Distinguish between debentures and mortgage bonds.
> Garret Industries has a price/earnings ratio of 16.29X. a. If Garret’s earnings per share are $1.35, what is the price per share of Garret’s stock? b. Using the price per share you found in part (a), determine the price/book ratio if Garret’s equity-book
> If you were offered $1,079.50 ten years from now in return for an investment of $500 currently, what annual rate of interest would you earn if you took the offer?
> In September 1963, the first issue of the comic book X-MEN was issued. The original price for that issue was $0.12. By September 2016, 53 years later, the value of the near-mint copy of this comic book had risen to $35,000. What annual rate of interest w
> You lend a friend $10,000, for which your friend will repay you $27,027 at the end of 5 years. What interest rate are you charging your “friend”?
> If the 10-year Treasury bond rate is 4.9%, the inflation premium is 2.1%, and the maturity-risk premium on 10-year Treasury bonds is 0.3%, assuming that there is no liquidity-risk premium on these bonds, what is the real risk-free interest rate?
> a. How does a bond’s par value differ from its market value? b. Explain the differences among a bond’s coupon interest rate, current yield, and required rate of return.
> If ABC Company earned $280,000 in net income and paid cash dividends of $40,000, what are ABC’s earnings per share and dividends per share if it has 80,000 shares outstanding?
> This morning, you noticed the following information in your financial newspaper: 1 British pound = 103.25 yen ( JPY) 1 U.S. dollar = 81.23 yen 1 U.S. dollar = 0.77 euro s Given this information, how many euro s did the newspaper likely state could be con
> Suppose the exchange rate between U.S. dollars and Japanese yen is $1 US = ¥79.1 JPY, and the exchange rate between the U.S. dollar and the British pound is $1 US = £0.64 GBP. What is the cross rate of Japanese yen to British pounds? (In other words, how
> If one euro buys 1.32 U.S. dollars, how many euros can you purchase for 3 U.S. dollars?
> Compute the Canadian dollar/yen and the yen/Swiss franc spot rates from the data in the preceding table. COUNTRY CONTRACT S/FOREIGN CURRENCY Canada dollar Spot 0.8437 30-day 0.8417 90-day 0.8395 Japan yen Spot 0.004684 30-day 0.004717 90-day 0.004
> An American business pays $10,000, $15,000, and $20,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive? COUNTRY CONTRACT $/FOREIGN CURRENCY Canada dollar Spot 0.8437 30-day 0.
> An American business needs to pay (a) 10,000 Canadian dollars, (b) 2 million yen, and (c) 50,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries? COUNTRY CONTRACT S/FOREIGN CURRENCY Canada dollar Spot 0.
> Identify each of the following sources of short-term credit in terms of whether they are secured (include some type of collateral) or are unsecured: ◆ Line of credit ◆ Pledging of accounts receivable ◆ Trade credit ◆ Factoring of accounts receivable ◆ In
> Simpson Energy earned $3 million in net income last year and for the first time ever paid its common stockholders a cash dividend of $0.12 per share. The firm has 10 million shareholders. What was Simpson’s dividend payout ratio?
> The Hokie Corporation is considering two mutually exclusive projects. Both require an initial outlay of $10,000 and will operate for 5 years. Project A will produce expected cash flows of $5,000 per year for years 1 through 5, whereas project B will prod
> Describe the bondholder’s claim on the firm’s assets and income.
> Captins’ Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. The new cereal will be similar to the old with the exception that it will contain sugarcoated marshmallows shaped in the form of stars and will be calle
> Nanotech, Inc. currently has an electronics production facility, and it is cost-prohibitive to expand this production facility. Nanotech is deciding among the following four contracts: Which project or projects should Nanotech accept? CONTRACT'S
> Your investment advisor has offered you an investment that will provide you with one cash flow of $10,000 at the end of 20 years if you pay premiums of $200 per year at the end of each year for 20 years. Find the internal rate of return on this investmen
> Jella Cosmetics is considering a project that costs $800,000 and that is expected to last for 10 years and produce future free cash flows of $175,000 per year. If the appropriate discount rate for this project is 12 percent, what is the project’s IRR?
> Pathos Co.’s common stock is currently selling for $23.80. Dividends paid last year were $0.70. Flotation costs on issuing stock will be 10 percent of market price. The dividends and earnings per share are projected to have an annual growth rate of 15 pe
> Your firm is planning to issue preferred stock. The stock sells for $115; however, if new stock is issued, the company would receive only $98. The par value of the stock is $100, and the dividend rate is 14 percent of net income. What is the cost of capi
> The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $1,000 par value bonds at a net price of $945. The coupon interest rate is 12 percent, and the bonds would mature in 15 years. If the co
> The preferred stock of Texas Southern Power Company sells for $51 and pays $4.25 in dividends. The net price of the security after issuance costs is $48.00. What is the cost of capital for the preferred stock?
> Carraway Seed Company is issuing a $1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $850 for the bond. Flotation costs will be 3 percent of market value. The company is in a 30 percent margin
> In the spring of 2015, the Brille Corporation was involved in issuing new common stock at a market price of $35. Dividends last year were $1.50 and are expected to grow at an annual rate of 5 percent forever. Flotation costs will be 6 percent of market p
> Define (a) Eurobonds, (b) zero coupon bonds, and (c) junk bonds.
> Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 14 percent annual coupon rate and a 10-year maturity. The investors require a 9 percent rate of return. a. C
> The Cammack Corporation wants to achieve a steady 7 percent growth rate. If it can achieve a 12 percent return on equity, what percentage of earnings must Cammack retain for investment purposes?
> Mosser Corporation’s common stock paid $1.32 in dividends last year and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require an 11 percent return?
> You are considering an investment in one of two preferred stocks, TCF Capital or TAYC Capital Trust. TCF Capital pays an annual dividend of $2.69, while TAYC Capital pays an annual dividend of $2.44. If your required return is 12 percent, what value woul
> Calculate the value of a preferred stock that pays a dividend of $6 per share if your required rate of return is 12 percent.
> The market price for the Earnest Corporation’s common stock is $43 per share. The price at the end of 1 year is expected to be $48, and dividends for next year should be $2.84. What is the expected rate of return?
> The common stock of Martin Co. is selling for $32.84 per share. The stock recently paid dividends of $2.94 per share and has a projected constant growth rate of 9.5 percent. If you purchase the stock at the market price, what is your expected rate of ret
> Bennett, Inc.‘s common stock currently sells for $22.50 per share. The company’s executives anticipate a constant growth rate of 10 percent and an end-of-year dividend of $2. a. What is your expected rate of return if you buy the stock for $22.50? b. If
> You are considering the purchase of Kline, Inc.‘s stock at a market price of $36.72 per share. Assume the stock pays an annual dividend of $2.33. What would be your expected return? Should you purchase the stock if your required return is 8 percent?
> You are considering the purchase of 150 shares of preferred stock. Your required return is 11 percent. If the stock is currently selling for $40 and pays a dividend of $5.25, should you purchase the stock?
> Define the expected rate of return to bondholders.
> You own 150 shares of Budd Corporation’s preferred stock at a market price of $22 per share. Budd pays dividends of $1.55. What is your expected rate of return? If you have a required rate of return of 9 percent, should you buy more stock?
> What is the present value of the following? a. A $300 perpetuity discounted back to the present at 8 percent b. A $1,000 perpetuity discounted back to the present at 12 percent c. A $100 perpetuity discounted back to the present at 9 percent d. A $95 per
> Zust preferred stock is selling for $42.16 per share and pays $1.95 in dividends. What is your expected rate of return if you purchase the security at the market price?
> The preferred stock of the Gand t Corporation pays a $2.75 dividend. What is the value of the stock if your required return is 9 percent?
> You’re in need of some money fast, and rather than ask your folks for help, you’ve decided to look into a payday loan. At a payday loan shop right near your school you see that you can borrow $100 and repay $115 in 10 days. What are the APR and the EAR o
> You’ve just received an offer from a bank for a credit card with a quoted rate, or APR, of 18 percent compounded monthly. What’s the EAR, or effective annual rate, on the credit card?
> Schlumberger is selling for $64.91 per share and paid a dividend of $1.10 last year. The dividend is expected to grow at 4 percent indefinitely. What is the stock’s expected rate of return?
> Abercrombie & Fitch’s common stock pays a dividend of $0.70. It is currently selling for $34.14. If the firm’s investors require a 10 percent return on their investment from buying Abercrombie & Fitch stock, what growth rate would Abercrombie & Fitch hav
> Septian, Inc.’s return on equity is 16 percent, and the management plans to retain 60 percent of earnings for investment purposes. What will be the firm’s growth rate?
> Sanford’s common stock is expected to pay $1.85 in dividends next year, and the market price is projected to be $42.50 per share by yearend. If investors require a rate of return of 11 percent, what is the current value of the stock?
> Given that a firm’s return on equity is 18 percent and management plans to retain 40 percent of earnings for investment purposes, what will be the firm’s growth rate?
> Herrera Motor, Inc. paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
> You intend to purchase Dorchester common stock at $50 per share, hold it for 1 year, and then sell it after a dividend of $6 is paid. How much will the stock price have to appreciate for you to satisfy your required rate of return of 15 percent?
> Bates, Inc. pays a dividend of $1 and is currently selling for $32.50. If investors require a 12 percent return on their investment from buying Bates stock, what growth rate would Bates, Inc. have to provide the investors?
> What is the value of a preferred stock when the dividend rate is 16 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12 percent.
> Assume you have a bond with a semiannual interest payment of $35, a par value of $1,000, and a current market of $780. What is the current yield of the bond?
> Your folks just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for $21,074.25 that will pay them $3,000 per year for 20 years, but they don’t have the slightest idea
> Assume you have the following portfolio. What is the portfolio’s beta? STOCK STOCK WEIGHT ВЕТА Apple 38% 1.50 Green Mountain Coffee 15% 1.44 Disney 27% 1.15 Target 20% 1.20
> From the graph in the right margin relating the holding-period returns for Aram Inc. to the S&P 500 Index, estimate the firm’s beta.
> As a recent business school graduate, you work directly for the corporate treasurer. Your corporation is going to issue a new security and is concerned with the probable flotation costs. What tendencies about flotation costs can you relate to the treasur
> What effect will diversifying your portfolio have on your returns and your level of risk?
> Why is the examination of only the balance sheet and income statement not adequate in evaluating a firm?
> Why is an investment-banking syndicate formed?
> What is a beta? How is it used to calculate r, the investor’s required rate of return?
> What is the security market line? What does it represent?
> How would an increase in the interest rate (r) or a decrease in the holding period (n) affect the future value (FVn) of a sum of money? Explain why.
> What additional factors are encountered in international as compared with domestic financial management? Discuss each briefly.
> How do we measure the beta of a portfolio?
> Identify three distinct ways that savings are ultimately transferred to business firms in need of cash.
> Discuss briefly the two perspectives that can be taken when performing a ratio analysis.
> In the New York exchange market, the forward rate for the Indian currency, the rupee, is not quoted. If you were exposed to exchange rate risk in rupees, how could you hedge your position?
> Over the past eight decades, we have had the opportunity to observe the rates of return and the variability of these returns for different types of securities. Summarize these observations.
> A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has excess cash on hand?
> What is the objective of capital structure management?
> Define the term operating leverage. What type of effect occurs when the firm uses operating leverage?
> Define the term financial leverage. Does the firm use financial leverage if preferred stock is present in its capital structure?
> Define the EBIT-EPS indifference point.
> What does the term independence hypothesis mean as it applies to capital structure theory?
> In the preceding chapter we examined the payback period capital-budgeting criterion. Often this capital-budgeting criterion is used as a risk-screening device. Explain the rationale behind its use.
> How should managers compare two mutually exclusive projects of unequal size? Should the approach change if capital rationing is a factor?
> Explain the relationship between the required rate of return and the value of a security.
> Define the term structure of interest rates.
> If we were to graph the returns of a stock against the returns of the S&P 500 Index, and the points did not follow a very ordered pattern, what could we say about that stock? If the stock’s returns tracked the S&P 500 returns very closely, then what coul
> Explain the impact of inflation on rates of return.
> What is a general definition of the intrinsic value of an asset?
> What are the assumptions made by the EOQ model?
> Why would a firm repurchase its own stock?
> What are the advantages of a stock split or dividend over a cash dividend?
> How does a firm’s liquidity position affect the payment of dividends?
> State how investors’ expected rate of return is computed.
> Define investors’ expected rate of return.
> What is net working capital?
> What are the two major objectives of the firm’s cash management system?
> What is (a) unsystematic risk (company-unique or diversifiable risk) and (b) systematic risk (market or non diversifiable risk)?
> This Mini Case is available in My Finance Lab. After graduating from college in December 2014, Elizabeth Arce started her career at the W&T Corporation, a small- to medium-sized warehouse distributor in Nashville, Tennessee. The company was founded b
> What is the residual dividend theory?
> Explain the trade-off between retaining earnings internally and paying cash dividends.
> What is meant by the term dividend payout ratio?
> Knutson Products Inc. is involved in the production of airplane parts and has the following inventory, carrying, and storage costs: 1. Orders must be placed in round lots of 100 units. 2. Annual unit usage is 250,000. (Assume a 50-week year in your calcu
> A downtown bookstore is trying to determine the optimal order quantity for a popular novel just printed in paperback. The store feels that the book will sell at four times its hardback figures. It would, therefore, sell approximately 3,000 copies in the
> The following ratios were supplied by six loan applicants. Given this information and the credit-scoring model developed by Altman (equation [17-4]), which loans have a high probability of defaulting next year? EBIT + TOTAL ASSETS MARKET VALUE OF
