The primary operating goal of a publicly-owned firm interested in

#1

 

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.645981828″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. Maximize the stock price per share over the long run, which is the stock’s intrinsic value.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.645981828″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. Maximize the firm’s expected total income.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.645981828″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. Maximize the stock price on a specific target date.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.645981828″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. Maximize the firm’s expected EPS.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.645981828″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. Minimize the chances of losses.

 

#2

Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

 

2013

 

2012

Sales

$7,475.0

 

$6,500.0

Operating costs excluding depreciation

5,980.0

 

5,525.0

Depreciation and amortization

211.0

 

176.0

Earnings before interest and taxes

$1,284.0

 

$799.0

  Less: Interest

161.0

 

140.0

Pre-tax income

$1,123.0

 

$659.0

  Taxes (40%)

449.2

 

263.6

Net income available to common stockholders

$673.8

 

$395.4

Common dividends

$606.0

 

$316.0

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

 

2013

 

2012

Assets

Cash

$109.0

 

$91.0

Short-term investments

38.0

 

33.0

Accounts receivable

1,073.0

 

975.0

Inventories

1,248.0

 

1,040.0

Total current assets

$2,468.0

 

$2,139.0

Net plant and equipment

2,106.0

 

1,755.0

Total assets

$4,574.0

 

$3,894.0

Liabilities and Equity

Accounts payable

$644.0

 

$585.0

Accruals

312.0

 

260.0

Notes payable

150.0

 

130.0

Total current liabilities

$1,106.0

 

$975.0

Long-term bonds

1,495.0

 

1,300.0

Total liabilities

$2,601.0

 

$2,275.0

Common stock

1,786.2

 

1,500.0

Retained earnings

186.8

 

119.0

Total common equity

$1,973.0

 

$1,619.0

Total liabilities and equity

$4,574.0

 

$3,894.0

Using Rhodes Corporation’s financial statements (shown above), answer the following questions.

a.     What is the net operating profit after taxes (NOPAT) for 2013? 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 one decimal place.
$
______ million

b.    What are the amounts of net operating working capital for both years? 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 answers to one decimal place.
2013 $
______   PRIVATE “<INPUT NAME=”answer2_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million
2012 $
______   PRIVATE “<INPUT NAME=”answer3_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

c.     What are the amounts of total net operating capital for both years? 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 answers to one decimal place.
2013 $
______    PRIVATE “<INPUT NAME=”answer4_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million
2012 $ 
______   PRIVATE “<INPUT NAME=”answer5_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

d.    What is the free cash flow for 2013? 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 one decimal place.
$
______   PRIVATE “<INPUT NAME=”answer6_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

e.    What is the ROIC for 2013? Round your answer to two decimal places. 
  PRIVATE “<INPUT NAME=”answer7_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______%

f.      How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) 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 answers to one decimal place.

After-tax interest payment

$______  PRIVATE “<INPUT NAME=”answer8_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

Reduction (increase) in debt

$______   PRIVATE “<INPUT NAME=”answer9_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

Payment of dividends

$______  PRIVATE “<INPUT NAME=”answer10_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

Repurchase (Issue) stock

$______  PRIVATE “<INPUT NAME=”answer11_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

Purchase (Sale) of short-term investments

$______  PRIVATE “<INPUT NAME=”answer12_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

 

 

#3

Comprehensive Ratio Analysis

The Jimenez Corporation’s forecasted 2014 financial statements follow, along with some industry average ratios.

Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014

Assets

 

Cash

$    72,000

Accounts receivable

439,000

Inventories

894,000

  Total current assets

$1,405,000

Fixed assets

431,000

Total assets

$1,836,000

Liabilities and Equity

 

Accounts payable

$   332,000

Notes payable

   100,000

Accruals

170,000

  Total current liabilities

$   602,000

Long-term debt

404,290

Common stock

575,000

Retained earnings

254,710

Total liabilities and equity

$1,836,000

Jimenez Corporation: Forecasted Income Statement for 2014

Sales

$4,290,000

Cost of goods sold

3,580,000

Selling, general, and administrative expenses

370,320

Depreciation and amortization

159,000

  Earnings before taxes (EBT)

$   180,680

Taxes (40%)

72,272

Net income

$   108,408

Per Share Data

 

EPS

$        4.71

Cash dividends per share

$        0.95

P/E ratio

5.0

Market price (average)

$      23.57

Number of shares outstanding

23,000

Industry Financial Ratios (2013)*

 

Quick ratio

1.0

Current ratio

2.7

Inventory turnover**

7.0

Days sales outstanding***

32.0 days

Fixed assets turn over**

13.0

Total assets turnover**

2.6

Return on assets

9.1%

Return on equity

18.2%

Profit margin on sales

3.5%

Debt-to-assets ratio

21.0%

Liabilities-to-assets ratio

50.0%

 

 

P/E ratio

6.0

Price/Cash flow ratio

3.5

Market/Book ratio

3.5

*Industry average ratios have been constant for the past 4 years.

**Based on year-end balance sheet figures.

***Calculation is based on a 365-day year.

Calculate Jimenez’s 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez’s projected strengths and weaknesses. Round DSO to the nearest whole number. Round the other ratios to one decimal place.

Ratios

Firm

Industry

Strong or Weak?

Quick ratio

  PRIVATE “<INPUT NAME=”answer1_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

1.0

______  PRIVATE “<SELECT NAME=”answer2_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Strong</OPTION><OPTION>Weak</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 2</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Current ratio

  PRIVATE “<INPUT NAME=”answer3_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

2.7

  PRIVATE “<SELECT NAME=”answer4_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Strong</OPTION><OPTION>Weak</OPTION></SELECT>” MACROBUTTON HTMLDirect  ______  PRIVATE “<SELECT DISABLED><OPTION>Item 4</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Inventory turnover

  PRIVATE “<INPUT NAME=”answer5_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

7.0

______  PRIVATE “<SELECT NAME=”answer6_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Poor</OPTION><OPTION>Rich</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 6</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Days sales outstanding

  PRIVATE “<INPUT NAME=”answer7_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______days

32 days

______  PRIVATE “<SELECT NAME=”answer8_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Poor</OPTION><OPTION>Rich</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 8</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Fixed assets turnover

  PRIVATE “<INPUT NAME=”answer9_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

13.0

______  PRIVATE “<SELECT NAME=”answer10_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Poor</OPTION><OPTION>Rich</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 10</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Total assets turnover

  PRIVATE “<INPUT NAME=”answer11_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

2.6

______  PRIVATE “<SELECT NAME=”answer12_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Poor</OPTION><OPTION>Rich</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 12</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Return on assets

  PRIVATE “<INPUT NAME=”answer13_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______%

9.1%

______  PRIVATE “<SELECT NAME=”answer14_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Bad</OPTION><OPTION>Good</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 14</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Return on equity

  PRIVATE “<INPUT NAME=”answer15_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______%

18.2%

______  PRIVATE “<SELECT NAME=”answer16_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Bad</OPTION><OPTION>Good</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 16</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Profit margin on sales

  PRIVATE “<INPUT NAME=”answer17_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______%

3.5%

______  PRIVATE “<SELECT NAME=”answer18_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Bad</OPTION><OPTION>Good</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 18</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Debt ratio

  PRIVATE “<INPUT NAME=”answer19_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______%

21.0%

______  PRIVATE “<SELECT NAME=”answer20_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Low</OPTION><OPTION>High</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 20</OPTION></SELECT>” MACROBUTTON HTMLDirect  

Liabilities-to-assets

  PRIVATE “<INPUT NAME=”answer21_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

50.0%

______  PRIVATE “<SELECT NAME=”answer22_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Low</OPTION><OPTION>High</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 22</OPTION></SELECT>” MACROBUTTON HTMLDirect  

EPS

$4.71

n.a.

Stock Price

$23.57

n.a.

P/E ratio

  PRIVATE “<INPUT NAME=”answer23_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

6.0

______  PRIVATE “<SELECT NAME=”answer24_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Poor</OPTION><OPTION>Rich</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 24</OPTION></SELECT>” MACROBUTTON HTMLDirect  

P/CF ratio

  PRIVATE “<INPUT NAME=”answer25_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

3.5

______  PRIVATE “<SELECT NAME=”answer26_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>Poor</OPTION><OPTION>Rich</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 26</OPTION></SELECT>” MACROBUTTON HTMLDirect  

M/B ratio

  PRIVATE “<INPUT NAME=”answer27_978563920″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______

n.a.

So, the firm appears to be   PRIVATE “<SELECT NAME=”answer28_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>badly</OPTION><OPTION>well</OPTION></SELECT>” MACROBUTTON HTMLDirect  well or badly  PRIVATE “<SELECT DISABLED><OPTION>Item 28</OPTION></SELECT>” MACROBUTTON HTMLDirect   managed.

 

 

 

#4

Growing Annuity Payments

You want to accumulate $3 millions by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 7.76% interest, compounded annually. You expect to get an annual raise of 5%, which will offset inflation, and you will let the amount you deposit each year also grow by 5% (i.e., your second deposit will be 5% greater than your first, the third will be 5% greater than the second, etc.). How much must your first deposit be to meet your goal? Round your answer to the nearest cent.

 

$__________

 

 

Required Rate of Return

Stock R has a beta of 1.5, Stock S has a beta of 0.45, the expected rate of return on an average stock is 12%, and the risk-free rate is 7%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.

  PRIVATE “<INPUT NAME=”answer1_940659145″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ___ %

 

 

#5

CMS Corporation’s balance sheet as of today is as follows:

Long-term debt (bonds, at par)

$10,000,000

Preferred stock

2,000,000

Common stock ($10 par)

10,000,000

Retained earnings

4,000,000

Total debt and equity

$26,000,000

The bonds have an 7.9% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm’s debt?

Select the correct answer.

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.7768819″ VALUE=”1″>” MACROBUTTON HTMLDirect   $7,647,836

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.7768819″ VALUE=”2″>” MACROBUTTON HTMLDirect   $7,648,666

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.7768819″ VALUE=”3″>” MACROBUTTON HTMLDirect   $7,649,496

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.7768819″ VALUE=”4″>” MACROBUTTON HTMLDirect   $7,650,326

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.7768819″ VALUE=”5″>” MACROBUTTON HTMLDirect   $7,647,007

 

#6

Required Rate of Return

Stock R has a beta of 1.5, Stock S has a beta of 0.45, the expected rate of return on an average stock is 12%, and the risk-free rate is 7%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.

  PRIVATE “<INPUT NAME=”answer1_940659145″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  _____%

 

 

#7
Nonconstant Growth Stock Valuation

Conroy Consulting Corporation (CCC) has been growing at a rate of 19% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 19%).

a.     If D0= $2.00, rs= 9% and gL = 7%, then what is CCC’s stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations.

$______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

What is its expected dividend yield at this time? Round the answer to two decimal places. Do not round your intermediate computations.

  ______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect %

What is its capital gains yields at this time? Round the answer to two decimal places. Do not round your intermediate computations.

      PRIVATE “<INPUT NAME=”answer3_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect %

b.    Now assume that CCC’s period of supernormal growth is to last another 5 years rather than 2 years (g0,1 = g1,2 = g2,3 = g3,4 = g4,5 = 19%). How would this affect its price, dividend yield, and capital gains yield?
  PRIVATE “<SELECT NAME=”answer4_1964765327″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION><OPTION>IV</OPTION><OPTION>V</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 4</OPTION></SELECT>” MACROBUTTON HTMLDirect   Select from the following: _______
I.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
II.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
III.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
IV.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
V.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period.

c.     What will CCC’s dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) Round the answers to two decimal places. Do not round your intermediate computations.

Dividend yield

  PRIVATE “<INPUT NAME=”answer5_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect %

Capital gains yield

  PRIVATE “<INPUT NAME=”answer6_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect %

d.     

e.    Of what interest to investors is the relationship over time between dividend yield and capital gains yield?
  PRIVATE “<SELECT NAME=”answer7_1964765327″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION><OPTION>IV</OPTION><OPTION>V</OPTION></SELECT>” MACROBUTTON HTMLDirect Select from the following:______
I.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold.
II.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized.
III.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold.
IV.It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate.
V.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year.

 

 

#8

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binomial model, what is the option’s value? (Hint: Use daily compounding.)

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.328611847″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. $2.99

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.328611847″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. $3.29

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.328611847″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. $3.62

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.328611847″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. $2.70

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.328611847″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. $2.43

 

 

#9

The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm’s weighted average cost of capital. The balance sheet and some other information are provided below.

  Assets

 

  Current assets

$ 38,000,000

  Net plant, property, and equipment

101,000,000

  Total assets

$139,000,000

 

 

  Liabilities and Equity

 

  Accounts payable

$ 10,000,000

  Accruals

9,000,000

  Current liabilities

$ 19,000,000

  Long-term debt (40,000 bonds, $1,000 par value)

40,000,000

  Total liabilities

$ 59,000,000

  Common stock (10,000,000 shares)

30,000,000

  Retained earnings

50,000,000

  Total shareholders’ equity

80,000,000

  Total liabilities and shareholders’ equity

$139,000,000


The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is 11.50%, but the market has had an average annual return of 14.50% during the past 5 years. The firm’s tax rate is 40%.

Description: http://east.cengagenow.com/media/img/onepixel.gif

 

Refer to Exhibit 9.1. What is the best estimate of the firm’s WACC?

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.309393335″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. 10.85%

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.309393335″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. 11.19%

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.309393335″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. 11.88%

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.309393335″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. 11.53%

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.309393335″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. 12.24%

 

 

 

#10

NPV and IRR Analysis

Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:

 

EXPECTED NET CASH FLOWS

Year

Project A

Project B

0

-$300

-$405

1

-387

134

2

-193

134

3

-100

134

4

600

134

5

600

134

6

850

134

7

-180

134

a.     Construct NPV profiles for Projects A and B.

Select the correct graph.

Description: http://east.cengagenow.com/ilrn/bca/user/appletImage?dbid=1058032854  Description: http://east.cengagenow.com/ilrn/bca/user/appletImage?dbid=942569187 Description: http://east.cengagenow.com/ilrn/bca/user/appletImage?dbid=1471844231  Description: http://east.cengagenow.com/ilrn/bca/user/appletImage?dbid=1816884436

The correct graph (A, B, C or D) _____

b.    What is each project’s IRR? Round your answers to two decimal places. 

Project A   PRIVATE “<INPUT NAME=”answer2_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____

Project B   PRIVATE “<INPUT NAME=”answer3_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____%

c.     Calculate the two projects’ NPVs, if you were told that each project’s cost of capital was 10%. Round your answers to the nearest cent.

Project A    $_____    PRIVATE “<INPUT NAME=”answer4_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Project B    $_____    PRIVATE “<INPUT NAME=”answer5_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Which project, if either, should be selected? (A or B)  _____
  PRIVATE “<SELECT NAME=”answer6_296577758″><OPTION SELECTED>-Select-</OPTION><OPTION>Project A</OPTION><OPTION>Project B</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 6</OPTION></SELECT>” MACROBUTTON HTMLDirect   

Calculate the two projects’ NPVs, if the cost of capital was 17%. Round your answers to the nearest cent.

Project A    $_____    PRIVATE “<INPUT NAME=”answer7_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Project B    $_____    PRIVATE “<INPUT NAME=”answer8_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

What would be the proper choice? (A or B?)  _____
  PRIVATE “<SELECT NAME=”answer9_296577758″><OPTION SELECTED>-Select-</OPTION><OPTION>Project A</OPTION><OPTION>Project B</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 9</OPTION></SELECT>” MACROBUTTON HTMLDirect   

d.    What is each project’s MIRR at a cost of capital of 10%? (Hint: Note that B is a 6-year project.) Round your answers to two decimal places. 

Project A   PRIVATE “<INPUT NAME=”answer10_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____

Project B   PRIVATE “<INPUT NAME=”answer11_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____

What is each project’s MIRR at a cost of capital of 17%? (Hint: Note that B is a 6-year project.) Round your answer to two decimal places. 

Project A   PRIVATE “<INPUT NAME=”answer12_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____

Project B   PRIVATE “<INPUT NAME=”answer13_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____%

e.    What is the crossover rate? Round your answer to two decimal places.
  PRIVATE “<INPUT NAME=”answer14_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____

What is its significance?
  PRIVATE “<SELECT NAME=”answer15_296577758″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 15</OPTION></SELECT>” MACROBUTTON HTMLDirect   Select from the following: _______
I.The crossover rate has no significance in capital budgeting analysis. 
II.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. 
III.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. 

#11

Replacement Analysis

The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $10,000 per year. As the older flange-lippers are robust and useful machines, it can be sold for $20,000 at the end of its useful life.

A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.

The old machine can be sold today for $55,000. The firm’s tax rate is 35%, and the appropriate WACC is 12%.

 

a.     If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.
$_______  
 PRIVATE “<INPUT NAME=”answer1_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

b.    What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.

CF1

$_______      PRIVATE “<INPUT NAME=”answer2_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

CF2

$_______      PRIVATE “<INPUT NAME=”answer3_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

CF3

$_______      PRIVATE “<INPUT NAME=”answer4_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

CF4

$_______      PRIVATE “<INPUT NAME=”answer5_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

CF5

$_______      PRIVATE “<INPUT NAME=”answer6_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

c.     What is the NPV of this project? Round your answer to the nearest whole dollar.
$_______    
 PRIVATE “<INPUT NAME=”answer7_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Should Everly replace the flange-lipper? _______  

 

 

#12

Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1093951436″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. Project C, which has above-average risk and an IRR = 11%.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1093951436″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. Project B, which has below-average risk and an IRR = 8.5%.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1093951436″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. Without information about the projects’ NPVs we cannot determine which project(s) should be accepted.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1093951436″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. All of these projects should be accepted.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1093951436″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. Project A, which has average risk and an IRR = 9%.

 

 

 

 

#13

The capital intensity ratio is generally defined as follows:

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1494028446″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. The ratio of sales to current assets.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1494028446″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. Sales divided by total assets, i.e., the total assets turnover ratio.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1494028446″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. The ratio of current assets to sales.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1494028446″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. The percentage of liabilities that increase spontaneously as a percentage of sales.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1494028446″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. The amount of assets required per dollar of sales, or A0*/S0.

 

 

#14

AFN Equation

Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $3 million at the end of 2013. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$
_______      PRIVATE “<INPUT NAME=”answer1_982073892″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

 

Why is this AFN different from the one when the company pays dividends? 
  PRIVATE “<SELECT NAME=”answer2_982073892″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION><OPTION>IV</OPTION><OPTION>V</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 2</OPTION></SELECT>” MACROBUTTON HTMLDirect  Select from the following: ______ 
I. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed. 
II. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed. 
III. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed. 
IV. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed. 
V. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.


    
 PRIVATE “<SELECT NAME=”answer8_1652863961″><OPTION>-Select-</OPTION><OPTION>Yes</OPTION><OPTION>No</OPTION></SELECT>” MACROBUTTON HTMLDirect  

#17

Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.150296857″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. $400,000

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.150296857″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. $200,000

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.150296857″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. $100,000

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.150296857″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. $500,000

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.150296857″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. $300,000

 

 

#18

Stock Split

Fauver Enterprises declared a 4-for-1 stock split last year, and this year its dividend is $1.10 per share. This total dividend payout represents a 10% increase over last year’s pre-split total dividend payout. What was last year’s dividend per share? Round your answer to the nearest cent.

$_____    PRIVATE “<INPUT NAME=”answer1_1588059250″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

 

 

#19

Based on the information below for Benson Corporation, what is the optimal capital structure?

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1854218652″ VALUE=”1″>” MACROBUTTON HTMLDirect  a. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1854218652″ VALUE=”2″>” MACROBUTTON HTMLDirect  b. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1854218652″ VALUE=”3″>” MACROBUTTON HTMLDirect  c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1854218652″ VALUE=”4″>” MACROBUTTON HTMLDirect  d. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.

 

  PRIVATE “<INPUT TYPE=”radio” NAME=”choice.1854218652″ VALUE=”5″>” MACROBUTTON HTMLDirect  e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.

 

 

#20

Capital Structure Analysis

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company’s EBIT is $11.04 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 75% (based on market values) or decreasing it to 25%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 14% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.

The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%.

 

Present situation (50% debt):
What is the firm’s WACC? Round your answer to three decimal places.
    
 PRIVATE “<INPUT NAME=”answer1_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______%
What is the total corporate value? 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 three decimal places.
$______  
 PRIVATE “<INPUT NAME=”answer2_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

 

75% debt:
What is the firm’s WACC? Round your answer to two decimal places.
 ______ %
What is the total corporate value? 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 three decimal places.
$______  
 PRIVATE “<INPUT NAME=”answer4_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

 

25% debt:
What is the firm’s WACC? Round your answer to two decimal places.
 ______%
What is the total corporate value? 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 three decimal places.
$______  
 PRIVATE “<INPUT NAME=”answer6_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

 

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