Discuss the advantages and disadvantages of operating and financial leverage.

One bond has a coupon rate of 7.2%, another a coupon rate of 8.6%. Both bonds pay interest annually, have 14-year maturities, and sell at a yield to maturity of 8.0%. a. If their yields to maturity next year are still 8.0%, what is the rate of return on each bond? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

Does the higher-coupon bond give a higher rate of return over this period?

• Yes

• No

Simon recently received a credit card with a 12% nominal interest rate. With the card, he purchased an Apple iPhone 7 for $369.49. The minimum payment on the card is only $20 per month.

1. If Simon makes the minimum monthly payment and makes no other charges, how many months will it be before he pays off the card? Do not round intermediate calculations. Round your answer to the nearest whole number.

     month(s)

2. If Simon makes monthly payments of $65, how many months will it be before he pays off the debt? Do not round intermediate calculations. Round your answer to the nearest whole number.

     month(s)

3. How much more in total payments will Simon make under the $20-a-month plan than under the $65-a-month plan. Do not round intermediate calculations. Round your answer to the nearest cent.

   $   

Suppose your company needs to raise $36.3 million and you want to issue 23-year bonds for this purpose. Assume the required return on your bond issue will be 8.8 percent, and you’re evaluating two issue alternatives: an 8.8 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent. Both bonds would have a face value of $1,000.
  
a. How many of the coupon bonds would you need to issue to raise the $36.3 million? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Number of coupon bonds            

How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Number of zero coupon bonds            

b. In 23 years, what will your company’s repayment be if you issue the coupon bonds? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Coupon bonds repayment            $

What if you issue the zeroes? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Zero coupon bonds repayment            $

c. Assume that the IRS amortization rules apply for the zero coupon bonds.

Calculate the firm’s aftertax cash outflows for the first year under the two different scenarios. (Input a cash outflow as a negative value and a cash inflow as a positive value. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

18-1 Beedles Inc. needed to raise $14 million in an IPO and chose Security Brokers Inc. to underwrite the offering. The agreement stated that Security Brokers would sell 3 million shares to the public and provide $14 million in net proceeds to Beedles. The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. What profit or loss did Security Brokers incur if the issue were sold to the public at the following average price?

a. $5 per share

b. $6 per share

c. $4 per share

Your bank is offering you an account that will pay 22 % interest​ (an effective​ two-year rate) in total for a​ two-year deposit. Determine the equivalent discount rate for the following​ periods: a. Six months b. One year c. One month ​(Note: Be careful not to round any intermediate steps less than six decimal​ places.) a. Six months The equivalent discount rate for a period length of six months is. ​(Round to two decimal​ places.)

Where do your taxes go? Does knowing this information make you happier paying taxes or would you prefer your tax money not go to some of these expenses, if so which ones and why?

XYZ Ltd. has developed a new product which is expected to have a life of five years before it becomes obsolete. The project would be terminated after five years. The plant and equipment is expected to have a salvage value of $500,000 at the end of the project’s life. The company is in the tax bracket of 30 per cent and required return for this project is 15 per cent. XYZ Ltd. has put together the following information about the product:

Cost of new plant and equipment $7,900,000

Transport and installation costs $100,000

Unit Sales:

Year Units Sold

1 70,000

2 120,000

3 140,000

4 80,000

5 60,000

Sales Price per Unit:

Years 1-4 $300

Year 5 $260

Variable Cost per Unit $180

Annual Fixed Costs $200,000

Net Working Capital:

An initial investment of $100,000 in net working capital is required to start the project. Additionally, net working capital equal to 10 per cent of the value of sales will be required each year including year one.

a) Calculate the yearly cash flows and the yearly net after-tax cash flow related to the project

b) Calculate the Net Present Value

What is the duration of a 2-year bond that pays a coupon of 8% per annum semiannually? It has a face value of $100. The yield on the bond is 10% per annum with continuous compounding.  

A company currently pays a dividend of $3.25 per share (D0 = $3.25). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.25, the risk-free rate is 3%, and the market risk premium is 6%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

A method has been engineered and an operator has been time studied. The method has produced an average overall time of 2.39 minutes by actual watch timing. The overall pace rating applied to the job was 125%. This company, which uses an incentive system, adds extra time into the production rates to cover personal time, fatigue, and unavoidable delays. The total allowance is 15%. Determine the rated time or normal minutes, the total allowed time or standard minutes, the standard hour rate for the job per 100 units, and the pieces per hour. The labor rate per hour is $23.30. What is the standard labor cost per unit?

1. Why do you think the financial system has become more globally integrated over time?  Can you think of any downside to this increased integration?

2. If offered the choice of receiving $1,000 today or $1,000 in one year’s time, which option would you choose, and why?

3. Suppose financial institutions didn’t exist but you urgently needed a loan. Where would you most likely get this loan? Using Core Principles, identify an advantage and a disadvantage this arrangement might have over borrowing from a financial institution. (LO2)

4.   You are the owner of a small sandwich shop. A buyer may offer one of several payment methods: cash, a check drawn on a bank, a credit card, or a debit card. Which of these is the least costly for you? Explain why the others are more expensive.

UPS is being valued. The following assumptions have been made:
BV per share is estimated at $9.62 on 31 December 2007.
EPS will be 22 percent of the beginning BV per share for the next eight years
Cash dividends paid will be 30 percent of EPS
At the end of the eight-year period, the market price per share will be three times
book value per share at that time.
The beta for UPS is 0.60, the risk free rate is 5 percent and the equity risk
premium is 5.50 percent.
The current market price of UPS is $59.38, which indicates a current P/B of 6.2
a) Prepare a table that shows the beginning and ending book values, net income
and cash dividends annually for eight years.
b) Estimate the residual income and the present value of residual income for the
eight years.
c) Estimate the value per share of UPS stock using the residual income model.