Professional Documents
Culture Documents
percent? 9-16(Weight average cost of capital) ABBC Inc. operates a 10-5 (NPV,PI,IRR claculation) You are considering two
selling for $33 per share in the marketand pays a $3.60 the purchase of 150shares of preferred stock.Your required very successful chain of yogurt and coffee shops spread independent projects, Project A and Project B. The initial
annual dividend. return is11percent. If the stock is currently selling for $40 across the southwestern part of the United States and needs cash outlay associated with Project A is $50,000 and
(a)What is the expected rate of return on the stock? and pays a dividend of $5.25, should you purchase stock? to raise funds for its planned expansion into the Northwest. the initial cash outlay associated with Project B is $70,000.
(b) If an investor's required rate of return is 10 percent, The firms balance sheet at the close of 2009 appeared as The discount rate on both projects is 12 percent. The
what is the value of the stock for that investor? follows: expected annual cash flows from each project are as
8-27(Preferred stock expected return)You own 250 shares follows:
(c)Should the investor acquire the stock?
of Dalton Resources preferred stock, which currently sells
for $ 38.50 per share and pays annual dividends of $ 3.25
per share. a.What is your expected return? b.If you
require
an 8 percent return, given the current price, should you sell
or buy more stock? At present the firms common stock is selling for a price
equal to 2.5 times its book value, the firms investors require
8-4.(Preferred stock valuation) What is the value of an 18% return, the firms bonds command a yield to maturity
Calculate the NPV, PI, and IRR for each project and indicate
a preferred stock where the dividend rate is 16 percent on of 8%, and the firm faces a tax rate of 35 percent. At the end if the project should be accepted.
a $100 par value? The appropriate discount rate for a stock of the previous year ABBCs common stock was selling for a
of this risk level is12 percent? price of 2.5 times its book value, and its bonds were trading
near their par value.
8-33(Common stockholder expected return) Blackburn & 9-9(Individal or component cost of capital)
Smith common stock currently sells for $ 23 per share. Compute the cost of the following:
The companys executives anticipate a constant growth rate (a.) A bond that has $ 1,000 par value (face value) and
of 10.5 percent and an end- of- year dividend of $ 2.50. a contract or coupon interest rate of 11 percent. A new issue
8-11. Dalton, Inc. has an 11.5 percent return on equity and a. What is your expected rate of return? b. If you require would have a flotation cost of 5 percent of the $ 1,125 market
retains 55 percent of its earnings for reinvestment purposes. a 17 percent return, should you purchase the stock? value. The bonds mature in 10 years. The firms average tax
It recently paid a dividend of $3.25 and the stock is currently rate is 30 percent and its marginal tax rate is 34 percent.
selling for $40. (b.) A new common stock issue that paid a $ 1.80 dividend
a. what is the growth rate of Dalton, Inc? last year. The par value of the stock is $ 15, and earnings
Growth rate = return on equity x retention rate per share have grown at a rate of 7 percent per year.
= .115 x 0.55 = 0.0633 or 6.335 This growth rate is expected to continue into the foreseeable
b. what is the expected return for Dalton's stock? future. The company maintains a constant dividend
Dividend earnings ratio of 30 percent. The price of this stock is now
Expected rate of return = + growth rate =
Selling Price $ 27.50, but 5 percent flotation costs are anticipated. 10-10(Payback period calculation) You are considering three
$3.25(1+.0633) + 0.0633 = 01496 or 14.96% (c.) Internal common equity when the current market price independent projects, project A, project B, and project C.
of the common stock is $43. The expected dividend this Given the following cash- flow information, calculate the
$40 coming year should be $3.50, increasing thereafter at a payback period for each.
c. if you require a 13 percent return, should you invest in 7 percent annual growth rate. The corporations tax rate is
9-2(Cost of interval equity)Pathos Co.'s common stock is
the firm? Since the stock has an expected rate of return of 34 percent.
currently selling for $21.50. Dividends paid last year were
14.96 percent, which is greater than the 13-percent required (d.) A preferred stock paying a 9 percent dividend on a
$.70. Flotation costs on issuing stock will be 10 percent of 9-17(Weighted average cost of capital) Crawford Enterprises
rate of return, I should invest. $150 par value. If a new issue is offered, flotation costs will is a publicly held company located in Arnold, Kansas. The
market price. The dividends and earnings per share are
projected to have an annual growth rate of 15 percent. be 12 percent of the current price of $ 175. (e.) A bond firm began as a small tool and die shop but grew over its 35-
8-12.(Common stock valuation) You intend to purchase selling to yield 12 percent after flotation costs, but before
What is the cost of internal common equity for Pathos? year life to become a leading supplier of metal fabrication
Marigo common stock at $50 per share, hold it 1 year, adjusting for the marginal corporate tax rate of 34 percent. equipment used in the farm tractor industry. At the close of
and then sell it after a dividend of $6 is paid.How much will
In other words, 12 percent is the rate that equates the net 2009 the firms balance sheet appeared as follows: If you require a 3- year payback before an investment can be
the stock price haveto appreciate for you to satisfy your
proceeds from the bond with the present value of the future accepted, which project(s) would be accepted?
required rate of return of 15%?
cash flows (principal and interest).
a) Under these circumstances, what should the balance in 14-7(Financial forecasting-percent of sales) The balance
accounts receivable be at the end of April? 15-16(Cost of trade credit) Calculate the effective cost of the
sheet of the Boyd Trucking Company (BTC) follows:
b) How much cash did Mikes realize during April from sales BTC had sales for the year ended December 31, 2013, of $ following trade credit terms when payment is made on the net
and collections? The firms net profits were 6 percent of current years sales due date:
25 million. The firm follows a policy of paying all net earnings
but are expected to rise to 7 percent of next years sales. To a. 2/ 10, net 30
out to its common stockholders in cash dividends. Thus, help support its anticipated growth in asset needs next year, b. 3/ 15, net 30
BTC generates no funds from its earnings that can be used the firm has suspended plans to pay cash dividends to its
to expand its operations. (Assume that depreciation expense stockholders. In past years, a $1.50 per share dividend was c. 3/ 15, net 45
is just equal to the cost of replacing worn- out assets.) d. 2/ 15, net 60
paid annually. Armadillos payables and accrued expenses
a) If BTC anticipates sales of $ 40 million during the coming are expected to vary directly with sales. In addition, notes
year, develop a pro forma balance sheet for the firm on payable will be used to supply the funds that are needed to
December 31, 2014. Assume that current assets vary as finance next years operations that are not forthcoming from
a percent of sales, net fixed assets remain unchanged, and other sources. a) Fill in the table and project the firms needs
accounts payable vary as a percent of sales. Use notes for discretionary financing. Use notes payable as the
payable as a balancing entry. balancing entry for future discretionary financing needs.
b) How much new financing will BTC need next year? b) Compare Armadillos current ratio and debt ratio (total
liabilities/total assets) before the growth in sales and after.
c) What limitations does the percent of sales forecast method
What was the effect of the expanded sales on these two
suffer from? Discuss briefly.
14-2(Financial forecast) Zapatera Enterprises is evaluating its dimensions of Armadillos financial condition? c) What
financing requirements for the coming year. The firm has only difference, if any, would have resulted if Armadillos sales
been in business for one year, but its CFO predicts that the had risen to $6 million in one year and $7 million only after
firms operating expenses, current assets, net fixed assets, two years? Discuss only; no calculations arerequired.
and current liabilities will remain at their current proportion of
sales. Last year Zapatera had $12 million in sales with net
income of $1.2 million. The firm anticipates that next years
sales will reach $15 million with net income rising to
$2 million. Given its present high rate of growth, the firm
retains all of its earnings to help defray the cost of new
investments. The firms balance sheet for the year just
ended is as follows:
CHAPTER 8
CHAPTER 10
CHAPTER 9
CHAPTER 11 CHAPTER 12
CHAPTER 14
CHAPTER 13
CHAPTER 15