Question: Why would management of a company undertake

> You are currently thinking about investing in a stock valued at $25.00 per share. The stock recently paid a dividend of $2.25 and its dividend is expected to grow at a rate of 5 percent for the foreseeable future. You normally require a return of 14 perc

> Why is stock valuation more difficult than bond valuation?

> Explain why preferred stock is considered to be a hybrid of equity and debt securities?

> Ted McKay has just bought the common stock of Ryland Corp. The company expects to grow at the following rates for the next three years: 30 percent, 25 percent, and 15 percent. Last year the company paid a dividend of $2.50. Assume a required rate of retu

> You want to estimate the value of a local advertising firm. The earnings of the firm are expected to be $2 million next year. Based on expected earnings next year, the average price-to-earnings ratio of similar firms in the same industry is 48. Therefore

> You are valuing a company using the WACC approach and have estimated that the free cash flows from the firm (FCFF) in the next five years will be $36.7, $42.6, $45.1, $46.3, and $46.6 million, respectively. Beginning in year 6, you expect the cash flows

> How do the cash flows that are discounted when the WACC approach (FCFF approach) is used to value a business differ from those that are discounted when the free cash flow to equity (FCFE) approach is used to value the equity in a business?

> How is a preferred stock with a fixed maturity valued?

> You have the following information for a company you are valuing and for a comparable company: Comparable company: ………….……………………………… Company you are valuing: Stock price = $23.45 ………………… ………………………………………. Value of debt = $3.68 million Number of shares out

> Your sister wants to open a store that sells antique-style jewelry and accessories. She has $15,000 of savings to invest, but opening the store will require an initial investment of $20,000. Net cash inflows will be −$2,000, −$1,000, and $0 in the first

> Two publicly traded companies in the same industry are similar in all respects except one. Whereas Publicks has issued debt in the public markets, Privicks has never borrowed from any public source. In fact, it always uses private bank debt for its borro

> You believe that the average investor is subject to a 20 percent tax rate on dividend payments. If a firm is going to pay a $0.30 dividend, by what amount would you expect the stock price to drop on the ex-dividend date?

> You would like to own a common stock that has a record date of Friday, September 8, 2017. What is the last date that you can purchase the stock and still receive the dividend?

> You are analyzing a firm that is financed with 60 percent debt and 40 percent equity. The current cost of debt financing is 10 percent, but due to a recent downgrade by the rating agencies, the firm’s cost of debt is expected to increase to 12 percent im

> Mike’s T-Shirts, Inc., has debt claims of $400 (market value) and equity claims of $600 (market value). If the after-tax cost of debt financing is 11 percent and the cost of equity is 17 percent, then what is Mike’s weighted average cost of capital?

> Belt Bottoms, Inc. is considering a five-year project with an initial investment of $20,000. What annual free cash flow (FCF) would be required for this project to have an NPV of $0 if the opportunity cost capital is 11 percent?

> You are considering investing in a business that has monthly fixed costs of $5,500 and sells a single product that costs $35 per unit to make. This product sells for $90 per unit. What is the annual pretax operating cash flow break-even point for this bu

> The Vinyl CD Co. is going to take on a project that is expected to increase its EBIT by $90,000, its fixed cost cash expenditures by $100,000, and its depreciation and amortization by $80,000 next year. If the project yields an additional 10 percent in r

> Why can skipping payment of a preferred dividend be a bad signal?

> Hydrogen Batteries sells its specialty automobile batteries for $85 each, while its current variable cost per unit is $65. Total fixed costs (including depreciation and amortization expense) are $150,000 per year. Management expects to sell 10,000 batter

> The Yellow Shelf Company sells all of its shelves for $100 per shelf, and incurs $50 in variable costs to produce each. If the fixed costs for the firm are $2,000,000 per year, what will the EBIT for the firm be if it produces and sells 45,000 shelves ne

> Sprigg Lane Manufacturing, Inc., needs to purchase a new central air-conditioning system for a plant. There are two choices. The first system costs $50,000 and is expected to last 10 years, and the second system costs $72,000 and is expected to last 15 y

> In calculating the NPV of a project, should we use all of the after-tax cash flows associated with the project, or incremental after-tax cash flows from the project? Why?

> Explain why the announcement of a new investment is usually accompanied by a change in the firm’s stock price?

> You are considering a project that has an initial outlay of $1 million. The profitability index of the project is 2.24. What is the NPV of the project?

> Refer to Problem 10.1. Compute the IRR for each of the two systems. Is the investment decision different from the one determined by NPV? Refer to Problem 10.1: The Management of Premium Manufacturing Company is evaluating two forklift systems to use in

> Terrell Corp. management is considering purchasing a machine that will cost $117,250 and will be depreciated on a straight-line basis over a five-year period. The sales and expenses (excluding depreciation) for the next five years are shown in the follow

> Perryman Crafts Corp. management is evaluating two independent capital projects that will each cost the company $250,000. The two projects will provide the following cash flows: Which project will be chosen if the company’s payback cri

> The Management of Premium Manufacturing Company is evaluating two forklift systems to use in its plant that produces the towers for a windmill power farm. The costs and the cash flows from these systems are shown below. If the company uses a 12 percent d

> Explain why the growth rate g must always be less than the rate of return R for the constant-growth rate model?

> You are interested in buying the preferred stock of a bank that pays a dividend of $1.80 every quarter. If you discount such cash flows at 8 percent, what is the value of this stock?

> Barrymore Infotech is a fast-growing communications company. The company did not pay a dividend last year and is not expected to do so for the next two years. Last year the company’s growth accelerated, and management expects to grow the business at a ra

> Clarion Corp. has been selling electrical supplies for the past 20 years. The company’s product line has changed very little in the past five years, and the company’s management does not expect to add any new items for the foreseeable future. Last year,

> Merriweather Manufacturing Company has been growing at a rate of 6 percent for the past two years, and the CEO expects the company to continue to grow at this rate for the next several years. The company paid a dividend of $1.20 last year. If your requir

> How might financial statements for private companies differ from those for public companies?

> What is a key person?

> Why is marketability an important issue in business valuation?

> What is the difference between investment value and fair market value?

> Why is it important to specify a valuation date when you value a business?

> What is the difference between FCFE and dividends?

> What are growth stocks, and why do they typically pay little or no dividends?

> What are three income approaches used to value a business?

> What is a nonoperating asset, and how are such assets accounted for in business valuation?

> What are the two market approaches that can be used to value a business, and how do they differ?

> Why is a business plan important in raising capital for a young company?

> How does a cash budget help an entrepreneur?

> How do financing considerations affect the choice of organizational form?

> What are three general reasons that new businesses fail?

> List three practical considerations that managers should take into account when setting a dividend policy?

> Three years ago, you purchased 4,000 shares of Metwa Inc. for $17 per share. Today Metwa is repurchasing its shares through a fixed-price tender offer at a price of $45 per share. What are the after-tax proceeds that you will receive if capital gains are

> What did the 2005 study conclude about how managers view stock repurchases?

> Shares of Convoy West, Inc. are trading for $55.45 on the day before the ex-dividend date. If the quarterly dividend is $0.16 per share and there are no taxes, how will the share price change on the ex-dividend date?

> Miron’s Copper Corp. management expects its common stock dividends to grow 1.5 percent per year for the indefinite future. The firm’s shares are currently selling for $18.45, and the firm just paid a dividend of $3.00 yesterday. What is the cost of commo

> Quarri Industries has a beta of 1.6. If the market risk free rate is 4 percent and the expected return on the market 9 percent, what is Babbitt’s cost of common stock?

> Which of the following are relevant cash flows in the evaluation of a proposal to produce a new product? a. Decrease in the cash flows of a substitute product. b. Alternative of leasing an existing building that will be used for manufacturing this produc

> Burnes, Inc. is a mature firm that is growing at a constant rate of 5.5 percent per year. The last dividend that the firm paid was $1.50 per share. If dividends are expected to grow at the same rate as the firm and the required rate of return on Burnes’s

> Is preferred stock a debt or an equity security?

> Do private companies have audited financial statements prepared in accordance with GAAP?

> Sessler Corporation is a private company that had EBIT of $186 million and depreciation and amortization of $22 million in the most recent fiscal year. At the end of that year, a similar, public firm has an Enterprise Value/EBITDA multiple of 4.3. What i

> Which of the following is/are usually included in an entrepreneur’s business plan? a. Detailed description of the company’s products and services. b. Discussion of the management team, including organizational structure. c. A listing of the types of secu

> Which type of secondary market provides the most efficient market for financial securities?

> How does a stock dividend differ from a stock split?

> Why do some people view preferred stock as a special type of a bond rather than a stock?

> The current stock price of Largent, Inc., is $44.72. If the required rate of return is 19 percent, what is the dividend paid by this firm if the dividend is not expected to grow in the future?

> Ron Santana is interested in buying the stock of First National Bank. While the bank’s management expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 p

> Knight Supply Corp. has not grown for the past several years and management expects this lack of growth to continue. The firm last paid a dividend of $3.56. If you require a rate of return of 13 percent, what is the current value of this stock to you?

> Nynet, Inc., paid a dividend of $4.18 last year. The company’s management does not expect to increase its dividend in the foreseeable future. If the required rate of return is 18.5 percent, what is the current value of the stock?

> The law firm of Dewey, Cheatem, and Howe has monthly fixed costs of $100,000, EBIT of $250,000, and depreciation charges on its office furniture and computers of $5,000. Calculate the Cash Flow DOL for this firm?

> The Gearing Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital s

> When assembling the cash flows to calculate an NPV or IRR, the project’s after-tax interest expenses should be subtracted from the cash flows for: a. The NPV calculation, but not the IRR calculation. b. The IRR calculation, but not the NPV calculation. c

> Marx Political Consultants has decided to discontinue all of its business operations. The firm has total debt of $7 million, and the liquidation value of its assets is $10 million. If the book value of the firm’s equity is $5 million, then what will be t

> Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semiannually and a five-year maturity at $900 per bond. If Dot.Com’s marginal tax rate is 38 percent, its after-tax cost of debt is closest to: a. 6.2 percen

> The cost of equity is equal to the: a. Expected market return. b. Rate of return required by stockholders. c. Cost of retained earnings plus dividends. d. Risk the company incurs when financing.

> Why might stock repurchases be preferred to dividends?

> Operating leverage is a measure of the: a. Sensitivity of net earnings to changes in operating earnings. b. Sensitivity of net earnings to changes in sales. c. Sensitivity of fixed operating costs to changes in variable costs. d. Sensitivity of earnings

> You know that the return of Momentum Cyclicals common shares is 1.6 times as sensitive to macroeconomic information as the return of the market. If the risk-free rate of return is 2.88 percent and the market risk premium is 5.92 percent, what is Momentum

> Perpetual Ltd. has issued bonds that never require the principal amount to be repaid to investors. Correspondingly, Perpetual must make interest payments into the infinite future. If the bondholders receive annual payments of $75 and the current price of

> In most circumstances, given the choice between a higher fixed cost structure and a lower fixed cost structure, which of the two would generate a larger contribution margin?

> Rhea Kirby owns shares in Ryoko Corp. Currently, the market price of the stock is $36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was $3.25. Rhea’s required rate of return for suc

> Courtesy Bancorp issued perpetual preferred stock a few years ago. The bank pays an annual dividend of $4.27 and your required rate of return is 12.2 percent. a. What is the value of the stock given your required rate of return? b. Should you buy this st

> What are direct out-of-pocket costs?

> Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred stock, and 40 percent common stock. If the returns required by investors are 8 percent, 10 percent, and 15 percent for the debt, p

> How do we calculate incremental after-tax free cash flows from forecasted earnings of a project? What are the common adjustment items?

> Mick’s Soft Lemonade is starting to develop a new product for which the cash fixed costs are expected to be $80,000. The projected EBIT is $100,000, and the Accounting DOL is expected to be 2.0. What is the Cash Flow DOL for the firm?

> What are the benefits and costs associated with dividends?

> Explain how the value of accounting operating leverage can be used?

> If a manufacturing firm and a service firm have identical cash fixed costs, but the manufacturing firm has much higher depreciation and amortization, then which firm is more likely to have a large discrepancy between its FCF and its EBIT?

> Given the U.S. Corporate Tax Rate Schedule in Exhibit 11.6, what was the marginal tax rate and average tax rate of a corporation that had a taxable income of $12 million in 2016?

> You are graduating in two years. You want to invest your current savings of $5,000 in bonds and use the proceeds to purchase a new car when you graduate and start to work. You can invest the money in either Bond A, a two-year bond with a 3 percent annual

> If you had to choose between one project with an expected life of five years and a second project with an expected life of six years, how could you do this without using the equivalent annual cost concept?

> Explain how we determine the optimal time to replace an existing asset with a new one?

> Six Twelve, Inc., is considering opening up a new convenience store in downtown New York City. The expected annual revenue at the new store is $800,000. To estimate the increase in working capital, analysts estimate the ratio of cash and cash-equivalents

> You own shares of Old World DVD Company and are interested in selling them. With so many people downloading music these days, sales, profits, and dividends at Old World have been declining 6 percent per year. The firm just paid a dividend of $1.15 per sh

> Jenny Banks is interested in buying the stock of Fervan, Inc., which is increasing its dividends at a constant rate of 6 percent. Last year the firm paid a dividend of $2.65. The required rate of return is 16 percent. What is the current value of this st

> What is the Dow Jones Industrial Average?

> In what ways can a company repurchase its stock?

> The required rate of return is 23 percent. Ninex Corp. has just paid a dividend of$3.12 and is expected to increase its dividend at a constant rate of 5 percent. What is the expected price of the stock three years from now?

> Kay Williams is interested in purchasing the common stock of Reckers, Inc., which is currently priced at $37.45. The company is expected to pay a dividend of $2.58 next year and to increase its dividend at a constant rate of 7 percent. a. What should th

> Each quarter, Sirkota, Inc., pays a dividend on its perpetual preferred stock. Todaythe stock is selling at $63.37. If the required rate of return for such stocks is 15.5 percent, what is the quarterly dividend paid by Sirkota?

> The preferred stock of Axim Corp. is currently selling at $47.13. If the required rate of return is 12.2 percent, what is the dividend paid by this stock?