Question: You are called in as a financial

> Calculate the after tax cost of debt under each of the following conditions: Yield Corporate Tax Rate а. 8.0% 18% b. 12.0 34 C. 10.6 15

> Eaton Electronic Company’s treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity). Assume: a. Comput

> Why does capital budgeting rely on analysis of cash flows rather than on net income?

> A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $240,000 a year for the next 50 years. The attorney for the plaintiff’s estate argues that the lost income should be discounted back to the present at 4 p

> The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 40 percent debt, 30 percent preferred stock, and 30 percent common equity. Initially, common equity will be in the form of

> The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 50 percent debt, 30 percent preferred stock, and 20 percent common equity. Initially, common equity will be in the form of

> Delta Corporation has the following capital structure: a. If the firm has $18 million in retained earnings, at what size capital structure will the firm run out of retained earnings? b. The 8.1 percent cost of debt referred to earlier applies only to t

> Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 25 percent. Northwest’s treasurer is trying to determine the corporation’s current weigh

> A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information and has asked you to compute the weighted average cos

> Brook’s Window Shields Inc. is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of ca

> Given the following information, calculate the weighted average cost of capital for Digital Processing Inc. Line up the calculations in the order. Percent of capital structure: Additional information: Preferred stock. 20% Common equity 40 Debt.. 4

> Given the following information, calculate the weighted average cost of capital for Hamilton Corp. Line up the calculations in the order. Percent of capital structure: Debt………â€&brvb

> Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: a. Which of the four plans has the lowest weighted average cost of capital? (Round to two places to the right of

> Why is the cost of debt less than the cost of preferred stock if both securities are priced to yield 10 percent in the market?

> Evans Technology has the following capital structure. The after tax cost of debt is 6 percent; and the cost of common equity (in the form of retained earnings) is 13 percent. a. What is the firm’s weighted average cost of capital? b

> Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 11 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 9 percent r

> Global Technology’s capital structure is as follows: The after tax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent. Calculate Glo

> Business has been good for Keystone Control Systems, as indicated by the four-year growth in earnings per share. The earnings have grown from $1.00 to $1.63. a. Use Appendix A at the back of the text to determine the compound annual rate of growth in ear

> Compute Ke and Kn under the following circumstances: a. D1 = $5.00, P0 = $70, g = 8%, F = $7.00. b. D1 = $0.22, P0 = $28, g = 7%, F = $2.50. c. E1 (earnings at the end of period one) = $7, payout ratio equals 40 percent, P0 = $30, g = 6.0%, F = $2.20. d.

> Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $2.50 per share, and the current price of its common stock is $50 per share. The expected growth rate is 8 perce

> The treasurer of Riley Coal Co. is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the after tax cost of debt is at least 3 percent less than that for preferred stock. Based on th

> Wallace Container Company issued $100 par value preferred stock 12 years ago. The stock provided a 9 percent yield at the time of issue. The preferred stock is now selling for $72. What is the current yield or cost of the preferred stock? (Disregard flot

> Medco Corporation can sell preferred stock for $90 with an estimated flotation cost of $2. It is anticipated the preferred stock will pay $8 per share in dividends. a. Compute the cost of preferred stock for Medco Corp. b. Do we need to make a tax adjust

> Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity. a. What is Terrier’s after tax cost of debt? b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the co

> What is the concept of marginal cost of capital?

> Russell Container Corporation has a $1,000 par value bond outstanding with 30 years to maturity. The bond carries an annual interest payment of $105 and is currently selling for $880 per bond. Russell Corp. is in a 25 percent tax bracket. The firm wishes

> In March, Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August Mr. Hertz came up with a heating compound that would have a return of 14 percent. The chief financial office

> Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) increase from 9 to 12 percent. a. What is the bond price at 9 percent? b. What is the bond price at 12 percent? c.

> Go to Table 10-1, which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) decline from 11 percent to 8 percent: a. What is the bond price at 11 percent? b. What is the bond price at 8 perc

> Toxaway Telephone Company has a $1,000 par value bond outstanding that pays 6 percent annual interest. If the yield to maturity is 8 percent, and remains so over the remaining life of the bond, the bond will have the following values over time: Graph t

> Kilgore Natural Gas has a $1,000 par value bond outstanding that pays 9 percent annual interest. The current yield to maturity on such bonds in the market is 12 percent. Compute the price of the bonds for the following maturity dates: a. 30 years b. 15

> Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 15 percent annual interest. The current yield to maturity on such bonds in the market is 17 percent. Compute the price of the bonds for the following maturity dates: a. 30 years b. 2

> Barry’s Steroids Company has $1,000 par value bonds outstanding at 16 percent interest. The bonds will mature in 40 years. If the percent yield to maturity is 13 percent, what percent of the total bond value does the repayment of principal represent?

> Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 2 percent over the next four years. The required rate of return is 15 percent (this will also serve as the discount rate in this problem). Round al

> Martin Office Supplies paid a $3 dividend last year. The dividend is expected to grow at a constant rate of 7 percent over the next four years. The required rate of return is 14 percent (this will also serve as the discount rate in this problem). Round a

> Gibson Appliance Co. is a very stable billion-dollar company with a sales growth of about 7 percent per year in good or bad economic conditions. Because of this stability (a coefficient of correlation with the economy of +.4, and a standard deviation of

> A firm pays a $1.50 dividend at the end of year one (D1), has a stock price of $155 (P0), and a constant growth rate (g) of 10 percent. a. Compute the required rate of return (Ke). Indicate whether each of the following changes would make the required r

> A firm pays a $4.80 dividend at the end of year one (D1), has a stock price of $80, and a constant growth rate (g) of 5 percent. Compute the required rate of return (Ke).

> Justin Cement Company has had the following pattern of earnings per share over the last five years: The earnings per share have grown at a constant rate (on a rounded basis) and will continue to do so in the future. Dividends represent 40 percent of ea

> Maxwell Communications paid a dividend of $3 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm (g). The new dividend after 12 months will represent D1. The required rate of r

> Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity is a. 5 percent. b. 15 percent.

> Ecology Labs Inc. will pay a dividend of $6.40 per share in the next 12 months (D1). The required rate of return (Ke) is 14 percent and the constant growth rate is 5 percent. a. Compute P0. b. Assume Ke, the required rate of return, goes up to 18 percent

> BioScience Inc. will pay a common stock dividend of $3.20 at the end of the year (D1). The required return on common stock (Ke) is 14 percent. The firm has a constant growth rate (g) of 9 percent. Compute the current price of the stock (P0).

> Stagnant Iron and Steel currently pays a $12.25 annual cash dividend (D0). The company plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke)

> Analogue Technology has preferred stock outstanding that pays a $9 annual dividend. It has a price of $76. What is the required rate of return (yield) on the preferred stock?

> X-Tech Company issued preferred stock many years ago. It carries a fixed dividend of $12.00 per share. With the passage of time, yields have soared from the original 10 percent to 17 percent (yield is the same as required rate of return). a. What was the

> The Woodruff Corporation purchased a piece of equipment three years ago for $230,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $90,000. A new piece of equipment can be purchased for $320,000. It

> North Pole Cruise Lines issued preferred stock many years ago. It carries a fixed dividend of $6 per share. With the passage of time, yields have soared from the original 6 percent to 14 percent (yield is the same as required rate of return). a. What was

> The preferred stock of Denver Savings and Loan pays an annual dividend of $5.70. It has a required rate of return of 6 percent. Compute the price of the preferred stock.

> Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 11 percent and the interest is paid semiannually. The yield to maturity on the bonds is 14 percent annual interest. Ther

> Evans Emergency Response bonds have 6 years to maturity. Interest is paid semiannually. The bonds have a $1,000 par value and a coupon rate of 8 percent. If the price of the bond is $1,073.55, what is the annual yield to maturity?

> Midland Oil has $1,000 par value bonds outstanding at 8 percent interest. The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is a. 7 percent. b. 10 percent. c. 13 percent.

> Stilley Resources bonds have 4 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5 percent. If the price of the bond is $841.51, what is the yield to maturity?

> Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $690. They have 10 years remaining to maturity. The annual interest

> Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The $1,000 par value bond pays 4 percent annual interest and

> Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point in time as d

> Masco Oil and Gas Company is a very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: The vice president of finance is plannin

> Media Bias Inc. issued bonds 10 years ago at $1,000 per bond. These bonds had a 40-year life when issued and the annual interest payment was then 12 percent. This return was in line with the required returns by bondholders at that point in time as descri

> Katie Pairy Fruits Inc. has a $1,000, 20-year bond outstanding with a nominal yield of 15 percent (coupon equals 15% × $1,000 = $150 per year). Assume that the current market-required interest rate on similar bonds is now only 12 percent. a. Compute the

> Tom Cruise Lines Inc. issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 15 percent. This return was in line with the required returns by bondholders at that point as descri

> Jim Busby calls his broker to inquire about purchasing a bond of Disk Storage Systems. His broker quotes a price of $1,180. Jim is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 14 percent interest

> a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a 10-year, a 15-year, and a 20-year time period. b. Assume the interest rate in the m

> Using Table 10-1, assume interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent. a. What is the price of the bond? b. Assume five years have passed and interest rates in the market have gone down to 12 pe

> The Lone Star Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is a. 6 percent. b. 9 percent. c. 13 percent.

> You are going to receive $205,000 in 18 years. What is the difference in present value between using a discount rate of 12 percent versus 9 percent?

> Your father offers you a choice of $105,000 in 12 years or $47,000 today. a. If money is discounted at 8 percent, which should you choose? b. If money is still discounted at 8 percent, but your choice is between $105,000 in 9 years or $47,000 today, wh

> Your uncle offers you a choice of $105,000 in 10 years or $47,000 today. If money is discounted at 9 percent, which should you choose?

> Medical Research Corporation is expanding its research and production capacity to introduce a new line of products. Current plans call for the expenditure of $100 million on four projects of equal size ($25 million each), but different returns. Project A

> Your aunt offers you a choice of $20,100 in 20 years or $870 today. If money is discounted at 17 percent, which should you choose?

> If you invest $9,000 today, how much will you have a. In 2 years at 9 percent? b. In 7 years at 12 percent? c. In 25 years at 14 percent? d. In 25 years at 14 percent (compounded semiannually)?

> Your parents have accumulated a $120,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giv

> Your younger sister, Linda, will start college in five years. She has just informed your parents that she wants to go to Hampton University, which will cost $17,000 per year for four years (cost assumed to come at the end of each year). Anticipating Lind

> You are chairperson of the investment fund for the Continental Soccer League. You are asked to set up a fund of semiannual payments to be compounded semiannually to accumulate a sum of $250,000 after nine years at a 10 percent annual rate (18 payments).

> Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years. a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis f

> If your uncle borrows $60,000 from the bank at 10 percent interest over the seven-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest (round to the nearest dollar)? How muc

> Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent interest. That is, in this particular case, the amount owed will go up by 10 percent per year for five years. The lender then will require that Cal pay off the loan

> If you borrow $9,441 and are required to pay back the loan in five equal annual installments of $2,750, what is the interest rate associated with the loan?

> Mark Ventura has just purchased an annuity to begin payment two years from today. The annuity is for $8,000 per year and is designed to last 10 years. If the interest rate for this problem calculation is 13 percent, what is the most he should have paid f

> Mel Thomas, the chief financial officer of Preston Resources, has been asked to do an evaluation of Dunning Chemical Company by the president and Chair of the Board, Sarah Reynolds. Preston Resources was planning a joint venture with Dunning (which was p

> You will receive $6,800 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $6,800 ×
or divide by 1.10 (one year’s discount rate at 10 percent). b. What is the value of your invest

> Bridget Jones has a contract in which she will receive the following payments for the next five years: $1,000, $2,000, $3,000, $4,000, and $5,000. She will then receive an annuity of $8,500 a year from the end of the 6th through the end of the 15th year.

> Del Monty will receive the following payments at the end of the next three years: $2,000, $3,500, and $4,500. Then, from the end of the 4th through the end of the 10th year, he will receive an annuity of $5,000 per year. At a discount rate of 9 percent,

> You wish to retire in 14 years, at which time you want to have accumulated enough money to receive an annual annuity of $17,000 for 19 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you

> Morgan Jennings, a geography professor, invests $50,000 in a parcel of land that is expected to increase in value by 12 percent per year for the next five years. He will take the proceeds and provide himself with a 10-year annuity. Assuming a 12 percent

> Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund manager assumes he can earn a 9 percent return on her asset

> C. D. Rom has just given an insurance company $35,000. In return, he will receive an annuity of $3,700 for 20 years. At what rate of return must the insurance company invest this $35,000 in order to make the annual payments? Interpolate.

> Mr. Dow bought 100 shares of stock at $14 per share. Three years later, he sold the stock for $20 per share. What is his annual rate of return?

> Franklin Templeton has just invested $9,260 for his son (age one). This money will be used for his son’s education 18 years from now. He calculates that he will need $71,231 by the time the boy goes to school. What rate of return will Mr. Templeton need

> Beverly Hills started a paper route on January 1. Every three months, she deposits $550 in her bank account, which earns 8 percent annually but is compounded quarterly Four years later, she used the entire balance in her bank account to invest in an inve

> Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he had received from drug companies for his latest discovery, a unique electronic stimulator that reduces the pain from arthritis. The process had yet to pass rigorous F

> You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. a. What s

> a. What is the present value of $140,000 to be received after 30 years with a 14 percent discount rate? b. Would the present value of the funds in part a be enough to buy a $2,900 concert ticket?

> Your grandfather has offered you a choice of one of the three following alternatives: $7,500 now; $2,200 a year for nine years; or $31,000 at the end of nine years. Assuming you could earn 10 percent annually, which alternative should you choose? If you

> As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find th

> Determine the amount of money in a savings account at the end of 10 years, given an initial deposit of $5,500 and a 12 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly.

> Juan Garza invested $20,000 10 years ago at 12 percent, compounded quarterly. How much has he accumulated?

> Les Moore retired as president of Goodman Snack Foods Company but is currently on a consulting contract for $35,000 per year for the next 10 years. a. If Mr. Moore’s opportunity cost (potential return) is 10 percent, what is the present value of his cons

> Jack Hammer invests in a stock that will pay dividends of $2.00 at the end of the first year; $2.20 at the end of the second year; and $2.40 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the sto

> If you owe $35,000 payable at the end of eight years, what amount should your creditor accept in payment immediately if she could earn 13 percent on her money?

> At a growth (interest) rate of 10 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.