Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$48.96. The firm just recently paid a dividend of ​$4.05. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$2.96. After underpricing and flotation​ costs, the firm expects to net ​$45.53 per share on a new issue.

a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​ rate, what dividend would you expect the company to pay next​ year?

b. Determine the net​ proceeds, Nn​, that the firm will actually receive.

c.  Using the​ constant-growth valuation​ model, determine the required return on the​ company's stock, r Subscript srs​, which should equal the cost of retained​ earnings, r Subscript rrr.

d.  Using the​ constant-growth valuation​ model, determine the cost of new common​ stock, r Subscript nrn.

Question #1: You are planning to save for retirement over the next 35 years. To do this, you will invest $900 per month in a stock account and $500 per month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 7 percent. When you retire, you will combine your money into an account with a 8 percent return.

How much can you withdraw each month from your account assuming a 30-year withdrawal period? _____

14. Implied interest rate and period

Consider the case of the following annuities, and the need to compute either their expected rate of return or duration.

Joshua needed money for some unexpected expenses, so he borrowed $5,958.17 from a friend and agreed to repay the loan in six equal installments of $1,250 at the end of each year. The agreement is offering an implied interest rate of   .

Joshua’s friend, Willie, has hired a financial planner for advice on retirement. Considering Willie’s current expenses and expected future lifestyle changes, the financial planner has stated that once Willie crosses a threshold of $14,836,230 in savings, he will have enough money for retirement. Willie has nothing saved for his retirement yet, so he plans to start depositing $100,000 in a retirement fund at a fixed rate of 7.00% at the end of each year. It will take   years for Willie to reach his retirement goal.

Your company owns a piece of manufacturing equipment that requires a lot of maintenance. You estimate that the maintenance costs will be​ $750 next year​ (Year 1), and will increase by​ $250 each year until Year​ 8, at which point you will discard the equipment​ (after paying the maintenance costs for that year​ - there is a cash flow in Year​ 8). You want to know how much money you should put aside now to pay for this maintenance​ (the present value of the cash flows at Year​ 0), assuming an interest rate of​ 5% per year.

a. To solve for the present value in Year​ 0, you need to split the cash flows into two pieces. What are these​ pieces?

b. How much money do you need to put aside now to pay for the​ maintenance?

c. If you converted the maintenance costs into an equivalent uniform annual cost​ (an annuity) over the 8​ years, what would that annual cost​ be?

a. To solve for the present value in Year​ 0, you need to split the cash flows into two pieces. What are these​ pieces?

Piece​ 1:

A.

An annuity of​ $750 for 8 years

B.

An annuity of​ $500 for 8 years

C.

An annuity of​ $750 for 7 years

D.

An annuity of​ $700 for 7 years

Piece​ 2:

A.

A uniform gradient of​ $250 for 7 years

B.

A uniform gradient of​ $750 for 8 years

C.

A uniform gradient of​ $750 for 7 years

D.

A uniform gradient of​ $250 for 8 years

Kenny Enterprises has just issued a bond with a par value of $1,000​, a maturity of twenty​ years, and a coupon rate of 11.4% with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at the following​ prices?

a) $928

b) $1,000

c) $1,060.72

d) $1,131.49

Bill Clinton reportedly was paid $ 15.0 million to write his book My Life. The book took three years to write. In the time he spent​ writing, Clinton could have been paid to make speeches. Given his​ popularity, assume that he could earn $ 8.3 million per year​ (paid at the end of the​ year) speaking instead of writing. Assume his cost of capital is 9.5 % per year. a. What is the NPV of agreeing to write the book​ (ignoring any royalty​ payments)? b. Assume​ that, once the book is​ finished, it is expected to generate royalties of $ 4.9 million in the first year​ (paid at the end of the​ year) and these royalties are expected to decrease at a rate of 30 % per year in perpetuity. What is the NPV of the book with the royalty​ payments?

QUESTION 6

1. Which of the following would not be considered a bank qualified municipal security?

   	A.	A Treasury bond to finance government debt.
   	B.	A City of San Marcos general obligation bond to pay for street repairs.
   	C.	A City of Chicopee general obligation bond to pay for a new city jail.
   	D.	A Columbia County general obligation bond to modernize the county fire department.
   	E.	A Bucks County general obligation bond to build a new sewer plant.

8 points   

QUESTION 7

1. Which of the following is not one of the Capital Market instruments in which banks invest?

   	A.	Municipal bonds
   	B.	Corporate notes and bonds
   	C.	U.S. Treasury notes
   	D.	U.S. Treasury bonds
   	E.	Commercial paper

8 points   

QUESTION 8

1. The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its securities in response to its forecasts of changes in interest rates and other economic conditions is the:

   	A.	None of the other responses are correct.
   	B.	Front-end-loaded policy
   	C.	Ladder approach
   	D.	Rate expectations approach
   	E.	Barbell strategy

8 points   

QUESTION 9

1. A security where the interest payments and the principal payments are sold separately is called:

   	A.	A Treasury note
   	B.	An accretion
   	C.	A structured note
   	D.	A stripped security
   	E.	None of the other responses are correct.

8 points   

QUESTION 10

1. A security which was created by the U.S. Treasury to protect investors against inflation risk is called a(n):

   	A.	FNMA
   	B.	TIPS
   	C.	CD
   	D.	GNMA
   	E.	CMO

8 points   

QUESTION 11

1. The Carey State Bank has purchased a bank-qualified municipal bond with a yield of 6%. This bank has had to borrow funds to make this purchase at a cost of 5.25%. This bank is in the 40% tax bracket. What is the net after-tax return on this bank-qualified municipal bond? Under IRS rules if a muni bond is bank qualified then 80% of the interest expense associated with funding the investment is tax deductible.

   	A.	None of the other responses are correct.
   	B.	2.85%
   	C.	2.43%
   	D.	0.75%
   	E.	6.00%

8 points   

QUESTION 12

1. A bank that is concerned that the economic conditions of the market area they serve may take a downturn with falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?

   	A.	Liquidity risk
   	B.	Inflation risk
   	C.	Tax exposure
   	D.	Business risk
   	E.	Credit risk

8 points   

QUESTION 13

1. Which of the following statements is (are) correct regarding duration?

   	A.	In comparing two bonds with the same yield to maturity and the same maturity, a bond with a higher coupon rate will have a longer duration.
   	B.	In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment.
   	C.	The duration will always be shorter than the maturity for all debt instruments.
   	D.	All of the above
   	E.	B and C

Rockyford Company must replace some machinery that has zero book value and a current market value of $2,000. One possibility is to invest in new machinery costing $42,000. This new machinery would produce estimated annual pretax cash operating savings of $16,800. Assume the new machine will have a useful life of 4 years and depreciation of $10,500 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this new machinery would require an additional $3,200 investment of net working capital. (Assume that when the old machine was purchased, the incremental net working capital required at the time was $0.) If Rockyford accepts this investment proposal, the disposal of the old machinery and the investment in the new one will occur on December 31 of this year. The cash flows from the investment are expected to occur over a four-year period. Rockyford is subject to a 40% income tax rate for all ordinary income and capital gains and has a 11% weighted-average after-tax cost of capital. All operating and tax cash flows are assumed to occur at year-end. (For Parts 2 and 3, use the relevant table from Appendix C–Table 1 or Table 2.)

Required:

1. Determine the after-tax cash flow arising from disposing of the old machinery.

2. Determine the present value of the after-tax cash flows for the next 4-years attributable to the cash operating savings

3. Determine the present value of the tax shield effect of depreciation for year 1.

4. Which one of the following is the proper treatment for the additional $3,200 of net working capital required in the current year?

1. The Brownstone Corporation's bonds have 4 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%.

a. What is the yield to maturity at a current market price of $831? Round your answer to two decimal places.

b What is the yield to maturity at a current market price of $1,048? Round your answer to two decimal places.

2.Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.

a. Two years after the bonds were issued, the going rate of interest on bonds such as these fell to 8%. At what price would the bonds sell? Round the answer to the nearest cent. $

b Suppose that 2 years after the initial offering, the going interest rate had risen to 15%. At what price would the bonds sell? Round the answer to the nearest cent. $

ABC is considering purchasing a smaller chain, XYZ software. ABC’s financial
analysts project that the merger will result in incremental net cash flows of $5.5
million in Year 1, $6.5 million in Year 2, $8.5 million in Year 3, and $15.5
million in year 4. Interest tax savings after the merger are estimated to be $1.8
million for each of the next 4 years. The expected cost of capital will be 10.5%,
and the company expects to experience a normal growth of 6% starting at the
beginning of the fifth year. XYZ’s outstanding debt is estimated to be $40
million, and the post merger beta is estimated to be 1.50. The risk free rate is 3.5
percent, and the market returns are 10 percent. What is the value of XYZ
Software to ABC software? (15 points)
Value: $ __________

Our award-winning folding carton structural designers, working with the latest technologies, bring you innovative paperboard folding carton structures - alternatives that can address your unique goals and take your product packaging to the next level. Whether you know exactly how you want your folding carton structure to look, or you need a partner to generate unique concepts - we're with you. Our structural designers focus first on understanding the unique qualities of your product. Then they produce innovative structural concepts that help communicate value to the customers you are trying to reach. To help you evaluate new structural designs for folding cartons, the company is considering acquisition of new IntriCut® to expand its production capacity.

The cost of IntriCut® is $ 2.75 million. Unfortunately, installing this machine will take several months and will partially disrupt production. The firm has just completed a $ 50,000 feasibility study to analyze the decision to buy the IntriCut, resulting in the following estimates:

Marketing: Once the IntriCut is operational next year, the extra capacity is expected to generate $10 million per year in additional sales, which will continue for the 10-year life of the machine.

Operations: The disruption caused by the installation will decrease sales by $ 5 million this year. As with APC's existing products, the cost of goods for the products produced by the IntriCut is expected to be 70% of their sale price. The increased production will also require increased inventory on hand of $1 million during the life of the project, including year 0.

Human Resources: The expansion will require additional sales and administrative personnel at a cost of $ 2 million per year.

Accounting: The IntriCut will be depreciated via the straight-line method over the 10-year life of the machine. The firm expects receivables from the new sales to be 15 % of revenues and payables to be 10 % of the cost of goods sold. APC's marginal corporate tax rate is 35%.

a. Determine the incremental earnings from the purchase of the IntriCut.

b. Determine the free cash flow from the purchase of the IntriCut.

c. If the appropriate cost of capital for the expansion is 10 %, compute the NPV of the purchase.

d. While the expected new sales will be $ 10. million per year from the expansion, estimates range from $ 8.0 million to $ 12.0 million. What is the NPV in the worst case? In the best case?

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 $325 million and net income for the year was $9.75 million, so the firm's profit margin was 3.0%. Upton paid dividends of $3.9 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 21.54%, 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

Provide Sue with financial advice on which option has the potential to yield the highest monetary value. Support your rational with calculations using time value of money and comment on the risk return relationship for each option, assume interest rate on savings is 4% and is compounded semi-annually. Sue James is a 55-year old accountant who works at Ernst and Young (EY) who is about to retire. She has the following decision to make: Option A – Select a lump sum gratuity payment of $120,000 with a reduced pension of $1,750 per month. Option B – Select a monthly pension of $3,300 with no lump sum gratuity payment. In addition, Sue has a loan of $72,000 with loan payments of $1,200 per month for the next five years

What is the percentage price change for a zero coupon bond if its YTM changes from 3.7% to 4.9%? The bond's face value is $1,000 and it matures in 7 years. Use the price determined from the first yield, 3.7%, as the base in the percentage calculation. Round to the nearest tenth of a percent. (e.g., 4.32% = 4.3). [Hint: If the price dropped, enter a negative number].