2.99
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Kenneth Cole Productions (KCP) was acquired in 2012 for a purchase price of $15.25 per share. KCP has 18.5 million shares outstanding, $45 million in cash, and no debt at the time of the acquisition.

a. Given a weighted average cost of capital of 11%, and assuming no future growth, what level of annual free cash flow would justify this acquisition price?

b. If KCP’s current annual sales are $480 million, assuming no net capital expenditures or increases in net working capital, and a tax rate of 35%, what EBIT margin does your answer in part (a) require?

** >** Repeat Problem 4 assuming that the stock fell $5 to $45 instead. a. Is your capital gain different? Why or why not? b. Is your dividend yield different? Why or why not? Data from Problem 4: You bought a stock one year ago for $50 per share and sold it

** >** You bought a stock one year ago for $50 per share and sold it today for $55 per share. It paid a $1 per share dividend today. a. What was your realized return? b. How much of the return came from dividend yield and how much came from capital gain?

** >** State whether each of the following is inconsistent with an efficient capital market, the CAPM, or both: a. A security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. b. A security with a beta of 1 had a retu

** >** Suppose the market risk premium is 6.5% and the risk-free interest rate is 5%. Calculate the cost of capital of investing in a project with a beta of 1.2.

** >** Given the results to Problem 35, why don’t all investors hold Autodesk’s stock rather than Hershey’s stock? Data from Problem 35: Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the e

** >** Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data in Table 10.6, calculate the expected return of investing in a. Starbucksâ€™ stock. b. Hersheyâ€™s stock. c. Autodeskâ€

** >** Suppose the risk-free interest rate is 4%. a. i. Use the beta you calculated for the stock in Problem 33(a) to estimate its expected return. ii. How does this compare with the stock’s actual expected return? b. i. Use the beta you calculated for the stoc

** >** Suppose the market portfolio is equally likely to increase by 30% or decrease by 10%. a. Calculate the beta of a firm that goes up on average by 43% when the market goes up and goes down by 17% when the market goes down. b. Calculate the beta of a firm t

** >** Based on the data in Table 10.6, estimate which of the following investments you expect to lose the most in the event of a severe market down turn: (1) A $2000 investment in Hershey, (2) a $1500 investment in Macyâ€™s, or (3) a $1000 inve

** >** Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the custo

** >** You turn on the news and find out the stock market has gone up 10%. Based on the data in Table 10.6, by how much do you expect each of the following stocks to have gone up or down: (1) Starbucks, (2) Tiffany & Co., (3) Hershey, and (4) McDonaldâ

** >** What does the beta of a stock measure?

** >** Characterize the difference between the two stocks in Problems 1 and 2. What trade-offs would you face in choosing one to hold? Data from Problems 1: The figure on page 351 shows the one-year return distribution for RCS stock. Calculate a. The expected

** >** Download the spreadsheet from containing the realized return of the S&P 500 from 1929–2008. Starting in 1929, divide the sample into four periods of 20 years each. For each 20-year period, calculate the final amount an investor would have earned given a

** >** Suppose the risk-free interest rate is 5%, and the stock market will return either 40% or -20% each year, with each outcome equally likely. Compare the following two investment strategies: (1) invest for one year in the risk-free investment, and one year

** >** Identify each of the following risks as most likely to be systematic risk or diversifiable risk: a. The risk that your main production plant is shut down due to a tornado. b. The risk that the economy slows, decreasing demand for your firm’s products. c.

** >** Explain why the risk premium of a stock does not depend on its diversifiable risk.

** >** Using the data in Problem 23, plot the volatility as a function of the number of firms in the two portfolios. Data from Problem 23: Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both ty

** >** Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 60% probability that the firms will have a 15% return and a 40% probability that the firms will have a -10% r

** >** Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times all prices rise together and in bad times they all fa

** >** Can a firm with positive net income run out of cash? Explain.

** >** Using the data in Problem 20, calculate a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank. Data from Problem 20: Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, th

** >** Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across a

** >** The following table shows the one-year return distribution of Startup, Inc. Calculate a. The expected return. b. The standard deviation of the return.
Probability 40% 20% 20% 10% 10% Return – 100% -75% -50% -25% 1000%

** >** What if the last two and a half decades had been â€œnormalâ€? Download the spreadsheet from containing the data for Figure 10.1. a. Calculate the arithmetic average return on the S&P 500 from 1926 to 1989. b. Assuming

** >** Using the data from Problem 17, repeat your analysis over the 1990s. a. Which asset was riskiest? b. Compare the standard deviations of the assets in the 1990s to their standard deviations in the Great Depression. Which had the greatest difference betwee

** >** Download the spreadsheet from containing the data for Figure 10.1. a. Compute the average return for each of the assets from 1929 to 1940 (The Great Depression). b. Compute the variance and standard deviation for each of the assets from 1929 to 1940. c.

** >** How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of large, well-diversified portfolios?

** >** Compute the 95% confidence interval of the estimate of the average monthly return you calculated in Problem 13(a). Data from Problem 13: Using the same data as in Problem 12, compute the a. Average monthly return over this period. b. Monthly volatility

** >** Explain the difference between the average return you calculated in Problem 13(a) and the realized return you calculated in Problem 12. Are both numbers useful? If so, explain why. Data from Problem 13: Using the same data as in Problem 12, compute the

** >** Using the same data as in Problem 12, compute the a. Average monthly return over this period. b. Monthly volatility (or standard deviation) over this period. Data from Problem 12: Download the spreadsheet from that contains historical monthly prices an

** >** See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Use the data from the balance sheet and cash flow statement in 2012 to determine the following: a. How much cash did Mydeco have at the end of 2011? b. What were Mydeco&

** >** Download the spreadsheet from that contains historical monthly prices and dividends (paid at the end of the month) for Ford Motor Company stock (Ticker: F) from August 1994 to August 1998. Calculate the realized return over this period, expressing your a

** >** Consider an investment with the following returns over four years: a. What is the compound annual growth rate (CAGR) for this investment over the four years? b. What is the average annual return of the investment over the four years? c. Which is a bett

** >** Using the data in Table 10.2, a. What was the average dividend yield for the SP500 from 2002â€“2014? b. What was the volatility of the dividend yield? c. What was the average annual return of the SP500 from 2002â€“2014 exc

** >** The figure on page 351 shows the one-year return distribution for RCS stock. Calculate a. The expected return. b. The standard deviation of the return.
35 30 25 20 15 10 5 -25% -10% 0% 10% 25% Return Probability (%)

** >** In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.72. In 2008, KCP paid an annual dividend of $0.36, and then paid no further dividends through 2012. KCP was acquired at the end of 2012 for $15.25 per share. a. What would an in

** >** Canadian-based mining company El Dorado Gold (EGO) suspended its dividend in March 2016 as a result of declining gold prices and delays in obtaining permits for its mines in Greece. Suppose you expect EGO to resume paying annual dividends in two years ti

** >** Dorpac Corporation has a dividend yield of 1.5%. Dorpac’s equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s

** >** No Growth Corporation currently pays a dividend of $2 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 15% per year?

** >** Krell Industries has a share price of $22 today. If Krell is expected to pay a dividend of $0.88 this year, and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s dividend yield and equity cost of capital?

** >** In mid-2015, Coca-Cola Company (KO) had a share price of $41, and had paid a dividend of $1.32 for the prior year. Suppose you expect Coca-Cola to raise this dividend by approximately 7% per year in perpetuity. a. If Coca-Cola’s equity cost of capital is

** >** See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. In what year was Mydecoâ€™s net income the lowest? b. In what year did Mydeco need to reduce its cash reserves? c. Why did Mydeco need to reduce its c

** >** Suppose Hawaiian Airlines (HA) has 53 million shares outstanding. Estimate Hawaiian’s share value using each of the five valuation multiples in Problem 28, based on the median valuation multiple of the other seven airlines shown.

** >** Consider the following data for the airline industry for December 2015 (EV = enterprise value, Book = equity book value). Discuss the potential challenges of using multiples to value an airline.
Market Enterprise Value (EV) Company Name Capitalizati

** >** In addition to footwear, Kenneth Cole Productions designs and sells handbags, apparel, and other accessories. You decide, therefore, to consider comparable for KCP outside the footwear industry. a. Suppose that Fossil, Inc., has an enterprise value to EB

** >** Suppose that in January 2006, Kenneth Cole Productions had sales of $518 million, EBITDA of $55.6 million, excess cash of $100 million, $3 million of debt, and 21 million shares outstanding. a. Using the average enterprise value to sales multiple in Tabl

** >** Suppose that in January 2006, Kenneth Cole Productions had EPS of $1.65 and a book value of equity of $12.05 per share. a. Using the average P/E multiple in Table 9.1, estimate KCPâ€™s share price. b. What range of share prices do you est

** >** You notice that PepsiCo (PEP) has a stock price of $72.62 and EPS of $3.80. Its competitor, the Coca-Cola Company (KO), has EPS of $1.89. Estimate the value of a share of Coca-Cola stock using only this data.

** >** Consider the valuation of Kenneth Cole Productions. a. Suppose you believe KCP’s initial revenue growth rate will be between 4% and 11% (with growth slowing in equal steps to 4% by year 2011). What range of share prices for KCP is consistent with these f

** >** IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development strategy, in late 2008 you initiate discussions with IDX’s founder about the possibility of acquiring the business at the e

** >** Anle Corporation has a current price of $20, is expected to pay a dividend of $1 in one year, and its expected price right after paying that dividend is $22. a. What is Anle’s expected dividend yield? b. What is Anle’s expected capital gain rate? c. What

** >** See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. From 2012 to 2016, what was the total cash flow from operations that Mydeco generated? b. What fraction of the total in (a) was spent on capital expenditures? c. What

** >** What does the phrase limited liability mean in a corporate context?

** >** Benchmark Metrics, Inc. (BMI), an all-equity financed firm, reported EPS of $5.00 in 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due to the financial crisis, BMI does not wish to fund these in

** >** Suppose Amazon.com Inc. pays no dividends but spent $3 billion on share repurchases last year. If Amazon’s equity cost of capital is 8%, and if the amount spent on repurchases is expected to grow by 6.5% per year, estimate Amazon’s market capitalization.

** >** What is the value of a firm with initial dividend Div, growing for n years (i.e., until year n + 1) at rate g1 and after that at rate g2 forever, when the equity cost of capital is r ?

** >** Colgate-Palmolive Company has just paid an annual dividend of $1.50. Analysts are predicting dividends to grow by $0.12 per year over the next five years. After then, Colgate’s earnings are expected to grow 6% per year, and its dividend payout rate will

** >** Procter and Gamble (PG) paid an annual dividend of $1.72 in 2009. You expect PG to increase its dividends by 8% per year for the next five years (through 2014), and thereafter by 3% per year. If the appropriate equity cost of capital for Procter and Gamb

** >** DFB, Inc., expects earnings at the end of this year of $5 per share, and it plans to pay a $3 dividend at that time. DFB will retain $2 per share of its earnings to reinvest in new projects with an expected return of 15% per year. Suppose DFB will mainta

** >** Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price?

** >** Mersey Chemicals manufactures polypropylene that it ships to its customers via tank car. Currently, it plans to add two additional tank cars to its fleet four years from now. However, a proposed plant expansion will require Mersey’s transport division to

** >** Cellular Access, Inc. is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital expenditures of $200 million, and no interest expenses. W

** >** After looking at the projections of the Home Net project, you decide that they are not realistic. It is unlikely that sales will be constant over the four-year life of the project. Furthermore, other companies are likely to offer competing products, so t

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** >** Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit, and this year’s sales are expected to be 20,000 units.

** >** For the assumptions in part (a) of Problem 5, assuming a cost of capital of 12%, calculate the following: a. The break-even annual sales price decline. b. The break-even annual unit sales increase. Data from Problem 5: After looking at the projections

** >** Using the FCF projections in part (b) of Problem 11, calculate the NPV of the Home Net project assuming a cost of capital of a. 10%. b. 12%. c. 14%. What is the IRR of the project in this case?

** >** In September 2008, the IRS changed tax laws to allow banks to utilize the tax loss carry forwards of banks they acquire to shield their future income from taxes (prior law restricted the ability of acquirers to use these credits). Suppose Fargo Bank acqu

** >** Your firm would like to evaluate a proposed new operating division. You have forecasted cash flows for this division for the next five years, and have estimated that the cost of capital is 12%. You would like to estimate a continuation value. You have ma

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** >** Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents o

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** >** Consider again the choice between outsourcing and in-house assembly of Home Net discussed in Section 8.3 and analyzed in Table 8.6. Suppose, however, that the upfront cost to set up for in-house production is $6 million rather than $5 million, and the co

** >** A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make these c

** >** The following quote on Yahoo! stock appeared on July 23, 2015, on Yahoo! Finance: If you wanted to buy Yahoo!, what price would you pay? How much would you receive if you wanted to sell Yahoo!?
Yahoo! Inc. (YHOO) - NasdagGS 39.55 +0.31(0.79%) 12:0P

** >** Using the assumptions in part (a) of Problem 5 (assuming there is no cannibalization), a. Calculate Home Net’s net working capital requirements (that is, reproduce Table 8.4 under the assumptions in Problem 5(a)). b. Calculate Home Net’s FCF (that is, re

** >** You are considering an investment in a clothes distributor. The company needs $100,000 today and expects to repay you $120,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cos

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** >** Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid, from Huawei, will require a $20 million upfront investment and will generate $20 million in savings for Facebook each year for the n

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** >** You work for an outdoor play structure manufacturing company and are trying to decide between two projects: You can undertake only one project. If your cost of capital is 8%, use the incremental IRR rule to make the correct decision.
Year-End Cash

** >** You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firmâ€™s manufacturing facility. You find that the prior analysis ranked

** >** You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate additional revenue of $500 per month. What is the payback per

** >** You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, it will generate cash flows of

** >** You are considering investing in a start-up company. The founder asked you for $200,000 today and you expect to get $1,000,000 in nine years. Given the riskiness of the investment opportunity, your cost of capital is 20%. What is the NPV of the investmen

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** >** See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydecoâ€™s costs and expenses had been the same fraction of revenues in 2013â€“2016 as they were in 2012. What would Mydecoâ

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** >** You have 3 projects with the following cash flows: a. For which of these projects is the IRR rule reliable? b. Estimate the IRR for each project (to the nearest 1%). c. What is the NPV of each project if the cost of capital is 5%? 20%? 50%?
Year 2