Question: You are a junior treasury analyst at

> The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite’s marginal tax rate including both federal and state taxes is 38%. What is the firm’s cost of debt?

> Asbury Corp. issued 30-year bonds 11 years ago with a coupon rate of 9.5%. Those bonds are now selling to yield 7%. The firm also issued some 20-year bonds two years ago with an 8% coupon rate. The two bond issues are rated equally by Standard and Poor

> Blazingame Inc.'s capital components have the following market values: Calculate the firm's capital structure and show the weights that would be used for a weighted average cost of capital (WACC) computation. Debt . $35,180,000 Preferred Stock.

> Sanville Quarries is considering acquiring a new drilling machine which is expected to be more efficient than their current machine. The project is to be evaluated over four years. The initial outlay required to get the new machine operating is $675,000

> The Olson Company plans to replace an old machine with a new one costing $85,000. The old machine originally cost $55,000, and has six years of its expected 11-year life remaining. It has been depreciated straight line assuming zero salvage value, and

> Kleig Inc.'s bonds are selling to yield 9%. The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%. The company's marginal tax rate is 42%. a. What is Kleig's cost of debt with respect to the new bonds? (H

> Mitech Corp’s stock has been growing at approximately 8% for several years and is now $30. Based on past growth rate performance, what would you expect the stock’s price to be in five years?

> The Pepperpot Company's stock is selling for $52. Its last dividend was $4.50, and the firm is expected to grow at 7% indefinitely. Flotation costs associated with the sale of common stock are 10% of the proceeds raised. Estimate Pepperpot's cost of e

> What's an opportunity cost interest rate?

> Fuller, Inc. issued $100, 8% preferred stock five years ago. The shares are currently selling for $84.50. Assuming Fuller has to pay floatation costs of 10%, what is Fuller’s cost of preferred stock?

> Keener Clothiers Inc. is considering investing $2 million in an automatic sewing machine to produce a newly designed line of dresses. The dresses will be priced at $200, and management expects to sell 12,000 per year for six years. There is, however, so

> Haley Motors is considering a maintenance contract for its heavy equipment. One firm has offered Haley a four-year contract for $100,000 to be paid in advance. Another firm has offered an eight-year contract for $165,000 also to be paid in advance. Both

> The Paxton Homes Co. is a successful builder of moderate to high-priced houses. The firm is currently considering an expansion into light commercial construction in which it would build shopping centers and small office buildings. Management considers t

> Calculate IRRs for the projects in the previous problem. Problem 19: Initial Outlay (C) Project Length (in years) Annual Cost of NPV Cash Flow Сapital ($100,000) ($200,000) ($300,000) ($400,000) ? 5 $35,000 8% ? $35,000 $15,000 $20,000 $25,000 4

> Auburn Concrete Inc. is considering the purchase of a new concrete mixer to replace an inefficient older model that is completely worn out. If purchased, the new machine will cost $90,000 and is expected to generate savings of $40,000 per year for five

> Blue & Noble is a small law firm that does all of its business through billings (no cash sales). Historically the firm has collected 40% of its revenue in the month of billing, 50% during the first month after billing and 8% during the second month after

> Fox Woodworking Inc. issued preferred shares at a face value of $50 to yield 9% 10 years ago. The shares are currently selling at $60. What return are they earning for investors who buy them today?

> Olson-Jackson Corp. (OJC) is considering replacing a machine that was purchased only two years ago because of dramatic improvements in new models. The old machine has been depreciated straight line anticipating a ten years life based on a cost of $240,0

> Meade Metals Inc plans to start doing its own deliveries instead of using an outside service for which it has been paying $150,000 per year. To make the change Meade will purchase a $200,000 truck that it will depreciate straight line over ten years to

> Deferred payment terms are equivalent to a cash discount. Discuss and explain this idea.

> Harrington Inc. is introducing a new product in its line of household appliances. Household products generally have ten-year life cycles and are viewed as capital budgeting projects over that period. Harrington’s working capital forecast for the projec

> How many years will it take for $850 per year to accumulate to $20,000 if the interest rate is 8%?

> Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two years. However, software products have short lives, a

> Laurel Wilson has a portfolio of five stocks. The stocks’ actual investment performance last year is given below along with an estimate of this year’s performance. Compute the actual return on Laurelâ€&

> Harry and Flo Simone are planning to start a restaurant. Stoves, refrigerators, other kitchen equipment, and furniture are expected to cost $50,000 all of which will be depreciated straight line over five years. Construction and other costs of getting

> A project that is expected to last six years will generate a profit and cash flow contribution before taxes and depreciation of $23,000 per year. It requires the initial purchase of equipment costing $60,000, which will be depreciated straight line over

> Voxland Industries purchased a computer for $10,000, which it will depreciate straight line over five years to a $1,000 salvage value. The computer will then be sold at that price. The company’s marginal tax rate is 40%. Calculate the cash flows assoc

> A four-year project has cash flows before taxes and depreciation of $12,000 per year. The project requires the purchase of a $50,000 asset that will be depreciated over five years, straight line. At the end of the fourth year the asset will be sold for

> Flextech Inc. is considering a project that will require new equipment costing $150,000. It will replace old equipment with a book value of $35,000 that can be sold on the second-hand market for $75,000. The company’s marginal tax rate is 35%. Calcula

> Imagine making choices in the following situation to test your degree of risk aversion. Someone offers you the choice between the following game and a sure thing. The Game: A coin is tossed. If it turns up heads, you get a million dollars. If tails,

> Write a brief, verbal description of the logic behind the development of the time value formulas for annuities.

> Why might the government be interested in influencing exchange rates from time to time? How would it go about moving the exchange rate?

> Calculate the IRR for the following projects. a. An initial outflow of $15,220 followed by inflows of $5,000, $6,000, and $6,500. b. An initial outflow of $47,104 followed by inflows of $16,000, $17,000, and 18,000.

> Calculate an IRR for the project in problem 2 using an iterative technique. (Hint: Start by guessing 15%.)

> Conestoga Ltd. has the following estimated probability distribution of returns. Calculate Conestoga’s expected return, the variance and standard deviation of its expected return and the return’s coefficient of variat

> Fred Tibbits has made a detailed study of the denim clothing industry. He's particularly interested in a company called Denhart Fashions that makes stylish denim apparel for children and teenagers. Fred has done a forecast of Denhart's earnings and look

> The Habender Company just issued a two-year bond at 12%. Inflation is expected to be 4% next year and 6% the year after. Habender estimates its default risk premium at about 1.5% and its maturity risk premium at about .5%. Because it's a relatively sma

> A project has the following cash flows a. What is the project’s payback period? b. Calculate the projects NPV at 12%. c. Calculate the project’s PI at 12%. Co ($700) Ca $244 $200 $500

> Blackstone Corporation's $7 preferred was issued five years ago. The risk-appropriate interest rate for the issue is currently 11%. What is this preferred stock selling for today?

> What will a deposit of $4,500 left in the bank be worth under the following conditions? a. Left for nine years at 7% interest? b. Left for six years at 10% compounded semiannually? c. Left for five years at 8% compounded quarterly? d. Left for 10 years

> Pam Smith just inherited a $1,000 face value K-S Inc. bond from her grandmother. The bond clearly indicates a 12% coupon rate, but the maturity date has been smudged and can’t be read. Pam called a broker and determined that similar bonds are currently

> A four-stock portfolio is made up as follows Calculate the portfolio's beta. Current Value $4,500 Stock Beta .8 .6 2,900 6,800 1,200 1.3 1.8 D ABCA

> Calculate the present value of one dollar 30 years in the future at 10% interest. What does the result tell you about very long-term contracts?

> Grand Banks Mining Inc. plans a project to strip mine a wilderness area. Setting up operations and initial digging will cost $5 million. The first year's operations are expected to be slow and net a positive cash flow of only $500,000. Then there will

> The Duncan Company's stock is currently selling for $15. People generally expect its price to rise to $18 by the end of next year. They also expect that it will pay a dividend of $.50 per share during the year. (Hint: Apply Equation 9.2 page 395.) a.

> Calculate the expected return on an investment in Delta Inc.'s stock if the probability distribution of returns is as follows. Plot the distribution on the axis with Omega Inc. of the previous problem. Based on the graph, which company has the lower r

> The probability distribution of the return on an investment in Omega Inc.'s common stock is as follows: Graph the probability distribution. Calculate the expected return, the standard deviation of the return, and the coefficient of variation. Re

> The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the interest rate is 7%?

> The Aldridge Co. is expected to grow at 6% into the indefinite future. Its latest annual dividend was $2.50. Treasury bills currently earn 7% and the S&P 500 yields 11%. a. What price should Aldridge shares command in the market if its beta is 1.3? b.

> The stock of Sedly Inc. is expected to pay the following dividends: At the end of the fourth year its value is expected to be $37.50. What should Sedly sell for today if the return on stocks of similar risk is 12%? Year Dividend 3. 1 2 4 $2.25 $3.

> A portfolio consists of the following four stocks. What is the expected return of the portfolio? Еxpected Current Market Value Return $180,000 $145,000 $452,000 $223,000 $1,000,000 Stock 8% 10% 12% 5% ABCA

> Longly Trucking is issuing a 20-year bond with a $2,000 face value tomorrow. The issue is to pay an 8% coupon rate, because that was the interest rate while it was being planned. However, rates have increased suddenly and are expected to be 9% when the

> Why is it important that physical assumptions precede financial results in the planning process? For example, what's wrong with assuming that you want a business that sells $50 million a year earning a profit of $5 million, and then building a revenue an

> At what interest rate will $750 grow into $3,132.83 in 15 years?

> How long will it take $5,000 invested at 14% to double?

> The Pancake Corporation recently paid a $3 dividend, and is expected to grow at 5% forever. Investors generally require an expected return of at least 9% before they'll buy stocks similar to Pancake. a. What is Pancake's intrinsic value? b. Is it a ba

> The Spinnaker Company has paid an annual dividend of $2 per share for some time. Recently the board of directors voted to grow the dividend by 6% from now on. What is the most you would be willing to pay for a share of Spinnaker if you expect a 10% ret

> Broxholme Industries has sales of $40 million, equity totaling $27.5 million and an ROS of 12%. The sustainable growth rate has been calculated at 10.9%. What dividend payout ratio was assumed in this calculation?

> Refer to the Microsoft stock quotation on page 194. Demonstrate that the price earnings (P/E) ratio is consistent with other information in the listing.

> Snyder Mfg. issued a $1,000 face value 30-year bond 5 years ago with an 8% coupon. The bond is subject to call after 10 years, and the current interest rate is 7%. What call premium will make a bondholder indifferent to the call? (Hint: Equate the for

> What would you pay for an annuity paying $3,000 per year for 12 years if the interest rate is 10%?

> Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two years. However, software products have short lives, a

> How much will $650 per year deposited at 12% be worth in 8 years?

> Why is planning for a new business harder than planning for an existing operation? In which do you have to make more assumptions? Why? What implicit assumption provides a short cut in one situation?

> What is the FV of $1,250.63 for 3 years at 7%?

> At what interest rate will $1,000 grow into $3,642.50 in 15 years?

> What is the current yield on each of the bonds in the previous problem?

> How much is a guaranteed promise of $15,750 to be received in 12 years’ worth today if interest is 14%?

> If you deposit $207.86 in an account that pays 4% and leave it there for 12 years how much will you have in the account?

> Timberline Inc. has the following current accounts last year. ($000) In addition, the company had sales revenues of $9,453,000 and costs and expenses (including interest and tax) of $7,580,000. Depreciation of $1,462,000 is included in the cost and

> How much will $175 grow into if it is invested at 16% for 30 years?

> Lapps Inc. makes a gift product that sells best during the holiday season. Retailers stock up in the fall so Lapps’ sales are largest in October and November and drop dramatically in December. The firm expects the following revenue patt

> The Centurion Corp. is putting together a financial plan for the company covering the next three years, and needs to forecast its interest expense and the related tax savings. The firm's most significant liability is a fully amortized mortgage loan on it

> Amitron Inc. is considering an engineering project that requires an investment of $250,000 and is expected to generate the following stream of payments (income) in the future. Use the TIMEVAL program to determine if the project is a good idea in a presen

> What was the trigger that started the crisis? If it didn’t happen would the crisis have been averted?

> The Lexington Property Development Company has a $10,000 note receivable from a customer due in three years. How much is the note worth today if the interest rate is a. 9%? b. 12% compounded monthly? c. 8% compounded quarterly? d. 18% compounded month

> What interest rate will make $7,500 per year accumulate to $279,600 in 15 years?

> Tutak Industries issued a $1,000 face value bond a number of years ago that will mature in eight years. Similar bonds are yielding 8%, and the Tutak bond is currently selling for $1,291.31. Compute the coupon rate on this bond. (In practice we generall

> If you invest $8,000 at 12%, how long will it take to triple?

> How much would you have to put in the bank today to have $42,800 in 9 years if the interest rate is 7%?

> Sam Rothstein wants borrow $15,500 to be repaid in quarterly installments over five years at 16% compounded quarterly. How much will his payment be?

> Sweet Tooth Cookies, Inc. has the following ratios What percentage of its assets are financed by equity? (Hint: Substitute into the Extended DuPont Equation.) ROE . = 15% ...... T/A turnover = 1.2 ROS . E 10%

> What are the annual payments on a loan of $350,000 to be repaid over 10 years at 8%?

> How much would you have to save each year to have $65,000 in 10 years if the interest rate is expected to be 7%?

> The Lineberry Golf Cart Co. sold 7,400 carts this year at an average unit price of $3,000. The firm produced the carts at a 42% cost ratio, which is calculated as cost of goods sold (COGS) divided by revenue. At year end 50 days of sales remained uncol

> What is a tranche and how was its risk estimated before the crisis?

> Fleming, Inc. had a dividend payout ratio of 25% this year that resulted in a payout of $80,000 in dividends. Return on sales (ROS) was 8% this year and is expected to increase to 9% next year. If Fleming expects to have $305,100 available from next ye

> The Eagle Feather Fabric Company expects to complete the current year with the following financial results ($000). Forecast next year using a modified percentage of sales method assuming no dividends are paid and no new stock is sold along with the fol

> The Tower family wants to make a home improvement that is expected to cost $60,000. They want to fund as much of the cost as possible with a home equity loan, but can afford payments of only $600 per month. Their bank offers equity loans at 12% compound

> Larime Corp is forecasting 20X2 near the end of 20X1. The estimated year-end financial statements and a worksheet for the forecasts are shown below. Management expects the following next year: • An 8% increase in revenue. â&

> The management of Coker Corp is doing a quick forecast of 20X9 using the modified percentage of sales method in preparation for a more detailed planning exercise later in the month. The estimate is to assume a 10% growth in sales. All other line items

> If Sharon Henderson of the previous problem is also a founder of the company and has retained 8 million shares of its stock, how much of a difference will the auditors’ decision make in her personal wealth outside of the stock option?

> Joe Ferro's uncle is going to give him $250 a month for the next two years starting today. If Joe banks every payment in an account paying 6% compounded monthly, how much will he have at the end of three years?

> Read Business Analysis Case 3. Henderson Industries Inc.’s stock is currently selling at $22.40 per share. Sharon Jacobs, the CEO, has options to buy 250,000 shares at $25.50 per share that expire at the end of this year. Sharon feels that if the tradi

> The Cambridge Cartage Company has partially completed its forecast of next year's financial statements as follows. The firm pays interest at 10% on all borrowings and pays a combined state and federal tax rate of 40%. Complete the forecasted income st

> The Nelson Sheet Metal Company has current assets of $2.5 million and current liabilities of $1.0 million. The firm is in need of additional inventory and has an opportunity to borrow money on a short-term note with which it can buy the needed material.

> List the traditional qualifications for a mortgage loan and describe how each protects the lender.

> Industry A is dominated by ten large firms each with sales of approximately $500 million per year. A proposal to merge two of these firms was approved by the Justice Department as not violating the antitrust laws. Industry B is locally defined and much

> Relate the idea of cost of capital to the opportunity cost concept. Is the cost of capital the opportunity cost of project money?

> Why is it desirable to construct capital budgeting rules so that higher risk projects become less acceptable than lower risk projects?