Co ($700) Ca $244 $200 $500

> Blackstone Corporation's $7 preferred was issued five years ago. The risk-appropriate interest rate for the issue is currently 11%. What is this preferred stock selling for today?

> What will a deposit of $4,500 left in the bank be worth under the following conditions? a. Left for nine years at 7% interest? b. Left for six years at 10% compounded semiannually? c. Left for five years at 8% compounded quarterly? d. Left for 10 years

> Pam Smith just inherited a $1,000 face value K-S Inc. bond from her grandmother. The bond clearly indicates a 12% coupon rate, but the maturity date has been smudged and can’t be read. Pam called a broker and determined that similar bonds are currently

> A four-stock portfolio is made up as follows Calculate the portfolio's beta. Current Value $4,500 Stock Beta .8 .6 2,900 6,800 1,200 1.3 1.8 D ABCA

> Calculate the present value of one dollar 30 years in the future at 10% interest. What does the result tell you about very long-term contracts?

> Grand Banks Mining Inc. plans a project to strip mine a wilderness area. Setting up operations and initial digging will cost $5 million. The first year's operations are expected to be slow and net a positive cash flow of only $500,000. Then there will

> The Duncan Company's stock is currently selling for $15. People generally expect its price to rise to $18 by the end of next year. They also expect that it will pay a dividend of $.50 per share during the year. (Hint: Apply Equation 9.2 page 395.) a.

> Calculate the expected return on an investment in Delta Inc.'s stock if the probability distribution of returns is as follows. Plot the distribution on the axis with Omega Inc. of the previous problem. Based on the graph, which company has the lower r

> The probability distribution of the return on an investment in Omega Inc.'s common stock is as follows: Graph the probability distribution. Calculate the expected return, the standard deviation of the return, and the coefficient of variation. Re

> The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the interest rate is 7%?

> The Aldridge Co. is expected to grow at 6% into the indefinite future. Its latest annual dividend was $2.50. Treasury bills currently earn 7% and the S&P 500 yields 11%. a. What price should Aldridge shares command in the market if its beta is 1.3? b.

> You are a junior treasury analyst at the Palantine Corporation. The treasurer believes the CAPM gives a good estimate of the company's return to equity investors at any time, and has asked you to prepare an estimate of that return using the SML. Treasu