The Morrit Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morrit’s annual sales are $3 million, its average tax rate is 40%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan and bankruptcy will result. What is Morrit’s TIE ratio?
> Upton Computers makes bulk purchases of small computers, stocks the min conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton’s bal
> The Booth Company’s sales are forecasted to double from $1,000 in 2016 to $2,000 in 2017. Here is the December 31, 2016, balance sheet: Booth’s fixed assets were used to only 50% of capacity during 2016, but its curr
> At year-end 2016, Wallace Landscaping’s total assets were $2.17 million, and its accounts payable were $560,000. Sales, which in 2016 were $3.5 million, are expected to increase by 35% in 2017. Total assets and accounts payable are proportional to sales,
> Maggie’s Muffins Bakery generated$5,000,000 in sales during 2016, and its year-end total assets were $2,500,000. Also, at year-end 2016, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,
> Refer to Problem 12-1. Return to the assumption that the company had $5 million in assets at the end of 2016, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why i
> Refer to Problem 12-1. What would be the additional funds needed if the company’s year end 2016 assets had been $7 million? Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at full capacity
> The following table gives the current balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. The following facts also apply to TII. (1) Short-term debt consists of bank loans that currently
> EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC 12%. Calculate EMC’s estimated value of operations.
> What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a timeline? Is the opportunity rate a single number that is used to evaluate all potential investments?
> Conroy Consulting Corporation (CCC) has been growing at a rate of 30% per year inrecent years. This same non constant growth rate is expected to last for another 2 years g0,1 g1,2 30% . a. If D0 $2 50, rs 12% , and gL 7%, then what is CCC’s stock worth
> Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier’s weighted average cost o
> Kendra Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The company’s weighted average cost of capit
> Investors require a 13% rate of return on Brook Corporation stock rs = 13% . a. What would the estimated value of Brook’s stock be if the previous dividend were D0 = $3 00 and if investors expect dividends to grow at a constant annual rate of (1) −5%, (
> Several years ago, Rolen Riders issued preferred stock with a stated annual dividend of 10% of its $100 par value. Preferred stock of this type currently yields 8%. Assume dividends are paid annually. a. What is the estimated value of Rolen’s preferred s
> Simpkins Corporation does not pay any dividends because it is expanding rapidly and needs to retain all of its earnings. However, investors expect Simpkins to begin paying dividends, with the first dividend of $0.50 coming 3 years from today. The dividen
> Assume that the average firm in your company’s industry is expected to grow at a constant rate of 6% and that its dividend yield is 7 %. Your company is about as risky as the average firm in the industry and just paid a dividend D0 of $1. You expect that
> Brushy Mountain Mining Company’s coal reserves are being depleted, so its sales are falling. Also, environmental costs increase each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 4%
> Define each of the following terms: a. Proprietorship; partnership; corporation; charter; bylaws b. Limited partnership; limited liability partnership; professional corporation c. Stockholder wealth maximization d. Money market; capital market; primary m
> You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? b. What are the required rates of return on Stocks X and Y? c. What is the required rate
> You are considering an investment in either individual stocks or a portfolio of stocks. The two stocks you are researching, Stock A and Stock B, have the following historical returns: a. Calculate the average rate of return for each stock during the 5-
> A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.) a. What is the bond’s yield to maturity? b. What is the bond’s cu
> a. Find the present values of the following cash flow streams. The appropriate interest rate is 8%. b. What is the value of each cash flow stream at a 0% interest rate? Year Cash Stream A Cash Stream B 1 $100 $300 400 400 400 400 400 400 5 300 100 N
> Find the present value of the following ordinary annuities a. $400 per year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0% d. Now rework parts a, b, and c assuming that payments are made at the beginning of each
> You want to accumulate $1 million by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 8% interest, compounded annually. You expect to receive annual raises of 3%, whic
> Assume that your father is now 50 years old, plans to retire in 10 years, and expects to live for 25 years after he retires — that is , until age 85. He wants his first retirement payment to have the same purchasing power at the time he retires as $40,00
> Anne Lockwood, manager of Oaks Mall Jewelry, wants to sell on credit, giving customers 3 months to pay. However, Anne will have to borrow from her bank to carry the accounts receivable. The bank will charge a nominal rate of 15% and will compound monthly
> It is now January 1.You plan to make a total of 5 deposits of $100 each, one every 6 months, with the first payment being made today. The bank pays a nominal interest rate of 12% but uses semi annual compounding. You plan to leave the money in the bank f
> Your company is planning to borrow $1 million on a 5-year, 15%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal?
> Give two reasons why stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.
> Assume that your aunt sold her house on December 31, and to help close the sales he took a second mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10% ; it calls for payments every 6 months
> Assume that you inherited some money. A friend of yours is working as an unpaid internata local broker age firm, and her boss is selling securities that call for 4 payments of $50 (1 payment at the end of each of the next 4 years) plus an extra payment o
> Find the future value of the following annuities. The first payment in these annuities is made at the end of Year 1, so they are ordinary annuities. a. $400 per year for 10 years at 10% b. $200 per year for 5 years at 5% c. $400 per year for 5 years at 0
> You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year — with the first payment being made a year from today—into a bank account that pays 12% annual interest. Your last deposit will be less than $1,250 if less is needed t
> While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 instudentloansatanannualinterestrateof9%.If Maryre pays $1,500 per year, then how long (to the nearest year) will it take her to repay the loan?
> To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year (that is, you will need to with draw the first $10,000 one year from today). Your uncle offers to put you through
> A mortgage company offers to lend you $85,000; the loan calls for payments of $8,273.59 at the end of each year for30 years. What interest rate is the mortgage company charging you?
> Washington-Pacific (W-P) invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P ’s expected rate of re
> Sales for Hanebury Corporation’s just-ended year were $12 million. Sales were $6 million 5 years earlier. a. At what rate did sales grow? b. Suppose someone calculated the sales growth for Hanebury in part a as follows: “Sales doubled in 5 years. This re
> Consider a $25,000 loan to be repaid in equal installments at the end of each of the next 5 years. The interest rate is 10%. a. Set up an amortization schedule for the loan. b. How large must each annual payment be if the loan is for $50,000? Assume that
> Explain why the APV model is suited for situations in which the capital structure is changing during the forecast period.
> Universal Bank pays 7% interest, compounded annually, on time deposits. Regional Bank pays 6% interest, compounded quarterly. a. Based on effective interest rates, in which bank would you prefer to deposit your money? b. Could your choice of banks be inf
> Find the future values of the following ordinary annuities. a. FV of $400 each 6 months for 5 years at a nominal rate of 12%, compounded semiannually b. FV of $200 each 3 months for 5 years at a nominal rate of 12% ,compounded quarterly c. The annuities
> Find the present value of $500 due in the future under each of the following conditions. a. 12% nominal rate, semiannual compounding, discounted back 5 years b. 12% nominal rate, quarterly compounding, discounted back 5 years c. 12% nominal rate, monthly
> Find the amount to which $500 will grow under each of the following conditions. a. 12% compounded annually for 5 years b. 12% compounded semiannually for 5 years c. 12% compounded quarterly for 5 years d. 12% compounded monthly for 5 years
> Data for Lozano Chip Company and its industry averages follow. a. Calculate the indicated ratios for Lozano. b. Construct the extended DuPont equation for both Lozano and the industry. c. Outline Lozano’s strengths and weaknesses as rev
> The Jimenez Corporation’s forecasted 2017 financial statements follow, along with some industry average ratios. Calculate Jimenez’s 2017 forecasted ratios, compare them with the industry average data, and comment brief
> The Book binder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2016 the firmincurredalossof$650,000. The firm will claim a tax credit at the time it
> Using Rhodes Corporation’s financial statements (shown after Part f), answer the following questions. a. What is the net operating profit after taxes (NOPAT) for 2016? b. What are the amounts of net operating working capital for both ye
> To the closest year, how long will it take $200 to double if it is deposited and earns the following rates? [Notes: (1) See the Hint for Problem 4-9. (2) This problem cannot be solved exactly with some financial calculators. For example, if you enter PV
> Modigliani and Miller assumed that firms do not grow. How does positive growth change their conclusions about the value of the levered firm and its cost of capital?
> You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to addre
> David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technolo
> Randy’s, a family- owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s
> Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for
> Hatfield Medical Supply’s stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak, a finance MBA who had been working for a consulting company, to r
> Assume that you are nearing graduation and have applied for a job with a local bank. The bank’s evaluation process requires you to take an examination that covers several financial analysis techniques. The first section of the test addr
> The first part of the case, presented in Chapter 2, discussed the situation of Computron Industries after an expansion program. A large loss occurred in 2016, rather than the expected profit. As a result, its managers, directors ,and investors are concer
> Jenny Cochran, a graduate of the University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previ
> Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is Michelle Della Torre,a professional tennis player who has just come to the United State
> On the basis of your answers to Problems 22-1 and 22-2, indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Data from Problems 22-1: Hastings Corporation is interested in acquiring Van
> Describe some similarities and differences among broker-dealer networks, alternative trading systems (ATS), and registered stock exchanges.
> Counts Accounting’s beta is 1.15 and its tax rate is 40%. If it is financed with 20% debt, what is its unlevered beta?
> What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7%? If interest rates in general were to double and the appropriate discount rate rose to 14%, what would happen to the present value of the perpetuity?
> You buy a share of The Ludwig Corporation stock for $21.40. You expect it to pay dividends of$1.07,$1.1449,and$1.2250inYears 1,2,and3,respectively,andyouexpect to sell it at a price of $26.22 at the end of 3 years. a. Calculate the growth rate in dividen
> What are some similarities and differences between the NYSE and the NASDAQ Stock Market?
> What is the required rate of return on a preferred stock with a $50 par value, a stated annual dividend of 7% of par, and a current market price of (a) $30, (b) $40, (c) $50,and (d) $70 (assume the market is in equilibrium with the required return equal
> What are financial intermediaries, and what economic functions do they perform?
> Edmund Corporation recently made a large investment to upgrade its technology. Althoughtheseimprovementswon’thavemuchofanimpactonperformanceintheshort run, they are expected to reduce future costs significantly. What impact will this investment have on E
> What is a firm’s fundamental value (which is also called its intrinsic value)? What might cause a firm’s intrinsic value to be different from its actual market value?
> Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10% and $50 million of straight bonds with a coupon rate of 14%. Both bonds have the same maturity. Does the convertible issue’s lower coupon rate suggest that
> Define each of the following terms: a. Interest tax shields; value of tax shield b. Adjusted present value (APV) model c. Compressed adjusted present value (CAPV) model
> The current price of a stock is $ 33,and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercis
> Many companies that go public with an IPO don’t actually need additional cash to continue growing their operations. Why might such a firm decide to go public?
> Define each of the following terms: a. PV; I; INT; FVN; PVAN; FVAN; PMT; M; INOM b. Opportunity cost rate c. Annuity; lump-sum payment; cash flow; uneven cash flow stream d. Ordinary (or deferred) annuity; annuity due e. Perpetuity; consol. f. Outflow; i
> What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value be?
> A company currently pays a dividend of $2 per share D0 = $2 .It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% there after. The company’s stock has a beta of 1.2, the r
> Nick’sEnchiladasIncorporatedhaspreferredstockoutstandingthatpaysadividendof$5 at the end of each year. The preferred sells for $50 a share. What is the stock’s required rate of return (assume the market is in equilibrium with the required return equal to
> Woidtke Manufacturing’s stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share (i.e., D0 = $1 20), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now
> Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 $1 50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of return on the stock, rs, is 13%. What is the estimated value
> Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2016 to $ 9.2 million in 2017. Its assets totaled $5 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected
> A stock is trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share D1 = $4 , and it is expected to grow at some constant rate gL throughout time. The stock’s required rate of return is 14% (assume the market is in equi
> Explain how to use the free cash flow valuation model to find the price per share of common equity.
> Contrast and compare trading in face-to-face auctions, dealer markets, and automated trading platforms.
> Tremaine would like to organize UTA as either an S Corporation or a C corporation. In either form, the entity will generate a 9 percent annual before-tax return on a $1,000,000 investment. Tremaine’s marginal income tax rate is 37 percent and his tax rat
> On January 1 of year 1, Arthur and Aretha Franklin purchased a home for $1.5 million by paying $200,000 down and borrowing the remaining $1.3 million with a 7 percent loan secured by the home. The Franklins paid interest only on the loan for year 1 and y
> Javier and Anita Sanchez purchased a home on January 1 of year 1 for $1,000,000 by paying $200,000 down and borrowing the remaining $800,000 with a 6 percent loan secured by the home. The Sanchezes made interest only payments on the loan in years 1 and 2
> Javier and Anita Sanchez purchased a home on January 1, 2018 for, $600,000 by paying $200,000 down and borrowing the remaining $400,000 with a 7 percent loan secured by the home. The loan requires interest-only payments for the first five years. The Sanc
> George (age 42 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and his IRA is now worth $25,000. He is planning on transferring (or rolling over) the entire balance into a Roth IRA account. George’s margin
> Harriet and Harry Combs (both 37 years old) are married and both want to contribute to a Roth IRA. In 2018, their AGI before any IRA contribution deductions is $50,000. Harriet earned $46,000 and Harry earned $4,000. a. How much can Harriet contribute to
> Jackson and Ashley Turner (both 45 years old) are married and want to contribute to a Roth IRA for Ashley. In 2018, their AGI is $191,000. Jackson and Ashley each earned half of the income. a. How much can Ashley contribute to her Roth IRA if they file
> Brooklyn has been contributing to a traditional IRA for seven years (all deductible contributions) and has a total of $30,000 in the account. In 2018, she is 39 years old and has decided that she wants to get a new car. She withdraws $20,000 from the IRA
> In 2018, Rashaun (62 years old) retired and planned on immediately receiving distributions (making withdrawals) from his traditional IRA account. The balance of his IRA account is $160,000 (before reducing it for withdrawals/distributions described below
> In 2018, Susan (44 years old) is a highly successful architect and is covered by an employee-sponsored plan. Her husband, Dan (47 years old), however, is a Ph.D. student and is unemployed. Compute the maximum deductible IRA contribution for each spouse i
> William is a single writer (age 35) who recently decided that he needs to save more for retirement. His 2018 AGI before the IRA contribution deduction is $66,000 (all earned income). a. If he does not participate in an employer-sponsored plan, what is th
> Describe how goodwill with a zero basis for tax purposes but not for book purposes leads to a permanent book–tax difference when the book goodwill is written off as impaired.
> John (age 51 and single) has earned income of $3,000. He has $30,000 of unearned (capital gain) income. a. If he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution John can make in 2018? b. If he does par
> XYZ Corporation has a deferred compensation plan under which it allows certain employees to defer up to 40 percent of their salary for five years. (For purposes of this problem, ignore payroll taxes in your computations). a. Assume XYZ has a marginal tax
> Leslie participates in IBO’s nonqualified deferred compensation plan. For 2018, she is deferring 10 percent of her $300,000 annual salary. Based on her deemed investment choice, Leslie expects to earn a 7 percent before-tax rate of return on her deferred
> In 2018, Nitai (age 40) contributes 10 percent of his $100,000 annual salary to a Roth 401(k) account sponsored by his employer, AY Inc. AY Inc., matches employee contributions to the employee’s traditional 401(k) account dollar for dollar up to 10 perce
> Tommy (age 47) and his wife, Michelle (age 49), live in Columbus, Ohio, where Tommy works for Callahan Auto Parts (CAP) as the vice-president of the brakes division. Tommy’s 2018 salary is $360,000. CAP allows Tommy to participate in its nonqualified def
