a. A newly issued bond has a maturity of 10 years and pays a 7% coupon rate (with coupon payments coming once annually). The bond sells at par value. What is the duration of the bond?
b. Find the actual price of the bond assuming that its yield to maturity immediately increases from 7% to 8% (with maturity still 10 years)
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1. Why do firms set upper and lower limits on their cash balance? What factors affect these limits?
2. How is WACC different from the expected rate of return calculated using CAPM?
3. Firm A and Firm B have the same betas but Firm A has a much higher total risk (standard deviation of returns) than the Firm B. The dividends and dividend growth rates for both firms are the same. Do we expect Firm A’s price to be greater or less than Firm B’s price?
4. What is the relationship between the expected rate of return and the rate used to discount cash flows? Re-write the formula for stock price P=D/(r-g) to provide an expression for the expected rate of return.
5. Is it true that if a stock possesses a higher expected rate of return then it must be a better investment?
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Stock 1: The Binkelman Corporation has just announced that it plans to introduce a new solar panel that will greatly reduce the cost of solar energy. As a result, analysts now expect the company’s earnings, currently $5 per share to grow by 50 percent per year for the next two years, by 25 percent per year for the following two years, and by 8 percent per year, thereafter. Blinkelman does not currently pay a dividend, but it expects to pay out 20 percent of its earnings beginning two years from now and to continue to pay dividends at the same level. The required rate of return for this company is 20 percent for now. Analysts think that it will stay at that level for the next five years and then it decreases to 15%.
Stock 2: Sports Novalties, Inc. has experienced an explosion in demand for its featured football novelties. The firm currently pays a dividend of $0.25 per share. This dividend is expected to increase to $0.75 per share one year from now. It is expected to grow at a rate of 15% per year for the following three years and then growth rate is expected to decrease to 10% and stay at that level. The required return for Sports Novalties is 16% and estimated to stay at that level for three more years and it will be 12% thereafter.
a)Calculate the price of Stock 1 today.
b)Calculate the price of Stock 2 today.
c) Suppose Stock 1 is selling for $25 in the market right now.
Decide whether Mary should include Stock 1 in the portfolio of her
clients or not and briefly justify your decision.
d)Suppose Mary purchased Stock 2 today with an intention of selling it a year later. Suppose a year has passed and Mary is getting ready to sell her shares. Today, the company announced experiencing some financial difficulties and the required rate of return on company shares suddenly changed to 15% indefinitely. Calculate the new price for Stock 2. Calculate the return she earned on her investment during her 1-year holding period and decompose this return into dividend yield and capital gains yield components.
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Santa Corp. has 5,000 zero-coupon bonds outstanding. The bonds have a face value of $1,000, 4 years to maturity, and are currently trading at $822.70. The firm also has 750,000 common shares outstanding. The shares are currently priced at $21.75 each and yesterday paid a dividend of $2.24. The firm’s most recent annual financial statements show net income of $2.80 mln, shareholders’ equity of $26.67 mln, and a marginal tax rate of 26%.
What are the weights of debt and equity in Santa Corp.’s capital structure? [2 points]
What is Santa Corp.’s required return on equity? [4 points]
What is Santa Corp.’s weighted average cost of capital? [4 points]
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Most publicly traded companies are examined by numerous analysts. Locate analysts’ ratings about a company of your choice by visiting a website such as Yahoo Finance (Links to an external site.). Provide a comparison over time and across companies in the same industry by answering the following questions:
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General Electric has 10 million shares of common stock with a book value of $1 per share and a current market price of $25 per share. The company’s beta is 1, the risk free rate is 3% and the market rate is 9%. The firm’s outstanding bonds have a total face value of $75 million, a maturity of 10 years, a 4% annual coupon, and are selling currently for 101% of par value. The marginal tax rate is 35%. What discount rate should General Electric use to evaluate its projects? (You MUST show all your work) 21. What is the weight of equity? A) 57.3% B) 42.7% C) 76.7% D) 23.3% 22. What is the weight of debt? A) 57.3% B) 42.7% C) 76.7% D) 23.3% 23. What is the rate of equity? A) 9% B) 3% C) 12% D) 4.5% 24. What is the rate of debt? A) 4.0% B) 3.8% C) 1.9% D) 7.6% 25. What is the discount rate for the firm? A) 7.5% B) 4.1% C) 3.8% D) 2.8%
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|
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.2 million on an aftertax basis. In five years, the aftertax value of the land will be $6.6 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.8 million to build. The following market data on DEI’s securities are current: |
| Debt: |
255,000 bonds with a coupon rate of 6.2 percent outstanding, 25 years to maturity, selling for 107 percent of par; the bonds have a $1,000 par value each and make semiannual payments. |
| Common stock: |
9,700,000 shares outstanding, selling for $73.70 per share; the beta is 1.3. |
| Preferred stock: |
475,000 shares of 4 percent preferred stock outstanding, selling for $83.50 per share. The par value is $100. |
| Market: |
6.2 percent expected market risk premium; 3.1 percent risk-free rate. |
|
DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 6.5 percent on new common stock issues, 4 percent on new preferred stock issues, and 2 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 24 percent. The project requires $1,525,000 in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally and that the NWC does not require floatation costs.. |
| a. |
Calculate the project’s initial Time 0 cash flow, taking into account all side effects. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| b. | The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2.5 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| c. | The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation to a zero salvage value. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.4 million. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| d. | The company will incur $7,700,000 in annual fixed costs. The plan is to manufacture 19,600 RDSs per year and sell them at $11,090 per machine; the variable production costs are $9,750 per RDS. What is the annual operating cash flow (OCF) from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar amount, e.g., 1,234,567.) |
| e. | DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project? (Do not round intermediate calculations and round your answer to nearest whole number, e.g., 32.) |
| f. |
Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. (Do not round intermediate calculations. Enter your NPV in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enter your IRR as a percent rounded to 2 decimal places, e.g., 32.16.) |
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A firm issues $1000 face value bonds, with an 8.5% annual coupon. The bonds have 20 years to maturity and are currently selling with a 7% YTM. The firm is in the 34% tax bracket. What is the price of the bond.
1158.91
845.50
Need more information
1000
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Problem 12-09 Financing Deficit Garlington Technologies Inc.'s 2016 financial statements are shown below: Balance Sheet as of December 31, 2016 Cash $ 180,000 Accounts payable $ 360,000 Receivables 360,000 Notes payable 156,000 Inventories 720,000 Line of credit 0 Total current assets $1,260,000 Accruals 180,000 Fixed assets 1,440,000 Total current liabilities $ 696,000 Common stock 1,800,000 Retained earnings 204,000 Total assets $2,700,000 Total liabilities and equity $2,700,000 Income Statement for December 31, 2016 Sales $3,600,000 Operating costs 3,279,720 EBIT $ 320,280 Interest 18,280 Pre-tax earnings $ 302,000 Taxes (40%) 120,800 Net income 181,200 Dividends $ 108,000 Suppose that in 2017 sales increase by 20% over 2016 sales and that 2017 dividends will increase to $192,000. Forecast the financial statements using the forecasted financial statement method. Assume the firm operated at full capacity in 2016. Use an interest rate of 14%, and assume that any new debt will be added at the end of the year (so forecast the interest expense based on the debt balance at the beginning of the year). Cash does not earn any interest income. Assume that the all new-debt will be in the form of a line of credit. Round your answers to the nearest dollar. Do not round intermediate calculations. Garlington Technologies Inc. Pro Forma Income Statement December 31, 2017 Sales $ Operating costs $ EBIT $ Interest $ Pre-tax earnings $ Taxes (40%) $ Net income $ Dividends: $ Addition to RE: $ Garlington Technologies Inc. Pro Forma Balance Statement December 31, 2017 Cash $ Receivables $ Inventories $ Total current assets $ Fixed assets $ Total assets $ Accounts payable $ Notes payable $ Accruals $ Total current liabilities $ Common stock $ Retained earnings $ Total liabilities and equity.
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1. Capital structure:
a. What are the capital structure theories?
b. The Miller and Modigliani proposition that dividend policy has
no impact on the value of the firm fails to explain the accepted
facts of dividend policy by major corporations. Explain the nature
of Miller and Modigliani’s theory on dividend policy and outline
its practical limitations.
Long explanations and discussions needed
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Analyze how much of the funding should come from debt, and how much from equity. Support your evaluation. Please provide reference
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Broussard Skateboard's sales are expected to increase by 25% from $8.4 million in 2016 to $10.50 million in 2017. Its assets totaled $6 million at the end of 2016. Broussard is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2016, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%, and the forecasted payout ratio is 70%. What would be the additional funds needed? Do not round intermediate calculations. Round your answer to the nearest dollar.
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Problem 12-07 Forecasted Statements and Ratios Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them set up their new computers. Upton's balance sheet as of December 31, 2016, is shown here (millions of dollars): Cash $ 3.5 Accounts payable $ 9.0 Receivables 26.0 Notes payable 18.0 Inventories 58.0 Line of credit 0 Total current assets $ 87.5 Accruals 8.5 Net fixed assets 35.0 Total current liabilities $ 35.5 Mortgage loan 6.0 Common stock 15.0 Retained earnings 66.0 Total assets $122.5 Total liabilities and equity $122.5 Sales for 2016 were $275 million and net income for the year was $8.25 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.3 million to common stockholders, so its payout ratio was 40%. Its tax rate was 40%, and it operated at full capacity. Assume that all assets/sales ratios, (spontaneous liabilities)/sales ratios, the profit margin, and the payout ratio remain constant in 2017. Do not round intermediate calculations. If sales are projected to increase by $70 million, or 25.45%, during 2017, use the AFN equation to determine Upton's projected external capital requirements. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ million Using the AFN equation, determine Upton's self-supporting growth rate. That is, what is the maximum growth rate the firm can achieve without having to employ nonspontaneous external funds? Round your answer to two decimal places. % Use the forecasted financial statement method to forecast Upton's balance sheet for December 31, 2017. Assume that all additional external capital is raised as a line of credit at the end of the year and is reflected (because the debt is added at the end of the year, there will be no additional interest expense due to the new debt). Assume Upton's profit margin and dividend payout ratio will be the same in 2017 as they were in 2016. What is the amount of the line of credit reported on the 2017 forecasted balance sheets? (Hint: You don't need to forecast the income statements because the line of credit is taken out on last day of the year and you are given the projected sales, profit margin, and dividend payout ratio; these figures allow you to calculate the 2017 addition to retained earnings for the balance sheet without actually constructing a full income statement.) Round your answers to the nearest cent. Upton Computers Pro Forma Balance Sheet December 31, 2017 (Millions of Dollars) Cash $ Receivables $ Inventories $ Total current assets $ Net fixed assets $ Total assets $ Accounts payable $ Notes payable $ Line of credit $ Accruals $ Total current liabilities $ Mortgage loan $ Common stock $ Retained earnings $ Total liabilities and equity $.
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You are just 23 years old and you have $10,000 in your retirement saving accounts. You expect to retire at the age of 70 (work for 47 more years) and expect to live for another 30 years after your retirement. On the day you retire, you want to have enough money in our retirement saving accounts such that you are able to draw $10,000 per month for 30 years. You are conservative in your estimate of interest rate and expect to earn on an average 4.25% on your money during the entire period.
(a) How much you need to deposit each month throughout your working years to achieve your post retirement income goal, if you plan to die on the day you spend your last penny?
(b) There is one more complication that you realized only at the last day of your age 35! And the end of your age 55 (in 20 year time), you expect your only kid to join a top notch MBA program. You want to help your kid achieve his/her career goal and you plan to give him/her a onetime grant of $150,000 when he joins the program. How much you need to additionally save each month from age 35 onwards to achieve enough funds at the end of age 70 to meet your original retirement income goal as well as your child’s educational goal?
(c) Suppose your financial situations at age 35 is such that you cannot increase your monthly savings in the pension account. If you still want to give your kid a onetime grant of $150,000 at the end of your age 55, how much reduction in your post retirement monthly income you have to absorb in order to accommodate the additional expenditure of $150,000.
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