10 Jan ii. What is the weight

• Question 1

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below.

Based solely on the cash flow statements for 2008 through 2010, select the statement that best describes the major activities of Goggle’s management team over the period.

• Question 2

When managers have little or no ownership in the firm, they are less likely to work energetically for the company’s shareholders. We call this type of conflict a(n) __________.

• Question 3

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

What years did Goggle generate positive cash flow from its operations?

• Question 4

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

Describe Goggle’s main source of financing in the financial markets over the period.

• Question 5

(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:

How much did Goggle invest in new capital expenditures over the period? (Round to the nearest integer.)

• Question 6

(Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 12 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,130.

a. What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)

b. What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)

c. Should you purchase the bond at the current market price?

• Question 7 (Common stock valuation) The common stock of NCP paid $1.21 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years.

a. If your required rate of return is 9.30 percent, what is the value of the stock for you?

b. Should you make the investment?

• Question 8

(DuPont analysis) Dearborn Supplies has total sales of $150 million, assets of $109 million, a return on equity of 30 percent, and a net profit margin of 7.6 percent. What is the firm’s debt ratio?

• Question 9

(Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks.

a. Given the information in the table, what is the expected rate of return for stock B?

b. What is the standard deviation of stock B?

c. What is the expected rate of return for stock A?

d. Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)

• Question 10 (Review of financial statements) Prepare a balance sheet and income statement for the Warner Company from the scrambled list of items found here in order to answer the question below. The statements do not need to be submitted, only your response to the question.

What can you say about the firm’s financial condition based on the prepared financial statements?

• Question 11 (Cost of preferred stock) The preferred stock of Walter Industries Inc. currently sells for $35.67 a share and pays $3.49 in dividends annually. What is the firm’s cost of capital for the preferred stock?

• Question 12

(Cost of common equity) The common stock for the Hetterbrand Corporation sells for $59.17, and the last dividend paid was $2.24. Five years ago the firm paid $1.54 per share, and dividends are expected to grow at the same annual rate in the figure as they did over the past five years.

a. What is the estimated cost of common equity to the firm using the dividend growth model? (Round to 2 decimal places.)

b. Hetterbrand’s CFO has asked his financial analyst to estimate the firm’s cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.1 percent, the market risk premium is estimated to be 4.2 percent, and Hetterbrand’s beta is 0.78. What is your estimate of the firm’s cost of common equity using this method? (Round to 2 decimal places.)

• Question 13

(Weighted average cost of capital) The target capital structure for QM Industries is 37 percent common stock, 8 percent preferred stock, and 54 percent debt. If the cost of common equity for the firm is 17.6 percent, the cost of preferred stock is 10.6 percent, the before-tax cost of debt is 7.7 percent, and the firm’s tax rate is 34 percent, what is QM’s weighted average cost of capital?

• Question 14

(Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:

To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8.4 percent per year (paid semiannually) at the market price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03. Common stock for GBH is currently selling for $49.09 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 4.5 percent per year into the indefinite figure. The firm’s marginal tax rate is 32 percent.

1.

a. Calculate component weights of capital:

i. What is the weight of debt in the firm’s capital structure?

ii. What is the weight of preferred stock in the firm’s capital structure?

iii. What is the weight of common stock in the firm’s capital structure?

b. Calculate component costs of capital:

i. What is the after-tax cost of debt for the firm?

ii. What is the cost of preferred stock for the firm?

iii. What is the cost of common equity for the firm?

c. Calculate the firm’s weighted average cost of capital.

d. What is the discount rate you should use to evaluate the warehouse project? (Round to 3 decimal places.)