Question: You have been given the historical return

> Netflix common stock has a beta, b, of 0.8. The risk-free rate is 3%, and the market return is 10%. a. Determine the risk premium on Netflix common stock. b. Determine the required return that Netflix common stock should provide. c. Determine Netflix’s c

> Determine the cost for each of the following preferred stocks. Preferred stock Par value Sale price Flotation cost Annual dividend A $100 $101 $9.00 11% B 40 38 $3.50 8% C 35 37 $4.00 $5.00 D 30 26 5% of par $3.00 E. 20 20 $2.50 9%

> A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $175,000. Since then, it has taken depreciation deductions totaling $124,250. What is the system’s current book value? If Largo sold the system for $110,00

> Taylor Systems has just issued preferred stock. The stock has an 8% annual dividend and a $100 par value and was sold at $99.50 per share. In addition, flotation costs of $1.50 per share must be paid. a. Calculate the cost of the preferred stock. b. If t

> Wans is interested in buying a new motorcycle. She has decided to borrow money to pay the $25,000 purchase price of the bike. She is in the 25% federal income tax bracket. She can either borrow the money at an interest rate of 5% from the motorcycle deal

> Gronseth Drywall Systems Inc. is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The fir

> For each of the following $1,000-parvalue bonds, assuming annual interest payment and a 40% tax rate, calculate the after-tax cost to maturity, using the approximation formula. Life (years) Discount (-) or premium (+) Coupon interest rate Bond Under

> David Abbot is buying a new house, and he is taking out a 30-year mortgage. David will borrow $200,000 from a bank, and to repay the loan he will make 360 monthly payments (principal and interest) of $1,199.10 per month over the next 30 years. David can

> Assume that the risk-free rate, RF, is currently 8%; the market return, rm, is 12%; and asset A has a beta, bA, of 1.10. a. Draw the security market line (SML) on a set of “non-diversifiable risk (x-axis)– required return (y-axis)” axes. b. Use the CAPM

> Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 13%. a. Draw the security market line (SML) on a set of “non diversifiable risk (x-axis)– required return (y-axis)” axes. b. Calculate and label the market r

> Jamie Peters invested $100,000 to set up the following portfolio 1 year ago. a. Calculate the portfolio beta on the basis of the original cost figures. b. Calculate the percentage return of each asset in the portfolio for the year. c. Calculate the per

> Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems. a. Find the required return for an asset with a beta of 0.90 when the risk-free rate and market return are 8% and 12%, respectively. b. Find the ris

> Katherine Wilson is wondering how much risk she must undertake to generate an acceptable return on her portfolio. The risk-free return currently is 5%. The return on the overall stock market is 16%. Use the CAPM to calculate how high the beta coefficient

> Landscapes Unlimited has spent $2,200 evaluating a new service area for expanding its business territory. The expansion will require the purchase of a new truck for $35,000, and fitting the truck with a flatbed that will cost $6,500 to install. The compa

> For each case in the following table, use the capital asset pricing model to find the required return. Risk-free rate, Rp Market Case return, rm Beta, ß A 1% 8% 1.30 B 2 6 0.90 C 5 13 -0.20 D 12 1.00 E 10 0.60 64

> Rose Berry is attempting to evaluate two possible portfolios, which consist of the same five assets held in different proportions. She is particularly interested in using beta to compare the risks of the portfolios, so she has gathered the data shown in

> You are considering three stocks—A, B, and C—for possible inclusion in your investment portfolio. Stock A has a beta of 0.80, stock B has a beta of 1.40, and stock C has a beta of -0.30. a. Rank these stocks from the most risky to the least risky. b. If

> During the 1990s, General Electric put together a long string of consecutive quarters in which the firm managed to meet or beat the earnings forecasts of Wall Street stock analysts. Some skeptics wondered if GE “managed” earnings to meet Wall Street’s ex

> American Exploration Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently, it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 70% debt. American Explorat

> Currently, Warren Industries can sell 15-year, $1,000-par-value bonds paying annual interest at a 7% coupon rate. Because current market rates for similar bonds are just under 7%, Warren can sell its bonds for $1,010 each; Warren will incur flotation cos

> Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year

> John Dough has just been awarded his degree in business. He has three education loans outstanding. They all mature in 5 years, and he can repay them without penalty any time before maturity. The amounts owed on each loan and the annual interest rate asso

>  Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the following weights: 40% long-term debt, 10% preferred stock,

> Edna Recording Studios Inc. reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 4

> Iridium Corp. has spent $3.5 billion over the past decade developing a satellitebased telecommunication system. It is currently trying to decide whether to spend an additional $350 million on the project. The firm expects that this outlay will finish the

> After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table. The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost o

> Webster Company has compiled the information shown in the following table. a. Calculate the WACC using book value weights. b. Calculate the WACC using market value weights. c. Compare the answers obtained in parts a and b. Explain the differences.

> The market values and after-tax costs of various sources of capital used by Ridge Tool are shown in the following table. a. Calculate the firm’s WACC. b. Explain how the firm can use this cost in the investment decision-making process

> Bell Jewelers wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 40% debt, 10% preferred stock, and 50% common stock. The cost of financing with retained ear

> Using the data for each firm shown in the following table, calculate the cost of retained earnings and the cost of new common stock using the constant-growth valuation model. Projected dividend per growth rate share next year Current market Dividend

> Ross Textiles wishes to measure its cost of common stock equity. The firm’s stock is currently selling for $70.67. The firm just recently paid a dividend of $4. The firm has been increasing dividends regularly. Five years ago, the dividend was just $2.99

> Mace Manufacturing is in the process of analyzing its investment decision-making procedures. Two projects evaluated by the firm recently involved building new facilities in different regions, North and South. The basic variables surrounding each project

> Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech Inc.; he has been impressed with the company’s computer products and believes that Hi-Tech is an innovative market player. However, Mi

> Greengage Inc., a successful nursery, is considering several expansion projects. All the alternatives promise to produce an acceptable return. Data on four possible projects follow. a. Which project is least risky, judging on the basis of range? b. Whi

> Metal Manufacturing has isolated four alternatives for meeting its need for increased production capacity. The following table summarizes data gathered relative to each alternative. a. Calculate the coefficient of variation for each alternative. b. If

> If Halley Industries reimburses employees who earn master’s degrees and who agree to remain with the firm for an additional 3 years, should the expense of the tuition reimbursement be categorized as a capital expenditure or an operating expenditure?

> Swan’s Sportswear is thinking about bringing out a line of designer jeans. Currently, it is negotiating with two well-known designers. Because of the highly competitive nature of the industry, the two lines of jeans have been given code

> Micro-Pub Inc. is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the accompanying table showing estimate

> Solar Designs is considering an investment in an expanded product line. Two possible types of expansion are under review. After investigating the possible outcomes, the company made the estimates shown in the following table. The pessimistic and optimist

> Sharon Smith, the financial manager for Barnett Corporation, wishes to select one of three prospective investments: X, Y, and Z. Assume that the measure of risk Sharon cares about is an asset’s standard deviation. The expected returns a

> Answer the questions below for assets A to D shown in the table. a. What impact would a 10% increase in the market return be expected to have on each asset’s return? b. What impact would a 10% decrease in the market return be expected to have on each ass

> A firm wishes to assess the impact of changes in the market return on an asset that has a beta of 1.20. a. If the market return increased by 15%, what impact would this change be expected to have on the asset’s return? b. If the market

> For each of the investments shown in the following table, calculate the rate of return earned over the period. Cash flow during period -$ 800 Beginning-of- period value $ 1,100 120,000 End-of- Investment period value A $ $ 100 B 15,000 118,000 C 7,0

> You are analyzing the performance of two stocks. The first, shown in Panel A, is Cyclical Industries Incorporated. Cyclical Industries makes machine tools and other heavy equipment, the demand for which rises and falls closely with the overall state of t

> A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the past 10 years, 2009–2018. a. On a set of &acir

> David Talbot randomly selected securities from all those listed on the New York Stock Exchange for his portfolio. He began with a single security and added securities one by one until a total of 20 securities were held in the portfolio. After each securi

> Cooper Electronics uses NPV profiles to visually evaluate competing projects. Key data for the two projects under consideration are given in the following table. Using these data, graph, on the same set of axes, the NPV profiles for each project, using d

> Joe Martinez, a U.S. citizen living in Brownsville, Texas, invested in the common stock of Telmex, a Mexican corporation. He purchased 1,000 shares at 20.50 pesos per share. Twelve months later, he sold them at 24.75 pesos per share. He received no divid

> Matt Peters wishes to evaluate the risk and return behaviors associated with various combinations of assets V and W under three assumed degrees of correlation: perfectly positive, uncorrelated, and perfectly negative. The expected returns and standard de

> Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The historical returns over the last 6 years, 2013&aci

> Answer the following questions, assuming that the rates of return associated with a given asset investment are normally distributed; that the expected return, r, is 18.9%; and that the coefficient of variation, CV, is 0.75. a. Find the standard deviation

> Three assets—F, G, and H—are currently under consideration by Perth Industries. The probability distributions of expected returns for these assets are shown in the following table. a. Calculate the average return, r,

> Swift Manufacturing must choose between two asset purchases. The annual rate of return and the related probabilities given in the following table summarize the firm’s analysis to this point. a. For each project, compute: (1) The range

> Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Douglas’s research indicates that the immediate past returns will serve as reasonable estimates of future returns. A

> McCracken Roofing Inc. common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future. a. What required rate of return for this stock would result in a pri

> Use the constant-growth dividend model (Gordon growth model) to find the value of each firm shown in the following table. Firm Dividend expected next year Dividend growth rate Required return A. $1.20 8% 13% 4.00 5 15 C 0.65 10 14 D 6.00 8. 9. E 2.2

> Billabong Tech uses the internal rate of return (IRR) to select projects. Calculate the IRR for each of the following projects and recommend the best project based on this measure. Project T-Shirt requires an initial investment of $15,000 and generates c

> Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has an $80 par value and pays an annual dividend of $6.40 per share. Similar-risk preferred stocks are currently earning a 9.3% annual rate of return. a. Wh

> Kelsey Drums Inc. is a well-established sup- plier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $2.80 per share per year for the last 12 years. Management expects to co

>  TXS Manufacturing has an outstanding preferred stock issue with a par value of $65 per share. The preferred shares pay dividends annually at a rate of 10%. a. What is the annual dividend on TXS preferred stock? b. If investors require a return of 8% on

> Valerian Corp. convertible preferred stock has a fixed conversion ratio of five common shares per one share of preferred stock. The preferred stock pays a dividend of $10.00 per share per year. The common stock currently sells for $20.00 per share and pa

> Gina Vitale has just contracted to sell a small parcel of land that she inherited a few years ago. The buyer is willing to pay $24,000 now, or the buyer will make a series of 5 payments starting now and continuing at annual intervals as shown in the tabl

> For each of the mixed streams of cash flows shown in the following table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12%, assuming that no withdrawals are made during the period

> In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends are paid? Dividend per share per period Periods of Case Туре Par value

> On completion of her introductory finance course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents, who were wealthy alumni of the university she was attending, to create an endowment.

> You are evaluating an investment that will pay $75 in 1 year, and it will continue to make payments at annual intervals thereafter, but the payments will grow by 4% forever. a. What is the present value of the first $75 payment if the discount rate is 10

> Bond-rating agencies have invested significant sums of money in an effort to determine which quantitative and non-quantitative factors best predict bond defaults. Furthermore, some of the raters invest time and money to meet privately with corporate pers

> Axis Corp. is considering investment in the best of two mutually exclusive projects. Project Kelvin involves an overhaul of the existing system; it will cost $52,500 and generate cash inflows of $24,500 per year for the next 3 years. Project Thompson inv

> a. Calculate the required rate of return for an asset that has a beta of 1.8, given a risk-free rate of 5% and a market return of 10%. b. If investors have become more risk averse due to recent geopolitical events and the market return rises to 13%, what

> Calculate the value of a $5,000-par-value bond paying quarterly interest at an annual coupon rate of 10% and having 10 years until maturity if the required return on similar-risk bonds is currently a 12% annual rate paid quarterly.

> Melissa is trying to value the stock of Generic Utility Inc., which is clearly not growing at all. Generic declared and paid a $5 dividend last year. The required return for utility stocks is 11%, but Melissa is unsure about the financial reporting integ

> Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to the constant growth valuation model. Craftâ€&#

> Giant Enterprises’ stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experi

> Given the following information for the stock of Foster Company, calculate the risk premium on its common stock. Current price per share of common Expected dividend per share next year Constant annual dividend growth rate Risk-free rate of return $5

> REH Corporation’s most recent dividend was $3 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. A variety of proposals are being considered by management to redirect the firm’s activities. Determine the imp

> For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E) multiples. Firm Expected EPS Price/earnings multiple A $3.00 6.2 В 4.50 10.0 1.80 12.6 2.40 8.9 E 5.10 15.0

> Acura Labs Inc. has an outstanding issue of preferred stock with a $40 par value and an 8% annual dividend. a. What is the annual dollar dividend? If it is paid quarterly, how much will be paid each quarter? b. If the preferred stock is noncumulative and

> The balance sheet for Gallinas Industries is as follows. Additional information with respect to the firm is available: (1) Preferred stock can be liquidated at book value. (2) Accounts receivable and inventories can be liquidated at 90% of book value.

> Assume that you have an opportunity to buy the stock of CoolTech Inc., an IPO being offered for $12.50 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of

> Herky Foods is considering acquisition of a new wrapping machine. By purchasing the machine, Herky will save money on packaging in each of the next 5 years, producing the series of cash inflows shown below. The initial investment (CF0) is estimated at $1

> Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firmâ&

> You are evaluating the potential purchase of a small business with no debt or preferred stock that is currently generating $42,500 of free cash flow (FCF0 = $42,500). On the basis of a review of similar-risk investment opportunities, you must earn an 18

> Lawrence Industries’ most recent annual dividend was $1.80 per share (D0 = $1.80), and the firm’s required return is 11%. Find the market value of Lawrence’s shares when: a. Dividends are expected to grow at 8% annually for 3 years, followed by a 5% cons

> Home Place Hotels Inc. is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when completed, it should allow the company to enjoy much improved growth in earnings and di

> Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $4.25 per share and paid cash dividends of $2.55 per share (D0 = 2.55). Grips’ earnings and dividends are expected to grow at 25%

> Over the past 6 years, Elk County Telephone has paid the dividends shown in the following table. The firm’s dividend per share in 2020 is expected to be $3.02. a. If you can earn 13% on similar-risk investments, what is the most you w

> The common stock of Barr Labs Inc. trades for $114 per share. Investors expect the company to pay a $1.35 dividend next year, and they expect that dividend to grow at a constant rate forever. If investors require a 15.8% return on this stock, what divide

> Seagate Technology is a global leader in data storage solutions and a high-yield dividend payer. From 2015 through 2019, Seagate paid the following per-share dividends: Assume that the historical annual growth rate of Seagate dividends is an accurate e

> Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm wishes to raise $48,000,000 for a plant expansion. Discussions

> In January 2016, Anheuser-Busch issued an outstanding bond that pays a 3.3% coupon rate, matures in January 2023, and has a yield to maturity of 2.82%. In January 2017, Santander Holdings issued an outstanding bond that pays a 3.571% coupon rate, matures

> Elysian Fields Inc. uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000; project Helium requires an initial outlay of $35,000. Using the expect

> A 1-year Treasury bill currently offers a 5% rate of return. A 2-year Treasury note offers a 5.5% rate of return. Under the expectations theory, what rate of return do investors expect a 1-year Treasury bill to pay next year?

> The following yield data for a number of highest quality corporate bonds existed at each of the three points in time noted. a. On the same set of axes, draw the yield curve at each of the three given times. b. Label each curve in part a with its genera

> Tyra loves to shop at her favorite store, Dollar Barrel, where she can find hundreds of items priced at exactly $1. Tyra has $200 to spend and is thinking of going on a shopping spree at Dollar Barrel, but she is also thinking of investing her money. a.

> Economic forecasters predict that the rate of inflation will hold steady at 2% per year indefinitely. The table below shows the nominal interest rate paid on Treasury securities having different maturities. a. Approximately what real interest rate do T

> A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The summarized data follow. a. Draw the yield curve associated with

> Zane Perelli currently has $100 that he can spend today on socks costing $2.50 each. Alternatively, he could invest the $100 in a risk-free U.S. Treasury security that is expected to earn a 9% nominal rate of interest. The consensus forecast of leading e

> Calculate the value of each of the bonds shown in the following table, all of which pay interest semiannually. Required stated annual return Years to Bond Par value Coupon rate maturity A $1,000 10% 12 8% B. 1,000 12 20 12 500 12 5 14 D 1,000 14 10

> Find the value of a bond maturing in 6 years, with a $1,000 par value and a coupon rate of 10% (5% paid semiannually) if the required return on similar-risk bonds is 14% per year (7% paid semiannually).

> Mark Goldsmith’s broker has shown him two bonds issued by different companies. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 7.5%. The first bond is issued by Crabbe Waste Disposal Corporation and has a coupon rate of