Explain the relationship between the required rate of return and the value of a security.
> 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?
> Distinguish between debentures and mortgage bonds.
> 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?
> 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
> Determine the effective annualized cost of forgoing the trade credit discount on the following terms: a. 1/10, net 20 b. 2/10, net 30 c. 3/10, net 30 d. 3/10, net 60 e. 3/10, net 90 f. 5/10, net 60
> Assuming a 360-day year, calculate what the average investment in inventory would be for a firm, given the following information in each case. a. The firm has sales of $600,000, a gross profit margin of 10 percent, and an inventory turnover ratio of 6. b
> The Cowboy Bottling Company will generate $12 million in credit sales next year. Collection of these credit sales will occur evenly over this period. The firm’s employees work 270 days a year. Currently, the firm’s processing system ties up 4 days’ worth
> Two years ago your corporate treasurer purchased for the firm a 20-year bond at its par value of $1,000. The coupon rate on this security is 8 percent. Interest payments are made to bondholders once a year. Currently, bonds of this particular risk class
> a. What is meant by the investor’s required rate of return? b. How do we measure the riskiness of an asset? c. How should the proposed measurement of risk be interpreted?
> Bradford Construction Supply Company is suffering from a prolonged decline in new construction in its sales area. In an attempt to improve its cash position, the firm is considering changes in its accounts-payable policy. After careful study, it has dete
> The Alex Daniel Shoe Manufacturing Company currently pays its employees on a weekly basis. The weekly wage bill is $500,000. This means that on average the firm has accrued wages payable of ($500,000 + $0)/2 = $250,000. Alex Daniel Jr. works as the firm’
> Peggy Pierce Designs Inc. is a vertically integrated, national manufacturer and retailer of women’s clothing. Currently, the firm has no coordinated cash management system. A proposal, however, from the First Pennsylvania Bank aimed at speeding up cash c
> Penn Steelworks is a distributor of cold-rolled steel products to the automobile industry. All of its sales are on a credit basis, net 30 days. Sales are evenly distributed over its 10 sales regions throughout the United States. Delinquent accounts are n
> As CFO of Portobello Scuba Diving Inc. you are asked to look into the possibility of adopting a lockbox system to expedite cash receipts from clients. Portobello receives check remittances totaling $24 million in a year. The firm records and processes 10
> The Mason Falls Mfg. Company just acquired a depreciable asset this year, costing $500,000. Furthermore, the asset falls into the 7-year property class using the MACRS. a. Using the MACRS, compute the annual depreciation. b. What assumption is being made
> In Problem 3-14, you were asked to prepare a statement of cash flows for Pamplin Inc. Pamplin’s financial statements are provided again on the next page. Using this information, compute the firm’s free cash flows and t
> In Study Problem 3-12, you were asked to prepare a statement of cash flows for Abrahams Manufacturing Company. Use the information given in the problem to compute the firm’s free cash flows and the financing cash flows, and interpret yo
> Interpret the following information regarding Maness Corporation’s free cash flows and financing cash flows. Maness Corporation Free Cash Flows and Financing Cash Flows Free cash flows Operating income (EBIT) $1,875 Depreciation
> Given the following information, compute the firm’s free cash flows and the financing cash flows. Dividends……………………………………………………. $ 25 Change in common stock………………………………$ 27 Change in inventories……………………………………$ 32 Change in accounts receivable……………………….
> What is an annuity? Give some examples of annuities. Distinguish between an annuity and a perpetuity.
> Gio’s Restaurants is considering a project with the following expected free cash flows: YEAR……………………...PROJECT CASH FLOW 0 ………………………………………………...$150 million 1……………………………………………………90 million 2……………………………………………………70 million 3 ………………………………………………….90 millio
> Calculate the PI given the following free cash flows if the appropriate required rate of return is 10 percent. YEAR……………………………. CASH FLOWS 0 ………………………………………………2$55,000 1……………………………………………………10,000 2……………………………………………………10,000 3……………………………………………………10,000
> Calculate the MIRR given the following free cash flows if the appropriate required rate of return is 10 percent (use this as the reinvestment rate). YEAR………………………….CASH FLOWS 0 ………………………………………….2$50,000 1………………………………………………. 25,000 2……………………………………………….
> Calculate the NPV given the following free cash flows if the appropriate required rate of return is 10 percent. YEAR………………CASH FLOWS 0 ……………………………...2$70,000 1…………………………………. 30,000 2…………………………………. 30,000 3…………………………………30,000 4 ……………………………. 230,000 5………
> Calculate the NPV given the following free cash flows if the appropriate required rate of return is 10 percent. YEAR……………………………CASH FLOWS 0 ……………………………………………2$60,000 1…………………………………………………20,000 2………………………………………………...20,000 3…………………………………………………. 10,000 4
> The Tiffin Barker Corporation is considering introducing a new currency verifier that has the ability to identify counterfeit dollar bills. The required rate of return on this project is 12 percent. What is the IRR on this project if it is expected to pr
> Mooby’s is considering building a new theme park. After future cash flows were estimated, but before the project could be evaluated, the economy picked up and with that surge in the economy interest rates rose. That rise in interest rates was reflected i
> Big Steve’s, a maker of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $100,000 and will generate free cash inflows of $18,000 per year for 10 years. a. If the required rate of
> Determine the IRR on the following projects: a. An initial outlay of $10,000 resulting in a single free cash flow of $17,182 after 8 years b. An initial outlay of $10,000 resulting in a single free cash flow of $48,077 after 10 years c. An initial outlay
> The common stock for the Bestsold Corporation sells for $58. If a new issue is sold, the flotation costs are estimated to be 8 percent. The company pays 50 percent of its earnings in dividends, and a $4 dividend was recently paid. Earnings per share 5 ye
> Suppose you were considering depositing your savings in one of three banks, all of which pay 5 percent interest; bank A compounds annually, bank B compounds semiannually, and bank C compounds daily. Which bank would you choose? Why?
> Saddle River Operating Company (SROC) is a Dallas-based independent oil and gas firm. In the past, the firm’s managers have used a single firm-wide cost of capital of 11 percent to evaluate new investments. However, the firm has long recognized that its
> In May of this year Newcastle Mfg. Company’s capital investment review committee received two major investment proposals. One of the proposals was issued by the firm’s domestic manufacturing division, and the other came from the firm’s distribution compa
> Compute the cost of the following: a. A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 9 percent. A new issue would have a flotation cost of 5 percent of the $1,100 market value. The bonds mature in 10 years. The fi
> LPT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E&P), pipelines, and refining. Historically, LPT did not spend a great deal of time t
