Allison, Inc. has established a target capital structure of 35 percent debt and 65 percent common equity. The firm expects to earn $550 million in after-tax income during the coming year, and it will retain 35 percent of those earnings. The current market price of the firm's stock is $26; its last dividend was $2.25, and its expected growth rate is 5.5 percent. Allison can issue new common stock at a 15 percent flotation cost.
a. What is the cost of retained earnings?
b. What is the cost of a new common stock issue?
c. What is the maximum capital budget that Allison can support with
retained earnings?
d. Suppose Allison has a $450 million budget. What will be Allison’s marginal cost of common equity?
In: Finance
Problem 3-7
The following table contains the demand from the last 10 months:
| MONTH | ACTUAL DEMAND |
| 1 | 33 |
| 2 | 36 |
| 3 | 37 |
| 4 | 38 |
| 5 | 42 |
| 6 | 38 |
| 7 | 41 |
| 8 | 43 |
| 9 | 40 |
| 10 | 41 |
a. Calculate the single exponential smoothing
forecast for these data using an α of 0.20 and an initial
forecast (F1) of 33. (Round
your intermediate calculations and answers to 2 decimal
places.)
| Month | Exponential Smoothing |
| 1 | |
| 2 | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
| 8 | |
| 9 | |
| 10 | |
b. Calculate the exponential smoothing with
trend forecast for these data using an α of 0.20, a
δ of 0.20, an initial trend forecast
(T1) of 1.00, and an initial exponentially
smoothed forecast (F1) of 32. (Round
your intermediate calculations and answers to 2 decimal
places.)
| Month | FITt |
| 1 | |
| 2 | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
| 8 | |
| 9 | |
| 10 | |
c-1. Calculate the mean absolute deviation
(MAD) for the last nine months of forecasts. (Round your
intermediate calculations and answers to 2 decimal
places.)
| MAD | |
| Single exponential smoothing forecast | |
| Exponential smoothing with trend forecast | |
c-2. Which is best?
| Exponential smoothing with trend forecast | |
| Single exponential smoothing forecast |
References
Worksheet
In: Finance
Consider a share of stock that cost $50 one year ago but is worth $55 today (assume no dividends were paid out)?
1. What was the total (annual) return?
2. If the Rfis 4% and Rmis 12%, what is this stock’s beta (assume the beta has stayed the same since last year and the stock is in equilibrium)?
3. Using the same information, now assume the stock costs $52 today. If it is in equilibrium, what must its beta be under this situation?
In: Finance
How long will it take an amount to double if it is deposited into an account which pays 3.8% interest compounded continuously? Use a 360 day year and give the answer to the nearest day.
Please show work. I am willing to rate you well if you give in-depth detail as how to solve the problem. Thanks!
In: Finance
Please explain why the following are value drivers in Finance/Corporate Finance:
1. Sales growth
2. Operating Profitability (OP = NOPAT/sales)
3. Capital Requirements (CR= operating capital/sales)
4. WACC (why is this a proxy for risk)
(I am having issues understanding why these are key value drivers in finance. Please explain their importance and how they value drivers.)
In: Finance
Returns earned over a given time period are called realized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use realized stock returns to estimate the risk of a stock. Consider the case of Happy Dog Soap Inc. (HDS): Five years of realized returns for HDS are given in the following table. Remember: 1. While HDS was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on its equity are calculated as arithmetic returns.
3. The historical returns for HDS for 2014 to 2018 are: 2014 2015 2016 2017 2018 Stock return 22.50% 15.30% 27.00% 37.80% 11.70% Given the preceding data, the average realized return on HDS’s stock is . The preceding data series represents of HDS’s historical returns. Based on this conclusion, the standard deviation of HDS’s historical returns is . If investors expect the average realized return from 2014 to 2018 on HDS’s stock to continue into the future, its coefficient of variation (CV) will be
In: Finance
You receive a 3-year $23,000 loan with an interest rate of 13% p.a., to be repaid in three annual installments. The loan requires that you make two equal total payments of $2,000 at t = 1 and t = 2, with the remaining loan balance paid at maturity. What is the total payment amount at t = 3, rounded to the nearest dollar?
In: Finance
Maudry is borrowing $10,000 today to fund a new small business. She has an interest-only loan for the first 12 months, and her first payment will be in one month. (Note: With this interest-only loan, each payment exactly equals the amount of interest accrued in the previous month.) How much will each of the first 12 payments be if the effective annual interest rate is 10%?
A. $83 B. $82 C. $81 D. $80 E. $79
Warren is considering investing in a local business. He can invest $12,000 today and will receive annual payments of $1,000, forever, starting five years from today. What is the profitability index of this investment if his effective annual interest rate is 7%?
A. 1.2 B. 1.1 C. 1.0 D. 0.9 E. 0.8
In: Finance
a. A coupon payment bond has a face value of $100 and sells at $94. The bond has a
coupon rate of 7.5% and pays semi-annual coupons. The bond has a maturity of 30 years.
What is the YTM?
b. What is the YTM if the same bond in a sells at $101?
c. What is the general relationship between bond price and market interest rate? (i.e. what
does discount bond imply about market interest rate and coupon rate? What does
premium bond imply about market interest rate and coupon rate?)
In: Finance
Terry’s Pets paid $5,000 in interest and $2,000 in dividends last year. The cash coverage ratio is 2 and the depreciation expense is $1000. What is the “times interest earned” ratio? Please show your work and the formulas you used clearly.
In: Finance
Jack Hammer invests in a stock that will pay dividends of $3.13 at the end of the first year; $3.56 at the end of the second year; and $3.99 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 stock for $63. What is the present value of all future benefits if a discount rate of 13 percent is applied? Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
In: Finance
|
You have your choice of two investment accounts. Investment A is a 9-year annuity that features end-of-month $2,180 payments and has an interest rate of 8 percent compounded monthly. Investment B is an annually compounded lump-sum investment with an interest rate of 10 percent, also good for 9 years. |
|
How much money would you need to invest in B today for it to be worth as much as Investment A 9 years from now? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
In: Finance
< Back to Assignment
Attempts:
3.6
Keep the Highest:
3.6 / 5
|
9. An analysis of company performance using DuPont analysis A sheaf of papers in his hand, your friend and colleague, Jason, steps into your office and asked the following. JASON: Do you have 10 or 15 minutes that you can spare? YOU: Sure, I’ve got a meeting in an hour, but I don’t want to start something new and then be interrupted by the meeting, so how can I help? JASON: I’ve been reviewing the company’s financial statements and looking for ways to improve our performance, in general, and the company’s return on equity, or ROE, in particular. Anja, my new team leader, suggested that I start by using a DuPont analysis, and I’d like to run my numbers and conclusions by you to see whether I’ve missed anything. Here are the balance sheet and income statement data that Anja gave me, and here are my notes with my calculations. Could you start by making sure that my numbers are correct? YOU: Give me a minute to look at these financial statements and to remember what I know about the DuPont analysis.
If I remember correctly, the DuPont equation breaks down our ROE into three component ratios: the , the total asset turnover ratio, and the . And, according to my understanding of the DuPont equation and its calculation of ROE, the three ratios provide insights into the company’s , effectiveness in using the company’s assets, and . Now, let’s see your notes with your ratios, and then we can talk about possible strategies that will improve the ratios. I’m going to check the box to the side of your calculated value if your calculation is correct and leave it unchecked if your calculation is incorrect. Cepeus Manufacturing Inc. DuPont Analysis
JASON: OK, it looks like I’ve got a couple of incorrect values, so show me your calculations, and then we can talk strategies for improvement. YOU: I’ve just made rough calculations, so let me complete this table by inputting the components of each ratio and its value: Do not round intermediate calculations and round your final answers up to two decimals. Cepeus Manufacturing Inc. DuPont Analysis
JASON: I see what I did wrong in my computations. Thanks for reviewing these calculations with me. You saved me from a lot of embarrassment! Anja would have been very disappointed in me if I had showed her my original work. So, now let’s switch topics and identify general strategies that could be used to positively affect Cepeus’s ROE. YOU: OK, so given your knowledge of the component ratios used in the DuPont equation, which of the following strategies should improve the company’s ROE? Check all that apply. Decrease the company’s use of debt capital because it will decrease the equity multiplier. Use more debt financing in its capital structure and increase the equity multiplier. Increase the efficiency of its assets so that it generates more sales with each dollar of asset investment and increases the company’s total assets turnover. Use more equity financing in its capital structure, which will increase the equity multiplier. JASON: I think I understand now. Thanks for taking the time to go over this with me, and let me know when I can return the favor. Grade It Now Save & Continue Continue without saving |
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In: Finance
Assume Highline Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Highline’s earnings are expected to grow at the current industry average of 5.2% per year. If Highline’s equity cost of capital is 8.5% per year and its dividend payout ratio remains constant, for what price does the dividend-discount model predict Highline stock should sell?
In: Finance
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard & Poor’s. However, due to recent financial difficulties at the company, Standard & Poor’s is warning that it may downgrade Andrew Industries bonds to BBB. Yields on A-rated, long-term bonds are currently 6.5%, and yields on BBB-rated bonds are 6.9%. a. What is the price of the bond if Andrew Industries maintains the A rating for the bond issue? b. What will the price of the bond be if it is downgraded?
In: Finance