You are an intern with First Bank, and have been asked to develop estimates for yield spreads that would be appropriate for corporate bonds or loans with different maturities and credit ratings. To get a rough idea, you decide to start looking at recent data from the bond market. 1. Begin by finding the current U.S. Treasury yield curve. At the Treasury Web site (www.treas.gov), search using the term “yield curve” and select “Daily Treasury Yield Curve Rates.” Copy the most recent rates for the 1-year through 30-year Treasury bonds into Excel and plot the current Treasury yield curve. 2. Find the current yields for bonds issued by Microsoft Corporation. Go to finramarkets.morningstar.com/BondCenter/. Using the Search tab, choose “Corporate” for the bond type and enter “Microsoft” for the issuer name. Sort the bonds by maturity and note the yields for bonds maturing within 1 to 30 years. Add a plot of these yields to your graph of the Treasury yield curve, and label it using Microsoft’s current bond rating. You can use Excel’s “trendline” feature to plot a smooth curve through these points. Note: These bonds may differ somewhat in seniority or have features such as call provisions that cause their yields to vary. Also, the quotes provided are based on the most recent trades, but the timing of those trades may differ across bonds. For these reasons, bonds with similar maturity and rating may have different yields. Fitting a trendline through the points provides a rough estimate of the average yields we might expect for each maturity. 3. Repeat the analysis in Step 2 for CVS Health. What is CVS Health’s current bond rating? How does its yield curve differ? 4. Repeat the analysis again for Boeing Corporation (search for “Boeing Co”). How does its yield curve compare with the previous ones? 5. Using the yield curves you have found, estimate the value of an annuity that pays $1000 every 5 years over the next 25 years (i.e., five total payments) paid by either the U.S. Treasury, Microsoft, CVS, or Boeing. What is the implied yield to maturity for each security? (Note: While the yields you have plotted are for coupon bonds, because coupon rates are relatively low, you decide to treat them as zero-coupon yields for this estimation, as you feel the estimation error from such an approximation is small relative to the other noise in the data.)
> Suppose a firm’s tax rate is 25%. a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings? b. What effect would a $10 million capital expense have on this year’s earnings if the
> Today is March 30, 2018, and you have just started your new job with a financial planning firm. In addition to studying for all your license exams, you have been asked to review a portion of a client’s stock portfolio to determine the risk/return profile
> 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 2016– 2019 as they were in 2015. What would Mydeco&acir
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2016, and this equipment was depreciated by $4 million per year in 2017, 2018, and 2019.
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases 2 million shares each year from 2016 to 2019. What would its earnings per share be in years 2016–2019? (Assume Mydeco pays f
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. By what percentage did Mydeco’s revenues grow each year from 2016–2019? b. By what percentage did net income grow each year? c. Wh
> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2017 (filed in October 2017). Answer the following questions from their income statement: a. What were Costco’s revenues for fiscal year 2017? By what percentage d
> Doris Company traded a tract of land to Rick’s Real Estate for a similar tract of land with no significant effect on future cash flows. The old land had a carrying value of $6,500,000. The land was appraised for $9,000,000. As part of the exchange, Doris
> Suppose that in 2019, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same pe
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. What is Mydeco’s market capitalization at the end of each year? b. What is Mydeco’s market-to-book ratio at the end of each year?
> In early 2018, Abercrombie & Fitch (ANF) had a book equity of $1250 million, a price per share of $22.48, and 68.4 million shares outstanding. At the same time, The Gap (GPS) had a book equity of $3140 million, a share price of $31.74, and 389 million sh
> In early 2015, Ford Motor (F) had a book value of equity of $24.8 billion, 4.0 billion shares outstanding, and a market price of $16 per share. Ford also had cash of $21.7 billion, and total debt of $119.2 billion. Three years later, in early 2018, Ford
> Repeat Problem 6 assuming the corporation is an S corporation. Data from Problem 6: You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a
> As a new analyst for a large brokerage firm, you are anxious to demonstrate the skills you learned in your MBA program and prove that you are worth your attractive salary. Your first assignment is to analyze the stock of the Columbia Sportswear Corporati
> In 2018, Mastercard Incorporated had a market capitalization of $200 billion, debt of $6.5 billion, cash of $8.2 billion, and EBIT of over $7 billion. If Mastercard were to increase its debt by $1 billion and use the cash for a share repurchase, which ma
> Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 25%. a. What is Revtek’s WACC given its current debt-equity ratio? b. Assuming no personal taxe
> Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.20. Its current stock price is $50 per share, with 2.5 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has
> In year 1, AMC will earn $1600 before interest and taxes. The market expects these earnings to grow at a rate of 3% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. As
> Mercurial Company traded its cutting equipment for the newer air-cooled equipment manufactured by Broad Street Corporation. The air-cooled equipment will increase Mercurial’s productivity. The old equipment had a book value of $140,000 (cost of $700,000
> Using Table 17.2 , for each of the following years, state whether dividends were tax disadvantaged or not for individual investors with a one-year investment horizon: a. 1985 b. 1989 c. 1995 d. 1999 e. 2005 f. 2018 data from Table 17.2:
> Suppose B&E Press paid dividends at the end of each year according to the schedule below. It also reduced its share count by repurchasing 5 million shares at the end of each year at the ex-dividend stock prices shown. (Assume perfect capital markets.
> Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and it has no other a
> Safeco Inc. has no debt, and maintains a policy of holding $10 million in excess cash reserves, invested in risk-free Treasury securities. If Safeco pays a corporate tax rate of 21%, what is the cost of permanently maintaining this $10 million reserve?
> Bay Transport Systems (BTS) currently has $30 million in debt outstanding. In addition to 6.5% interest, it plans to repay 5% of the remaining balance each year. If BTS has a marginal corporate tax rate of 25%, and if the interest tax shields have the sa
> Ten years have passed since Arnell issued $10 million in perpetual interest only debt with a 6% annual coupon, as in Problem 6 . Tax rates have remained the same at 21% but interest rates have dropped, so Arnell’s current cost of debt capital is 4%. a. W
> You have just been hired by Internal Business Machines Corporation (IBM) in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new type of tablet computer similar in size to an iPad but with
> Arnell Industries has just issued $10 million in debt (at par). The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 21% for the foreseeable future. a. Suppose Arnell pays interest of 6% per year on its debt. What is
> Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 25%, and that the interest tax shield
> Braxton Enterprises currently has debt outstanding of $35 million and an interest rate of 8%. Braxton plans to reduce its debt by repaying $7 million in principle at the end of each year for the next five years. If Braxton’s marginal corporate tax rate i
> Assume that the Ecara Video Game Company reports under IFRS. Repeat the requirement of E11-31, part (c). Data from E11-31: Prepare the journal entry for Ecara to record the exchange as if the exchange had lacked commercial substance.
> Quartech Enterprises manufactures and distributes thermostats for major kitchen appliances. At the beginning of the current year, Quartech decided to expand its operations by acquiring a metal soldering machine. The machine is to be produced by the manuf
> On December 31, 2018, the Clearwater Corporation acquired a custom-made plant asset by issuing a promissory note with a face value of $750,000, a due date of December 31, 2023, and a stated (coupon) rate of interest of 2%. Interest is compounded annually
> Sonata Manufacturing Corporation decided to expand its operations and open a new facility in Illinois. Rather than constructing a new plant, Sonata negotiated a contract to purchase an existing facility from a former competitor for a total cost of $5,000
> On January 2 of the current year, Vaughn, Inc. acquired land for $2,000,000 to be used to construct a new service and repair center. The closing costs amounted to $110,000, and Vaughn paid $20,000 for the current period’s property taxes. There was an exi
> St. Charles Flooring Company recently purchased a new tile-cutting machine with an invoice price of $215,500. The cost of delivery was $2,000, and installation amounted to $3,550. To test the machine, St. Charles cut 100 tiles that cost $4.50 each. The t
> IFRS. Repeat the requirements in E11-13 assuming that Kurtis Koal Company, Inc. is an IFRS reporter and the mining machine has two components: casing and engine. The amount allocated to the engine is $800,000. The engine has a 6-year useful life and $60,
> Kurtis Koal Company, Inc. purchased a new mining machine at a total cost of $900,000 on the first day of its fiscal year. The firm estimates that the machine has a useful life of 6Â years or 6,000,000 tons of coal and a residual value of $60,0
> Your success in business thus far has put you in a position to purchase a home for $500,000 located close to the university you attend. You plan to pay a 20% down payment of $100,000 and borrow the remaining $400,000. You need to decide on a mortgage, an
> IFRS. Avery Air, Plc, a UK company, conducts regularly scheduled maintenance and improvement of its fleet of airplanes. During the year, it replaced engines at a cost of £2,900,000, upgraded airplane interiors at a cost of £610,000, and spent £1,300,000
> Clave Building Products, Inc. conducts regularly scheduled maintenance of its machinery and equipment every Friday afternoon. The cost of maintenance for the current year amounted to $345,000. The regular maintenance revealed the need to conduct a major
> You have been asked to account for a plant asset exchange on the books of the Ecara Video Game Company. On January 1, 2013, Ecara acquired a plastic extruding machine at a cost of $260,000. This machine had an original estimated useful life of 10 years a
> IFRS. Assume that the Yawyag Corporation in E11-8 is an IFRS reporter and complete the following: Required: a. Compute the weighted-average accumulated expenditures for the current year. b. Compute the amount of interest related to the construction p
> Assume that the project in E11-8 was not completed in Year 1. Yawyag was required to make two additional payments to the contractor in Year 2: $900,000 on April 1 and $1,800,000 on August 1 of Year 2. On January 2 of Year 2, Yawyag was required to take o
> Yawyag Corporation engaged Sir Peter, Inc. to design and construct a manufacturing facility. Construction began on January 2 and was completed on December 31 of the current year. The following payments were made to the contractor during the year: To spec
> How would the solution to E11-6 change if Rolling Blackout Power Company was an IFRS reporter and earned $11,000 interest income on investing the excess funds from the construction loan during the year? Prepare the journal entry to record the cash intere
> Rolling Blackout Power Company constructed a new power plant to supply energy to the Northeast Electrical Grid. The construction began on January 2 and ended on December 31 of the current year. On the date of completion, the plant had a total cost of $8,
> Spill Oil Corporation drilled 10 oil wells at the beginning of the current year. The total exploration costs associated with this oil and gas activity amounted to $8,500,000. Only six of the wells were producing; the remaining wells are dry or nonproduct
> Repeat the requirements in E11-40 assuming that FFC uses the successful-efforts method. Data from E11-40: a. Determine the total cost of the natural resource under the full-cost method. b. Prepare the journal entries to record the acquisition of the na
> Ferro Fuel Company (FFC) acquired a tract of land to be used for oil and gas exploration at the beginning of the current year. FFC paid $500,000 to acquire the land, paid $325,000 in development costs, and incurred $130,000 in exploration and evaluation
> Assume that Sebastian Company from E11-38 reports under IFRS. Prepare the journal entry to record the exchange on the books of Sebastian Company. Data from E11-38: Brown Company contracts with Sebastian Company to exchange refrigerated trucks. Brown Com
> Assume that Rascals Candy, Inc. reports under IFRS. Repeat the requirement of E11-29, part (c). Data from E11-29: a. Record the journal entry on the books of Temptations Corporation to record the exchange assuming that the transaction altered the economi
> On January 2, 2018, Temptations Corporation paid $31,500 in cash and exchanged a chocolate mixing machine, which had a fair value of $437,500 and a book value of $500,000 ($1,135,000 historical cost − $635,000 accumulated depreciation brought up to the d
> Alto Devices acquires Medifast, a small start-up company, by paying $2,170,000 in cash on January 2. Following are the book values and fair values of Medifast on the date of acquisition. Required: a. What is the amount of goodwill acquired? b. What in
> IFRS. Repeat the requirements in E11-26 assuming that Carlson reports under IFRS. Assume that all the conditions to capitalize development costs have been met and the project is completed on January 1. Capitalized development costs are amortized over 4 y
> During the current year, Carlson Industries, Inc. conducted significant research activities related to the development of a new computer chip. Carlson had the following costs Prepare all journal entries required to record Carlson’s R&am
> On January 2, 2019, Bubba and Company paid $5,000,000 in cash to acquire 100% of the Cire Company’s voting common stock. Cire’s balance sheet on that date showed the following balances in its accounts: The appraised v
> IFRS. Use the information in E11-14, part (a) to prepare the required footnote disclosure under IFRS for Kurtis Koal Company, Inc.’s property, plant, and equipment for Years 1 and 2, including a statement of its accounting policy and a table with account
> Use the information in E11-13, part (a) to prepare the required footnote disclosure for Kurtis Koal Company, Inc.’s property, plant, and equipment for Years 1 and 2, including a statement of its accounting policy and a table with accou
> The Aries Group sold one of its plant assets on April 1 of the current year for $250,000. The asset had an original cost of $500,000 and an estimated residual value of $80,000. Aries used the straight-line method of depreciation assuming an estimated use
> The Gemini Group sold one of its plant assets on August 1 of the current year for $200,000. The asset had an original cost of $500,000 and an estimated residual value of $80,000. The firm used the straight-line method of depreciation assuming an estimate
> IFRS. Repeat the requirements in E11-18 assuming that Ace acquired the asset on July 14 of the current year. Use partial-year depreciation assuming that the manufacturing equipment was acquired at the beginning of the month to simplify the computation.
> You have been hired by a well-funded hedge fund to assess whether there are any arbitrage opportunities created by differences in prices in bitcoin across different markets. For the purposes of this exercise, you may ignore transaction costs by using the
> Repeat the requirements in E11-17 assuming that Ace acquired the asset on July 14 of the current year. Use partial-year depreciation assuming that the manufacturing equipment was acquired at the beginning of the month to simplify the computation.
> Repeat the requirements in E11-17 assuming that Ace is an IFRS reporter and the manufacturing equipment has two components: computer controls and engine. The amount allocated to the computer controls is $500,000. The computer controls have a 5-year usefu
> Ace Manufacturing, Inc. purchased a new piece of manufacturing equipment at a total acquisition cost of $3,000,000 on January 4 of the current year. The firm estimates that the equipment has a useful life of 10 years or 13,250,000 units of output and a r
> Repeat the requirements in E11-14 assuming that Kurtis Koal Company, Inc. acquired the asset on August 1 of the current year. Use partial-year depreciation without adopting any of the acceptable conventions that simplify the computation Data from E11-14
> Repeat the requirements in E11-13 assuming that Kurtis Koal Company, Inc. acquired the asset on August 1 of the current year. Data from E11-13: Prepare the depreciation schedules for the machine assuming that Kurtis Koal used the following methods (each
> Toyota Motor Company is expanding the production of their gas-electric hybrid drive systems and plans to shift production in the United States. To enable the expansion, they are contemplating investing $1.5 billion in a new plant with an expected 10-year
> In your role as a consultant at a wealth management firm, you have been assigned a very powerful client who holds one million shares of Cisco Systems, Inc. purchased on February 28, 2003. In researching Cisco, you discovered that they are holding a large
> Use EDGAR to find Qualcomm’s 10-K filing for 2017. From the balance sheet, answer the following questions: a. How much did Qualcomm have in cash, cash equivalents, and marketable securities (short-and long-term)? b. What were Qualcomm’s total accounts re
> What was the change in Global Conglomerate’s book value of equity from 2017 to 2018 according to Table 2.1 ? Does this imply that the market price of Global’s shares increased in 2018? Explain. Data from Table 2.1:
> Consider the following potential events that might have taken place at Global Conglomerate on December 30, 2018. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s boo
> Suppose the corporate tax rate is 25%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. T
> Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 20%. a. If Grommit increases leverage so that its interest expense rises by $1 million, how will its
> Your boss was impressed with your presentation regarding the irrelevance of capital structure but, as expected, has realized that market imperfections like taxes must be accounted for. You have now been asked to include taxes in your analysis. Your boss
> Colt Systems will have EBIT this coming year of $15 million. It will also spend $6 million on total capital expenditures and increases in net working capital, and have $3 million in depreciation expenses. Colt is currently an all-equity firm with a corpo
> With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impi’s corporate tax rate is 21% and it pays 8% interest on its debt, how much additional debt can Impi issue this year and still receive the benefit of the in
> Markum Enterprises is considering permanently adding $100 million of debt to its capital structure. Markum’s corporate tax rate is 25%. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? b. If investors pay a tax ra
> Suppose the corporate tax rate is 25%, and investors pay a tax rate of 20% on income from dividends or capital gains and a tax rate of 33% on interest income. Your firm decides to add debt so it will pay an additional $15 million in interest each year. I
> Rally, Inc., is an all-equity firm with assets worth $25 billion and 10 billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firm’s corporate tax rate is 21%, and Rally plans to keep its outstanding
> Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow $50 million and
> Suppose Microsoft has 8.75 billion shares outstanding and pays a marginal corporate tax rate of 21%. If Microsoft announces that it will pay out $50 billion in cash to investors through a combination of a special dividend and a share repurchase, and if i
> Milton Industries expects free cash flow of $5 million each year. Milton’s corporate tax rate is 21%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million, and it expects to maintain this level of debt permanentl
> Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.5% on its debt and has a corporate tax rate of 21%. a. If
> NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. Suppose NatNah decides to increase its leverage and maintain a market debt-to-value ratio of 0.5. Suppose its debt cost of capital is 9% and its corporate tax ra
> You work in the corporate finance division of The Home Depot and your boss has asked you to review the firm’s capital structure. Specifically, your boss is considering changing the firm’s debt level. Your boss remembers something from his MBA program abo
> Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 25%, and it pays 7% interest on its debt. The interest tax shield from its debt lowers Summit’s WACC by what amount?
> Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost of capital is 10%, and its debt cost of capital is 5%. a.
> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2017 (filed in October 2017). a. Which auditing firm certified these financial statements? b. Which officers of Costco certified the financial statements?
> In early 2018 Qualcomm Inc. had $21 billion in debt, total equity capitalization of $78 billion, and an equity beta of 1.49 (as reported on Yahoo! Finance). Included in Qualcomm’s assets was $37 billion in cash and risk-free securities. Assume that the r
> In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not equal to the actual expected returns, so the CAPM does
> In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not equal to the actual expected returns, so the CAPM does
> In Problem 20, assume the risk-free rate is 3% and the market risk premium is 7%. a. What does the CAPM predict the expected return for each stock should be? b. Clearly, the CAPM predictions are not equal to the actual expected returns, so the CAPM does
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydeco’s ROE each year from 2015 to 2019. b. Compute Mydeco’s ROA each year from 2015 to 2019. c. Which return is more vol
> In early 2018, United Airlines (UAL) had a market capitalization of $20.2 billion, debt of $14.4 billion, and cash of $3.8 billion. United also had annual revenues of $37.7 billion. Southwest Airlines (LUV) had a market capitalization of $35.8 billion, d
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydeco’s PE ratio each year from 2015 to 2019. In which year was it the highest? b. What was Mydeco’s Enterprise Value to
> You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team meeting later today. You quickly realize that the informat
> This is your second interview with a prestigious brokerage firm for a job as an equity analyst. You survived the morning interviews with the department manager and the Vice President of Equity. Everything has gone so well that they want to test your abil
> Although U.S. GAAP allows LIFO inventory costing, IFRS does not. Read paragraphs BC9 through BC21 of IASC, International Accounting Standard 2, “Inventories.” a. Why did the IASB decide not to allow the use of LIFO? b. Explain why you agree or disagree
> Hermit Associates acquired a machine on January 1 at a cost of $250,000. Hermit estimates that the machine has a useful life of 10 years and a $50,000 residual value. Compute the depreciation expense for the first 2 years and determine the net book value
