Question: X-Centric Energy Company has issued perpetual

> 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?

> The First Bank of Flagstaff has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.65 on this stock. What is the current price of this preferred stock given a required rate of return of 11.6 percent?

> Proxicam, Inc., is expected to grow at a constant rate of 7 percent. If the company’s next dividend, which will be paid in a year, is $1.15 and its current stock price is $22.35, what is the required rate of return on this stock?

> Refer to problem 10.5. What are the payback periods for Production Systems 1 and 2? If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest? Refer to problem 10.

> Nyeil, Inc., is a consumer products firm that is growing at a constant rate of 6.5 percent. The firm’s last dividend was $3.36. If the required rate of return is 18 percent, what is the market value of this stock if dividends grow at the same rate as the

> Moriband Corp. paid a dividend of $2.15 yesterday. The company’s dividend is expected to grow at a steady rate of 5 percent for the foreseeable future. If investors in stocks of companies like Moriband require a rate of return of 15 percent, what should

> How do stock repurchases differ from dividends?

> What is the replacement cost of a business?

> Compare the characteristics of an LLC with those of a partnership and a C-corporation.

> A company’s management announces a $1.00 per share dividend payment. Assuming all investors are subject to a 15 percent tax rate on dividends, how much should the company’s share price drop on the ex-dividend date?

> Scintilla, Inc., stock is trading for $10.00 per share on the day before the ex-dividend date. If the dividend is $0.25 and there are no taxes, what should the price of the shares be on the ex-dividend date?

> Llama Wool Company management is doing some financial planning for the coming year. Llama plans to raise $10,000 in new equity this year and wants to pay a dividend to stockholders of $30,000. The firm must pay $20,000 of interest during the year and wil

> An investment requires an outlay of $100 and produces after-tax cash flows of $40 annually for four years. A project enhancement increases the required outlay by $15 and the annual after-tax cash flows by $5. How will the enhancement affect the project’s

> You purchased 1,000 shares of Koogal stock five years ago for $30 per share. Today Koogal is repurchasing your shares through a fixed-price tender offer for $80 per share. What are the after-tax proceeds to you if only your capital gain is taxed at a 15

> At the end of 2012, the maximum tax rate on dividends increased from 15 percent to 23.8 percent. How would you expect this increase to affect the prices of dividend-paying stocks versus those of nondividend-paying stocks?

> Fjord Luxury Liners has preferred shares outstanding that pay an annual dividend equal to $15 per year. If the current price of Fjord preferred shares is $107.14, what is the after-tax cost of preferred stock for Fjord?

> Seerex Wok Co. is expected to pay a dividend of $1.10 one year from today on its common shares. That dividend is expected to increase by 5 percent every year thereafter. If the price of Seerex common stock is $13.75, what is the cost of its common equity

> How does a dividend affect the size of a stockholder’s investment in a firm?

> Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25.00 per share with a $1.75 dividend. If the company were to issue preferred stock today,

> Suppose the cost of capital of the Gadget Company is 10 percent. If Gadget has a capital structure that is 50 percent debt and 50 percent equity, its before-tax cost of debt is 5 percent, and its marginal tax rate is 20 percent, then its cost of equity c

> Stock A and Stock B are both priced at $50 per share. Stock A has a P/E ratio of 17, while Stock B has a P/E ratio of 24. Which is the more attractive investment, considering everything else to be the same, and why?

> Provide two conditions under which a set of projects might be characterized as mutually exclusive?

> The price of a share of stock is $15.00 on Tuesday, November 14, 2017. The record date for a $0.50 dividend is Friday, November 17, 2017. If there are no taxes on dividends, what would you expect the price of a share to be on each day from November 14 th

> What are the differences between cash flows used in capital budgeting calculations and past accounting earnings?

> Under what circumstances will the sale of an asset result in a taxable gain? How do you estimate the taxes or tax benefits associated with the sale of an asset?

> Management of the Bernie Rubbel Company has just declared a three-for-one stock split. If you own 12,000 shares before the split, how many shares do you own after the split? What if it were a one-for-three reverse stock split?

> Management of the Veil Acts Company just announced that instead of a regular dividend this quarter, it will be repurchasing shares using the same amount of cash that would have been paid in the suspended dividend. Should this be a positive or negative si

> Explain why the after-tax cost of equity (common or preferred) does not have to be adjusted by the marginal income tax rate for the firm?

> What are the key events and dates in the dividend payment process?

> Sunglass Heaven, Inc., is launching a new store in a shopping mall in Houston. The annual revenue of the store depends on the weather conditions in the summer in Houston. The annual revenue will be $240,000 in a sizzling summer, with probability of 0.3;

> You are considering opening another restaurant in the TexasBurgers chain. The new restaurant will have annual revenue of $300,000 and operating expenses of $150,000. The annual depreciation and amortization for the assets used in the restaurant will equa

> Berron Comics, Inc., has borrowed $100 million and is required to pay its lenders $8 million in interest this year. If Berron is in the 35 percent marginal tax bracket, then what is the after-tax cost of debt (in dollars as well as in annual interest) to

> The market value of a firm’s assets is $3 billion. If the market value of the firm’s liabilities is $2 billion, what is the market value of the stockholders’ investment and why?

> Why is it important to discuss the qualifications of the management team in a business plan?

> What else can a business plan be used for?

> How are dividend payouts affected by expected earnings?

> How does a stock dividend differ from other types of dividends?

> How do stock prices react to dividend announcements?

> What is a stock repurchase?

> List and define four types of dividends?

> What kinds of errors can be made when the WACC for a firm is used as the discount rate for evaluating all projects in the firm?

> Do analysts use book values or market values to calculate the weights when they use Equation13.7? Why?

> What is the advantage of using a multistage-growth dividend model, rather than the constant-growth dividend model, to estimate kcs?

> What information is needed to use the CAPM to estimate kcs or kps?

> How do taxes affect the cost of debt?

> What does the WACC for a firm tell us?

> How is a sensitivity analysis used in project analysis?

> How does operating leverage change when there is an increase in the proportion of a project’s costs that are fixed?

> How is the proportion of fixed costs in a project’s cost structure related to the sensitivity of EBITDA and EBIT to changes in revenue?

> Under what circumstance would you replace an old machine that is still operating with a new one?

> Under what conditions is the WACC the appropriate discount rate for a project?

> When choosing between mutually exclusive projects of unequal lives, how can we ensure that the best decision is made?

> Why is it important to understand that cash flow forecasts in an NPV analysis are expected values?