Unit 3 Questions

Chap. 7 1. Calculating Payback Period and NPV Tri Star, Inc., has the following mutually exclusive projects. Basic(Questions 1-13)

b. Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent?

2. Calculating Payback An investment project provides cash inflows of $825 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,600? What if it is $7,900?

8. Calculating IRR Compute the internal rate of return for the cash flows of the following two projects.

9. Calculating Profitability Index Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $185,000.

Bill expects aftertax cash inflows of $62,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 15 percent. What is the project's PI? Should it be accepted?

Chap 8. 1. Calculating Project NPV Who Dat Restaurant is considering the purchase of a $27,000 soufflé maker. The soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. The machine will produce 2,300 soufflés per year, with each costing $2 to make and priced at $7. Assume that the discount rate is 14 percent and the tax rate is 34 percent. Should the company make the purchase?

Unit 4

Chap 10 1. Calculating Returns Suppose a stock had an initial price of $73 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $82. Compute the percentage total return.

12. Holding Period Return A stock has had returns of -18.35 percent, 14.72 percent, 28.47 percent, 6.48 percent, and 16.81 percent over the past five years, respectively. What was the holding period return for the stock?

14. Calculating Returns You bought a share of 4.2 percent preferred stock for $94.83 last year. The market price for your stock is now $96.20. What is your total return for last year?

15. Calculating Returns You bought a stock three months ago for $41.75 per share. The stock paid no dividends. The current share price is $44.07. What is the APR of your investment? The EAR?

Chap 11 2. Portfolio Expected Return You own a portfolio that has $3,900 invested in Stock A and $5,700 invested in Stock B. If the expected returns on these stocks are 9.5 percent and 15.2 percent, respectively, what is the expected return on the portfolio?

12. Using CAPM A stock has a beta of .85, the expected return on the market is 11.5 percent, and the risk-free rate is 3.4 percent. What must the expected return on this stock be?

Chap 12 1. Calculating Cost of Equity TheDybvig Corporation's common stock has a beta of 1.21. If the risk-free rate is 3.5 percent and the expected return on the market is 11 percent, what is Dybvig's cost of equity capital?

5. Calculating WACC Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Mullineaux's WACC?

Unit 5

Chap 16 1. Dividends and Taxes Midnight Hour, Inc., has declared a $6.30 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 25 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Midnight Hour sells for $83 per share, and the stock is about to go ex dividend. What do you think the ex-dividend price will be?

4. Stock Splits and Stock Dividends Roll Corporation (RC) currently has 270,000 shares of stock outstanding that sell for $73 per share.

Assuming no market imperfections or tax effects exist, what will the share price be after:

a. RC has a five-for-three stock split?

b. RC has a 15 percent stock dividend?

c. RC has a 42.5 percent stock dividend?

d. RC has a four-for-seven reverse stock split?

Determine the new number of shares outstanding in parts (a) through (d).

7. Stock Dividends The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 25,000 shares of stock outstanding. What will the ex-dividend price be?

16. Dividend Smoothing The Sharpe Co. just paid a dividend of $2.05 per share of stock. Its target payout ratio is 40 percent. The company expects to have earnings per share of $6.20 one year from now.

a. If the adjustment rate is .3 as defined in the Lintner model, what is the dividend one year from now?

Unit 6

Chap 18 2. Cash Equation McConnell Corp. has a book value of equity of $13,205. Long-term debt is $8,200. Net working capital, other than cash, is $3,205. Fixed assets are $17,380. How much cash does the company have? If current liabilities are $1,630, what are current assets?

Chap 19 1. Rights Offerings Again, Inc., is proposing a rights offering. Presently, there are 490,000 shares outstanding at $75 each. There will be 80,000 new shares offered at $71 each.

a. What is the new market value of the company?

b. How many rights are associated with one of the new shares?

c. What is the ex-rights price?

d. What is the value of a right?

Chap 20 4. Yankee Bonds Which of the following most accurately describes a Yankee bond?

a. A bond issued by General Motors in Japan with the interest payable in U.S. dollars.