Problem 4-01

You are given the following information regarding prices for a sample of stocks.

1. Construct a price-weighted index for these three stocks, and compute the percentage change in the index for the period from T to T + 1. Do not round intermediate calculations. Round your answer to two decimal places.

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2. Construct a value-weighted index for these three stocks, and compute the percentage change in the index for the period from T to T + 1. Do not round intermediate calculations. Round your answer to two decimal places.

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elliott's cross country transportation services has a capital structure with 25% debt at a 9% interest rate. Its beta is 1.6 , the risk-free rate is 4%, and the market risk preimum is 7%. Elliott's combined federal-plus-state tax rate is 25%

What is the cost of equity ?

What is the WAAC?

What is its unlevered cost of equity?

Ziege Systems is considering the following independent projects for the coming year:

Ziege's WACC is 10.75%, but it adjusts for risk by adding 2% to the WACC for high-risk projects and subtracting 2% for low-risk projects.

1. Which projects should Ziege accept if it faces no capital constraints?

   Project A	-Select-AcceptRejectItem 1
   Project B	-Select-AcceptRejectItem 2
   Project C	-Select-AcceptRejectItem 3
   Project D	-Select-AcceptRejectItem 4
   Project E	-Select-AcceptRejectItem 5
   Project F	-Select-AcceptRejectItem 6
   Project G	-Select-AcceptRejectItem 7
   Project H	-Select-AcceptRejectItem 8

2. If Ziege can only invest a total of $13 million, which projects should it accept?

   Project A	-Select-AcceptRejectItem 9
   Project B	-Select-AcceptRejectItem 10
   Project C	-Select-AcceptRejectItem 11
   Project D	-Select-AcceptRejectItem 12
   Project E	-Select-AcceptRejectItem 13
   Project F	-Select-AcceptRejectItem 14
   Project G	-Select-AcceptRejectItem 15
   Project H	-Select-AcceptRejectItem 16

   If Ziege can only invest a total of $13 million, what would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $    million

3. Suppose Ziege can raise additional funds beyond the $13 million, but each new increment (or partial increment) of $5 million of new capital will cause the WACC to increase by 1%. Assuming that Ziege uses the same method of risk adjustment, which projects should it now accept?

   Project A	-Select-AcceptRejectItem 18
   Project B	-Select-AcceptRejectItem 19
   Project C	-Select-AcceptRejectItem 20
   Project D	-Select-AcceptRejectItem 21
   Project E	-Select-AcceptRejectItem 22
   Project F	-Select-AcceptRejectItem 23
   Project G	-Select-AcceptRejectItem 24
   Project H	-Select-AcceptRejectItem 25

   What would be the dollar size of its capital budget? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

   $    million

Your company is a global seller or home furnishings called Worldwide Home Stuff Unlimited (WHSU). (Yes, they need some more creative people in their company.) Complete a seven-year planning model for WHSU for the period 2016 through 2022. Use the structure shown at the end of this assignment. Proceed as follows:

1. Take the 2016, 2017, and 2018 values from the data at the end of this assignment. Enter the ACTUAL VALUES even for the various lines that can be calculated from other lines (e.g., the Gross Profit or the EBT).

2. Place all growth rates and other input variables at the top left corner of the worksheet. Use formulas and/or functions to perform all necessary calculations.

   Important Note: Most or all of the growth factors and other input values you will be using in this model are calculated in steps 3 through 7 below. So put the formulas for calculating these values in the appropriate cells at the top left corner of the worksheet.

3. Starting with 2019 and beyond, for the following line-items (a thru d below), assume a constantPERCENTAGE growth from one year to the next—e.g., from 2018 to 2019. That percentage change is equal to the Average Annual Percentage Change from 2016 to 2018. Calculate this value by averaging the percentage change from 2016 to 2017 and the percentage change from 2017 to 2018.

   1. Net Sales/Sales Revenue

   2. Selling, General, and Administrative (SG&A)

   3. Depreciation and Amortization

   4. Other Expenses

4. Starting with 2019 and beyond, assume that Advertising will change by the same dollar amount (not the same percentage) from one year to the next—e.g., from 2018 to 2019. That amount is equal to the Average Annual Change (in dollars) between 2016 and 2018.

5. Starting with 2018 and beyond, assume that Rent Expense will be unchanged (that is, constant) from one year to the next, so the values in 2019 through 2022 will be the same as the 2018 value.

6. Assume that the Cost of Goods Sold (CGS) as a percentage of Net Sales/Sales Revenue (that is, the ratio of CGS to Net Sales) will be constant in years 2018 through 2022 and equal to the percentage in 2018. You will need to calculate that percentage (ratio).

7. Assume that the tax rate will be constant in years 2018 through 2022 and equal to the tax rate in 2018. You will need to calculate that value (that is, the tax expense as a percentage of the EBT).

2

8. Note that your formulas should allow for the possibility that your company may lose money in any given year (whether or not it is not the case with the current data).

9. Be sure to note somewhere on the spreadsheet that all figures are in millions.

10. Format financial data with commas (but no decimal places), using dollar signs only for the Net Sales/Sales Revenue, Gross Profit, Total Expenses, Earnings Before Taxes, and Net Income lines. Format growth rates as percentages. Properly format all columns and numbers.

11. When creating the spreadsheet, be sure to copy cell formulas rather than entering similar formulas many times (for example, you can use the autofill handle to copy cell formulas from year to year).

12. Use Excel to place a footer on your spreadsheet with your last name and section (e.g., Jones—INSY 2299 RZQ—where you substitute your last name for Jones and your section for RZQ).

Be sure to follow these instructions carefully!

You are considering buying an oil field. If you buy the field, you can extract the oil in one year. There are 100 barrels of oil that can be extracted from the field; the cost of doing so is $4,000. You expect the price of oil in one year to be $50/barrel. However, there are four equally likely prices of oil in one year: $20/barrel, $35/barrel, $40/barrel, and $105/barrel.

If your discount rate is 15%, how much are you willing to pay for the field? Assume the price of oil never changes after one year, and that you have the option to not drill if the price of oil is too low.

The real risk-free rate is 3.0% and inflation is expected to be 2.25% for the next 2 years. A 2-year Treasury security yields 6.25%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

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It is now January 1, 2019, and you are considering the purchase of an outstanding bond that was issued on January 1, 2017. It has a 9% annual coupon and had a 20-year original maturity. (It matures on December 31, 2036.) There is 5 years of call protection (until December 31, 2021), after which time it can be called at 108—that is, at 108% of par, or $1,080. Interest rates have declined since it was issued, and it is now selling at 114.12% of par, or $1,141.20.

1. What is the yield to maturity? Do not round intermediate calculations. Round your answer to two decimal places.

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   What is the yield to call? Do not round intermediate calculations. Round your answer to two decimal places.

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2. If you bought this bond, which return would you actually earn?
   1. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
   2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   3. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   4. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

   -Select-I II III IV Item 3

3. Suppose the bond had been selling at a discount rather than a premium. Would the yield to maturity have been the most likely return, or would the yield to call have been most likely?
   1. Investors would not expect the bonds to be called and to earn the YTM because the YTM is greater than the YTC.
   2. Investors would not expect the bonds to be called and to earn the YTM because the YTM is less than the YTC.
   3. Investors would expect the bonds to be called and to earn the YTC because the YTC is greater than the YTM.
   4. Investors would expect the bonds to be called and to earn the YTC because the YTC is less than the YTM.

A bond has a $1,000 par value, 20 years to maturity, and an 8% annual coupon and sells for $1,110.

1. What is its yield to maturity (YTM)? Round your answer to two decimal places.

       %

2. Assume that the yield to maturity remains constant for the next four years. What will the price be 4 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

Harrimon Industries bonds have 6 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 10%.

1. What is the yield to maturity at a current market price of
   1. $864? Round your answer to two decimal places.

          %

   2. $1,196? Round your answer to two decimal places.

          %

2. Would you pay $864 for each bond if you thought that a "fair" market interest rate for such bonds was 12%—that is, if r_d = 12%?
   1. You would buy the bond as long as the yield to maturity at this price equals your required rate of return.
   2. You would not buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   3. You would not buy the bond as long as the yield to maturity at this price is less than the coupon rate on the bond.
   4. You would buy the bond as long as the yield to maturity at this price is greater than your required rate of return.
   5. You would buy the bond as long as the yield to maturity at this price is less than your required rate of return.

   -Select-I II III IV V

Madsen Motors's bonds have 16 years remaining to maturity. Interest is paid annually, they have a $1,000 par value, the coupon interest rate is 12%, and the yield to maturity is 13%. What is the bond's current market price? Round your answer to the nearest cent.

$  

A Treasury bond that matures in 10 years has a yield of 4.00%. A 10-year corporate bond has a yield of 8.25%. Assume that the liquidity premium on the corporate bond is 0.70%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

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1. Gabriele Enterprises has bonds on the market making annual payments, with 17 years to maturity, a par value of $1,000, and selling for $810. At this price, the bonds yield 10 percent. What must the coupon rate be on the bonds?

2. Chamberlain Co. wants to issue new 13-year bonds for some much-needed expansion projects. The company currently has 12.0 percent coupon bonds on the market that sell for $1,112.67, make semiannual payments, and mature in 13 years. What coupon rate should the company set on its new bonds if it wants them to sell at par? Assume a par value of $1,000.

What is significant about the difference between Budgeted Cost of Work Performed and Actual Cost of Work Performed (i.e., BCWP - ACWP)? How is it different than Budget vs. Actuals? (4 pts)