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, reproduce under the same assumptions as in (a)). Data from Problem 5: 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 the assumption that the sales price will remain constant is also likely to be optimistic. Finally, as production ramps up, you anticipate lower per unit production costs resulting from economies of scale. Therefore, you decide to redo the projections under the following assumptions: Sales of 50,000 units in year 1 increasing by 50,000 units per year over the life of the project, a year 1 sales price of $260/unit, decreasing by 10% annually and a year 1 cost of $120/unit decreasing by 20% annually. In addition, new tax laws allow you to depreciate the equipment over three rather than five years using straight line depreciation. a. Keeping the other assumptions that underlie Table 8.1 the same, recalculate unlevered net income (that is, reproduce Table 8.1 under the new assumptions, and note that we are ignoring cannibalization and lost rent). b. Recalculate unlevered net income assuming, in addition, that each year 20% of sales comes from customers who would have purchased an existing Cisco router for $100/unit and that this router costs $60/unit to manufacture.
> 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 2002–2014? b. What was the volatility of the dividend yield? c. What was the average annual return of the SP500 from 2002–2014 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 Mydeco’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 KCP’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.
> 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%, an
> 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
> Suppose the following orders are received by an exchange for Cisco stock: Limit Order: Buy 200 shares at $25 Limit Order: Sell 200 shares at $26 Limit Order: Sell 100 shares at $25.50 Limit Order: Buy 100 shares at $25.25 a. What are the best bid and
> 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
> Bay Properties is considering starting a commercial real estate division. It has prepared the following four-year forecast of free cash flows for this division: Assume cash flows after year 4 will grow at 3% per year, forever. If the cost of capital fo
> 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
> Your firm is considering a project that would require purchasing $7.5 million worth of new equipment. Determine the present value of the depreciation tax shield associated with this equipment if the firm’s tax rate is 40%, the appropriate cost of capital
> 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
> 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
> You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the Killer X3000, will cost $900,000 to develop up front (year 0), and you expect rev
> Open Seas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $500 million, and would operate for 20 years. Open Seas expects annual cash flows from operating the ship to be $70 million (at the end of each year) and its cost of cap
> Fast Track Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000 per year for 10 years. Assume the cost of capital is
> Bill Clinton reportedly was paid $15 million to write his book My Life. Suppose the book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popularity, assume that he could earn $8 million pe
> Your firm is considering the launch of a new product, the XJ5. The upfront development cost is $10 million, and you expect to earn a cash flow of $3 million per year for the next five years. Plot the NPV profile for this project for discount rates rangin
> Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well
> You own a car dealership and are trying to decide how to configure the showroom floor. The floor has 2000 square feet of usable space. You have hired an analyst and asked her to estimate the NPV of putting a particular model on the floor and how much spa
> Natasha’s Flowers, a local florist, purchases fresh flowers each day at the local flower market. The buyer has a budget of $1000 per day to spend. Different flowers have different profit margins, and also a maximum amount the shop can s
> Explain how the bid-ask spread is determined in most markets today.
> 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
> You are considering a safe investment opportunity that requires a $1000 investment today, and will pay $500 two years from now and another $750 five years from now. a. What is the IRR of this investment? b. If you are choosing between this investment and
> Consider two investment projects, both of which require an upfront investment of $10 million and pay a constant positive amount each year for the next 10 years. Under what conditions can you rank these projects by comparing their IRRs?
> You are evaluating the following two projects: Use the incremental IRR to determine the range of discount rates for which each project is optimal to undertake. Note that you should also include the range in which it does not make sense to take either p
> 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 firm’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
> Your firm has been hired to develop new software for the university’s class registration system. Under the contract, you will receive $500,000 as an upfront payment. You expect the development costs to be $450,000 per year for the next three years. Once
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco’s costs and expenses had been the same fraction of revenues in 2013–2016 as they were in 2012. What would Mydecoâ
> Your firm spends $500,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next three years. If it does so, it expects it will need to spend $2 million in year
> 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
> How many IRRs are there in part (a) of Problem 5? Does the IRR rule give the right answer in this case? How many IRRs are there in part (b) of Problem 5? Does the IRR rule work in this case? Data from Problem 5: Bill Clinton reportedly was paid $15 mil
> You have been offered a very long term investment opportunity to increase your money one hundredfold. You can invest $1000 today and expect to receive $100,000 in 40 years. Your cost of capital for this (very risky) opportunity is 25%. What does the IRR
> Your brother wants to borrow $10,000 from you. He has offered to pay you back $12,000 in a year. If the cost of capital of this investment opportunity is 10%, what is its NPV? Should you undertake the investment opportunity? Calculate the IRR and use it
> Explain why the yield of a bond that trades at a discount exceeds the bond’s coupon rate.
> The prices of several bonds with face values of $1000 are summarized in the following table: For each bond, state whether it trades at a discount, at par, or at a premium. Bond A В D Price $972.50 $1040.75 $1150.00 $1000.00
> Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74. a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)? b. If the bond’s yield to maturity changes to 9% AP
> In the Global Financial Crisis box in Section 6.1, www.Bloomberg.com reported that the three month Treasury bill sold for a price of $100.002556 per $100 face value. What is the yield to maturity of this bond, expressed as an EAR?
> Suppose the current zero-coupon yield curve for risk-free bonds is as follows: a. What is the price per $100 face value of a two-year, zero-coupon, risk-free bond? b. What is the price per $100 face value of a four-year, zero-coupon, risk-free bond? c.
> Describe the important changes that have occurred in stock markets over the last decade.
> Suppose the yield on German government bonds is 1%, while the yield on Spanish government bonds is 6%. Both bonds are denominated in euros. Which country do investors believe is more likely to default? How can you tell?
> What does it mean for a country to “inflate away” its debt? Why might this be costly for investors even if the country does not default?
> The Isabelle Corporation rents prom dresses in its stores across the southern United States. It has just issued a five-year, zero-coupon corporate bond at a price of $74. You have purchased this bond and intend to hold it until maturity. a. What is the y
> The following table summarizes prices of various default-free, zero-coupon bonds (expressed as a percentage of face value): a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield
> Grummon Corporation has issued zero-coupon corporate bonds with a five-year maturity. Investors believe there is a 20% chance that Grummon will default on these bonds. If Grummon does default, investors expect to receive only 50 cents per dollar they are
> In the Data Case in Chapter 5, we suggested using the yield on Florida Sate bonds to estimate the State of Florida’s cost of capital. Why might this estimate overstate the actual cost of capital?
> Explain why the expected return of a corporate bond does not equal its yield to maturity.
> Suppose you are given the following information about the default-free, coupon-paying yield curve: a. Use arbitrage to determine the yield to maturity of a two-year, zero-coupon bond. b. What is the zero-coupon yield curve for years 1 through 4? Ma
> Assume there are four default-free bonds with the following prices and future cash flows: Do these bonds present an arbitrage opportunity? If so, how would you take advantage of this opportunity? If not, why not? Cash Flows Bond Price Today Year 1
> Prices of zero-coupon, default-free securities with face values of $1000 are summarized in the following table: Suppose you observe that a three-year, default-free security with an annual coupon rate of 10% and a face value of $1000 has a price today o
> What is the difference between a public and a private corporation?
> Consider a five-year, default-free bond with annual coupons of 5% and a face value of $1000. a. Without doing any calculations, determine whether this bond is trading at a premium or at a discount. Explain. b. What is the yield to maturity on this bond?
> Consider a four-year, default-free security with annual coupon payments and a face value of $1000 that is issued at par. What is the coupon rate of this bond? Data for Problem 21: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.8
> What is the maturity of a default-free security with annual coupon payments and a yield to maturity of 4%? Why? Data for Problem 20: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.80%
> What is the price of a three-year, default-free security with a face value of $1000 and an annual coupon rate of 4%? What is the yield to maturity for this bond? Data for Problem 19: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70%
> What is the price of a five-year, zero-coupon, default-free security with a face value of $1000? Data for Problem 18: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00% 4.30% 4.50% 4.70% 4.80%
> What is the price today of a two-year, default-free security with a face value of $1000 and an annual coupon rate of 6%? Does this bond trade at a discount, at par, or at a premium? Data for Problem 17: Maturity (years) 1 3 4 5 Zero-coupon YTM 4.00
> Suppose the current yield on a one-year, zero coupon bond is 3%, while the yield on a five-year, zero coupon bond is 5%. Neither bond has any risk of default. Suppose you plan to invest for one year. You will earn more over the year by investing in the f
> Suppose you purchase a 30-year Treasury bond with a 5% annual coupon, initially trading at par. In 10 years’ time, the bond’s yield to maturity has risen to 7% (EAR). a. If you sell the bond now, what internal rate of return will you have earned on your
