You are considering three investments to add to your portfolio. The first is a bond that is selling in the market at $1,100. The bond has a $1,000 par value, pays interest at 13 percent, and is scheduled to mature in 15 years. For bonds has a high risk rating (junk bond) and therefore you believe that a 14 percent rate of return should be required. The second investment that you are analysing is a preferred stock ($100 par value) that sells for $90 and pays an annual dividend of $ 13. Your required rate of return for this stock is 15 percent. The last investment is a common stock ($25 par value) that recently paid a $2 dividend. The firm's earnings per share have increased from $3 to $6 in 10 years, which also reflects the expected growth in dividends per share for the indefinite future. The stock is selling for $20, and you think a reasonable required rate of return for the stock is 20 percent.

Calculate the value of each security based on your required rate of return.

Which investment(s) should you accept? Why?

If your anticipated growth rate in dividends per share changed to 12 percent, would your answer change?

Impact of Regulation and Deregulation on Financial Services

Carson Company relies heavily on commercial banks for funding and for some other services.

1. Explain how the services provided by a commercial bank (just the banking, not the nonbank, services) to Carson may be limited because of bank regulation.

2. Explain the types of nonbank services that Carson Company can receive from the subsidiaries of a commercial bank as a result of deregulation. How might Carson Company be affected by the deregulation that allows subsidiaries of a commercial bank to offer non-bank services?

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, what is the amount available for college tuition?

8. Cliff Corp. (CC) is considering moving its widgets division to a new building costing $220,000. The new building will be more efficient and will save the widget division $20,000/year in operating expenses indefinitely. The move will also allow the gadget division to expand its operations in the old building resulting in $4,000/year of additional cashflow. CC’s cost of capital is 10%. Should CC move the widget division? What is the NPV of the move? If all of the cost of the new building is allocated to the widget division, will the widget division manager be in favor of the move?

Alexis, a professional chef, is tired of the restaurant business and decides to open a toy store. She and her CPA project income and expenses; perform site selection studies; and research product lines, advertising approaches, etc.

Alexis locates Louie the Landlord, who plans to construct a small shopping center. Alexis looks at the plans and agrees to lease the corner location. The lease provides that Alexis is guaranteed occupancy by November 1 (at the start of the all-important holiday shopping season).

Alexis CPA starts ordering inventory. Louie, however, has difficulty with the contractor, and the premises are not ready for Alexis until February 1. In the meantime, Alexis must store the inventory and loses the profits that Alexis and her CPA projected for the first three months of operation. Alexis wants Louie to pay the profits that Alexis lost by reason of not being open for three months over the busy holiday season. The CPA's projections showed a net profit of $6,000 for each of those three months. Louie refuses to pay, saying that the delay is not his fault but that of his contractor. Alexis sues Louie and the contractor for loss of profits.

• Should Alexis be able to recover $18,000, the projected net profit for each of the three months the opening of her store was delayed?
• Why or why not?

3. Consider a 10% semi-annual coupon bond with a face value of $1,000 that has three years to maturity. Suppose the 6-month market interest rate is 4%.

a) What is the price of the bond today?

b) Suppose six months has passed and the market interest rate is still 4%. What is the bond’s price in six months.

c) Based on your answers to parts a and b, what is the total six-month return to holding the bond?

What is the purpose of the Weighted Average Cost of Capital model? How does increasing debt financing or equity financing affect the results in this model?

Leslie​ Mosallam, who recently sold her​ Porsche, placed ​$9 comma 600 in a savings account paying annual compound interest of 7 percent.

a.Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 3​, 7​, and 17 ​year(s).

b.Suppose Leslie moves her money into an account that pays 9 percent or one that pays 11 percent. Rework part ​(a​) using 9 percent and 11 percent.

c.What conclusions can you draw about the relationship between interest​ rates, time, and future sums from the calculations you just​ did?

You just received a bonus of ​$3,000.

a.  Calculate the future value of ​$3 comma 000​, given that it will be held in the bank for 5 years and earn an annual interest rate of 6 percent.

b.  Recalculate part ​(a​) using a compounding period that is​ (1) semiannual and​ (2) bimonthly.

c.  Recalculate parts ​(a​) and ​(b​) using an annual interest rate of 12 percent.

d.  Recalculate part ​(a​) using a time horizon of 10 years at an annual interest rate of 6 percent.

e.  What conclusions can you draw when you compare the answers in parts ​(c​) and ​(d​) with the answers in parts ​(a​) and ​(b​)?

Solar Charge is a company that manufactures solar panels for use in residential buildings. It has received an unsolicited request from a foreign buyer, willing to buy 100,000 units at $1200 each (Ex-works). It will take a year to fulfill the order and the purchaser will pay the entire amount owing when a shipment is completed. The cost of producing each unit is $1000 and the company would have to take out a loan to finance the production of the order. Its cost of capital is 10 percent per annum. The manager of the export office recommends that the company respond favourably to the foreign request, especially since it sells the panels on the domestic market for only $1100 per unit. What does the finance department say?

Krawczek Company will enter into a lease agreement with Heavy Equipment Co. where Krawczek will make lease payments over the next five years. The lease is cancelable and requires equal annual payments of $32,000 per year beginning on January 1 of the first year. The last payment will be January 1 of year 5, and Krawczek will continue to use the asset until December 31 of that year. Other important information includes the following:

• The fair value of the equipment is $215,000.
• The applicable discount rate is an 8 percent annual rate.
• The economic life of the asset is 10 years.
• Krawczek does not guarantee the residual value of the asset at the end of the lease, and it does not expect to keep the asset at the end of the term.
• The asset is a standard piece of equipment.

a. Is the lease an operating lease or a financing lease?

• Operating lease

• Financing lease

b. What will be the lease expense shown on the income statement at the end of year 1?

c. What will be the interest expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

d. What will be the amortization expense shown on the income statement at the end of year 1? (Leave no cells blank – be certain to enter “0” wherever required.)

Dantzler Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 6% rate. Dantzler's WACC is 11%.

Year	0		1		2		3
	.......	.......	.......	.......	.......	.......	.......	.......
FCF ($ millions)	.......	.......	.......	.......	.......	.......	.......	......
			- $12		$23		$35

1. What is Dantzler's horizon, or continuing, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.) Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55.

   $   million

2. What is the firm's value today? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,550,000 should be entered as 13.55. Do not round your intermediate calculations.

   $   million

3. Suppose Dantzler has $33 million of debt and 39 million shares of stock outstanding. What is your estimate of the current price per share? Round your answer to two decimal places. Write out your answer completely. For example, 0.00025 million should be entered as 250.

   $  

Suppose Ford's stock price is currently $10, and in the next six months it will either fall to $8 or rise to $15. The six-month risk-free interest rate is 1% (it is not the yearly rate). What is the current value of a six-month call option with an exercise price of $10? Explain your answer.

Note: std of the u and d are not needed...

P9-17 (similar to)

Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following​ weights:

35​%

​long-term debt,

10​%

preferred​ stock, and

55​%

common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is

24​%.

Debt The firm can sell for

​$1030

a

11​-year,

​$1,000​-par-value

bond paying annual interest at a

7.00​%

coupon rate. A flotation cost of

3​%

of the par value is required.Preferred stock  

9.50​%

​(annual dividend) preferred stock having a par value of

​$100

can be sold for

​$92.

An additional fee of

​$4

per share must be paid to the underwriters.Common stock  The​ firm's common stock is currently selling for

​$70

per share. The stock has paid a dividend that has gradually increased for many​ years, rising from

​$2.70

ten years ago to the

​$4.00

dividend​ payment,

Upper D 0D0​,

that the company just recently made. If the company wants to issue new new common​ stock, it will sell them

​$3.50

below the current market price to attract​ investors, and the company will pay

​$2.00

per share in flotation costs.  

a.  Calculate the​ after-tax cost of debt.

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock​ (both retained earnings and new common​ stock).

d.  Calculate the WACC for Dillon Labs.

a.  The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is

nothing​%.

​(Round to two decimal​ places.)

P10-24 (similar to)

All

techniqueslong dash—Decision

among mutually exclusive investments   Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and​ after-tax cash inflows associated with these projects are shown in the following table.

Cash flows	Project A		Project B		Project C
Initial investment​ (CF)	​$150,000		​$190,000		​$190,000
Cash inflows​ Initial investment (CF), cash inflows (cf),t=1to 5	​$50,000		​$62,000		​$63,000

a.  Calculate the payback period for each project.

b.  Calculate the net present value​ (NPV) of each​ project, assuming that the firm has a cost of capital equal to

12​%.

c.  Calculate the internal rate of return​ (IRR) for each project.

d.  Indicate which project you would recommend.

a.  The payback period of project A is

years.  ​(Round to two decimal​ places.)