02 Jan c. Given these price?

Q 1.

You are a shareholder in a C corporation. The corporation earns $ 1.72$1.72 per share before taxes. Once it has paid? taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 35 %35%?, and your personal tax rate on? (both dividend and? non-dividend) income is 30 %30%. How much is left for you after all taxes are? paid?

Q 2

You are a shareholder in an S corporation. The corporation earns $ 2.06$2.06 per share before taxes. As a pass through? entity, you will receive $ 2.06$2.06 for each share that you own. Your marginal tax rate is 30 %30%. How much per share is left for you after all taxes are? paid?

Q 3

You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too?high, but you will be the CEO of the?combined, much larger company. You know that when the company gets?bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical?considerations?

Q 4

What four financial statements can be found in a? firm’s 10-K? filing? What checks are there on the accuracy of these? statements?

What four financial statements can be found in a? firm’s 10-K? filing? ? (Select the best choice? below.)

A.

Balance? sheet, income? statement, statement of cash? flows, and Statement of income and expenses

B.

Balance? sheet, cash? budget, earnings? statement, and statement of? stockholders’ equity

C.

Balance? sheet, income? statement, statement of cash? flows, and statement of? stockholders’ equity

D.Balance? sheet, asset and liability? statement, statement of cash? flows, and statement of? stockholders’ equity

What checks are there on the accuracy of these? statements? ? (Select the best choice? below.)

A.Financial statements in form? 10-K are required to be audited by a neutral third? party, who checks them and ensures that the financial statements are prepared according to GAAP and that the information contained is reliable.

B. The accuracy of the? firm’s financial statements is certified by the? firm’s board of? directors, which is the only required check.

C.It is up to each investor to certify the accuracy of the financial statements.

D.Financial statements are always sufficiently accurate so no checks are needed.

Q 5

Consider a project that requires an initial investment of $ 100 comma 000$100,000 and will produce a single cash flow of $ 153 comma 000$153,000 in 44 years.

a. What is the NPV of this project if the 44?-year interest rate is 5.1 %5.1% ?(EAR)?

b. What is the NPV of this project if the 44?-year interest rate is 9.9 %9.9% ?(EAR)?

c. What is the highest 44?-year interest rate such that this project is still? profitable?

Q 6

?CBS’s five-year borrowing rate is 1.73 %1.73% and JPMorgan? Chases’ is 2.83 %2.83%. Which would you? prefer? $ 500$500 from CBS paid today or a promise that the firm will pay you $ 550$550 in five? years? Which would you choose if JPMorgan Chase offered you the same? alternative?

You would? prefer: ?(Select the best choice? below.)

A.

$ 550$550 from JPMorgan Chase 55 years and $ 500$500 from CBS today.

B.

$ 550$550 from JPMorgan Chase 55 years and $ 550$550 from CBS in 55 years.

C.

$ 500$500 from JPMorgan Chase today and $ 500$500 from CBS today.

D.

$ 500$500 from JPMorgan Chase today and $ 550$550 from CBS in 55 years.

Q 7

Your best taxable investment opportunity has an EAR of 6.3 %6.3%. Your best? tax-free investment opportunity has an EAR of 2.7 %2.7%. If your tax rate is 25 %25%?, which opportunity provides the higher? after-tax interest? rate?

Q 8

Consider the price paths of the following two stocks over six time? periods:

1

2

3

4

5

6

Stock 1

$ 7$7

$ 9$9

$ 11$11

$ 9$9

$ 10$10

$ 13$13

Stock 2

$ 14$14

$ 10$10

$ 7$7

$ 15$15

$ 14$14

$ 17$17

Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now it is time 3. Assume throughout this question that you do no trading? (other than what is? specified) in these stocks.

a. Which? stock(s) would you be inclined to? sell? Which would you be inclined to hold? onto?

b. How would your answer change if right now is time? 6?

c. What if you bought at time 3 instead of 1 and today is time? 6?

d. What if you bought at time 3 instead of 1 and today is time? 5?

Q 9

Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.

Firm

Dividend? ($ million)

Cost of Capital? (%/year)

S1

10.210.2

8.38.3

S2

10.210.2

12.412.4

S3

10.210.2

14.814.8

B1

102.0102.0

8.38.3

B2

102.0102.0

12.412.4

B3

102.0102.0

14.814.8

a.Using the cost of capital in the? table, calculate the market value of each firm.

b. Rank the three S firms by their market values and look at how their cost of capital is ordered. What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value? Repeat using the B firms.

c. Rank all six firms by their market values. How does this ranking order the cost of? capital? What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value?

d. Repeat part

?(c?)

but rank the firms by the dividend yield instead of the market value. What can you conclude about the dividend yield ranking compared to the market value? ranking?

Q 10

Consider the following? stocks, all of which will pay a liquidating dividend one year from now and nothing in the? interim:

Market Capitalization

?($ million)

Expected Liquidating Dividend? ($ million)

Beta

Stock A

807807

1 comma 0001,000

0.670.67

Stock B

801801

1 comma 0001,000

1.411.41

Stock C

898898

1 comma 0001,000

1.311.31

Stock D

888888

1 comma 0001,000

1.071.07

a.Calculate the expected return of each stock.

b. What is the correlation between the expected return and market capitalization of the? stocks?

Saint MBA570 Module 2 Homework

Q 1

Honda Motor Company is considering offering a $ 2 comma 200$2,200 rebate on its? minivan, lowering the? vehicle’s price from $ 28 comma 000$28,000 to $ 25 comma 800$25,800. The marketing group estimates that this rebate will increase sales over the next year from 49 comma 00049,000 to 67 comma 00067,000 vehicles. Suppose? Honda’s profit margin with the rebate is $ 6 comma 600$6,600 per vehicle. If the change in sales is the only consequence of this? decision, what are its benefits and? costs? Is it a good? idea?

Q 2

Suppose the current market price of corn is $ 3.64$3.64 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $ 1.72$1.72 per? bushel, at what market price of ethanol does conversion become? attractive?

Q 3

Suppose the? risk-free interest rate is 3.6 %3.6%.

a. Having $ 500$500 today is equivalent to having what amount in one? year?

b. Having $ 500$500 in one year is equivalent to having what amount? today?

c. Which would you? prefer, $ 500$500 today or $ 500$500 in one? year? Does your answer depend on when you need the? money? Why or why? not?

A.$ 500$500 today

$ 500$500 in one year

Does your answer depend on when you need the? money? Why or why? not????(Select the best choice? below.)

A.Yes, because if you did need the money today it is more valuable than $ 500$500.

B.No, because if you did need it you could borrow the $ 500$500.

C.Yes, because if you? didn’t need? it, it’s not worth $ 500$500.

D.No, because if you? didn’t need it then the $ 500$500 can be invested and you could have more than $ 500$500 in one year.

Q 4

Your firm has a? risk-free investment opportunity with an initial investment of $ 162 comma 000$162,000 today and receipts of $ 178 comma 000$178,000 in one year. For what level of interest rates is this project? attractive?

Q 5

Your firm has identified three potential investment projects. The projects and their cash flows are shown? here:???(Click on the icon located on the? top-right corner of the data table below in order to copy its contents into a? spreadsheet.)

Project

Cash Flow Today

?(millions)

Cash Flow in One Year

?(millions)

A

negative $ 14?$14

$ 25$25

B

$ 6$6

$ 5$5

C $ 25$25

negative $ 8?$8

Suppose all cash flows are certain and the? risk-free interest rate is 11 %.

a. What is the NPV of each? project?

b. If the firm can choose only one of these? projects, which should it choose based on the NPV decision? rule?

c. If the firm can choose any two of these? projects, which should it choose based on the NPV decision? rule?

A.

Project Upper CC

Your answer is correct.

B.

Project Upper AA

C.

Project Upper BB

D.

Cannot tell

c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule???(Select the best choice below.)

A.Project

Upper CC

project Upper AA

B.Project

Upper CC

and project Upper BB

C.Project

Upper AA

project Upper BB

D.Cannot tell

Q 6

What is the present value of $ 3 , 000$3,000 received

a. 1414 years from today when the interest rate is 8 % per? year?

b. 2828 years from today when the interest rate is 16 % per? year?

c. 77 years from today when the interest rate is 4 % per? year?

Q 7

Your daughter is currently 1212 years old. You anticipate that she will be going to college in 66 years. You would like to have $ 141 comma 000$141,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 5 %5% per? year, how much money do you need to put into the account today to ensure that you will have $ 141 comma 000$141,000 in 66 ?years?

Q 8

Suppose you receive $ 160$160 at the end of each year for the next three years.

a. If the interest rate is 6 %6%?, what is the present value of these cash? flows?

b. What is the future value in three years of the present value you computed in ?(a?)?

c. Suppose you deposit the cash flows in a bank account that pays 6 %6% interest per year. What is the balance in the account at the end of each of the next three years? (after your deposit is? made)? How does the final bank balance compare with your answer in ?(b?)?

Q 9

You have just received a windfall from an investment you made in a? friend’s business. He will be paying you $ 49 comma 287$49,287 at the end of this? year, $ 98 comma 574$98,574 at the end of the following? year, and $ 147 comma 861$147,861 at the end of the year after that? (three years from? today). The interest rate is 14.8 .8% per year.

a. What is the present value of your? windfall?

b. What is the future value of your windfall in three years? (on the date of the last? payment)?

Q 10

You have just turned 30 years? old, have just received your? MBA, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as? follows: Every dollar in the plan earns 9 %9% per year. You cannot make withdrawals until you retire on your 60 th60th birthday. After that? point, you can make withdrawals as you see fit. You decide that you will plan to live to 100 and work until you turn 6060. You estimate that to live comfortably in? retirement, you will need $ 93 comma 000$93,000 per year starting at the end of the first year of retirement and ending on your one hundredth birthday. You will contribute the same amount to the plan at the end of every year that you work. How much do you need to contribute each year to fund your? retirement?

Saint MBA570 Module 3 Homework

Q 1

You have been offered a very? long-term investment opportunity to increase your money one hundredfold. You can invest $ 1 comma 600$1,600 today and expect to receive $ 160 comma 000$160,000 in 4040 years. Your cost of capital for this? (very risky) opportunity is 15 %. What does the IRR rule say about whether the investment should be? undertaken? What about the NPV? rule? Do they? agree?

Q 2

You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $ 10 comma 000$10,000 and will be posted for one year. You expect that it will generate additional revenue of $ 1 comma 500$1,500 a month. What is the payback? period?

Q 3

You are considering making a movie. The movie is expected to cost $ 10.2$10.2 million upfront and take a year to make. After? that, it is expected to make $ 4.8$4.8 million in the first year it is released? (end of year? 2) and $ 1.8$1.8 million for the following four years? (end of years 3 through? 6) . What is the payback period of this? investment? If you require a payback period of two? years, will you make the? movie? What is the NPV of the movie if the cost of capital is 10.2 .2%?? According to the NPV? rule, should you make this? movie?

Q 4

AOL is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid from Huawei will require a $ 22$22 million upfront investment and will generate $ 20$20 million in savings for AOL each year for the next 33 years. The second bid from Cisco requires a $ 96$96 million upfront investment and will generate $ 60$60 million in savings each year for the next 33 years.

a. What is the IRR for AOL associated with each? bid?

b. If the cost of capital for each investment is 13 %?, what is the net present value ?(NPV?) of each? bid?

Suppose Cisco modifies its bid by offering a lease contract instead. Under the terms of the? lease, AOL will pay $ 25$25 million? upfront, and $ 35$35 million per year for the next 33 years.? AOL’s savings will be the same as with? Cisco’s original bid.

c. What is the IRR of the Cisco bid? now?

d. What is the new NPV??

e. What should AOL? do?

AOL should? choose: ? (Select the best choice? below.)

A.Cisco with lease

B.Huawei

C.Cisco without the lease

D.Take none of the bids

Q 5

?Natasha’s Flowers, a local? florist, purchases fresh flowers each day at the local flower market. The buyer has a budget of

$ 1 comma 230$1,230

per day to spend. Different flowers have different profit? margins, and also a maximum amount the shop can sell. Based on past experience the shop has estimated the following NPV of purchasing each? type:

NPV per

bunch

Cost per

bunch

Max.

Bunches

Roses

$ 3$3

$ 23$23

25

Lilies

$ 9$9

$ 25$25

10

Pansies

$ 4$4

$ 32$32

10

Orchids

$ 21$21

$ 81$81

5

What combination of flowers should the shop purchase each? day?

Q 6

Pisa? Pizza, a seller of frozen? pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be $ 15$15 million per year. While many of these sales will be to new? customers, Pisa Pizza estimates that 44 %44% will come from customers who switch to the? new, healthier pizza instead of buying the original version.??

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new? pizza?

b. Suppose that 62 %62% of the customers who will switch from Pisa? Pizza’s original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this? case?

Q 7

Cellular Access? Inc., is a cellular telephone service provider that reported net operating profit after tax? (NOPAT) of $ 257$257 million for the most recent fiscal year. The firm had depreciation expenses of $ 125$125 ?million, capital expenditures of $ 183$183 ?million, and no interest expenses. Working capital increased by $ 14$14 million. Calculate the free cash flow for Cellular Access for the most recent fiscal year.

Q 8

Castle View Games would like to invest in a division to develop software for video games. To evaluate this? decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates? (in millions of? dollars):

?(Click on the Icon located on the? top-right corner of the data table below in order to copy its contents into a? spreadsheet.)

Year 1

Year 2

Year 3

Year 4

Year 5

Cash

55

1111

1414

1414

1414

Accounts receivable

1919

2626

2323

2424

2626

Inventory

44

88

1212

1212

1515

Accounts payable

1717

2222

2525

2626

3232

Assuming that Castle View currently does not have any working capital invested in this? division, calculate the cash flows associated with changes in working capital for the first five years of this investment.

?(?Note:

Enter decreases as negative? numbers.)

Q 9

Markov Manufacturing recently spent $ 18$18 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five? years, and its marginal corporate tax rate is 35 %35%. The company plans to use? straight-line depreciation.

a. What is the annual depreciation expense associated with this? equipment?

b. What is the annual depreciation tax? shield?

c. Rather than? straight-line depreciation, suppose Markov will use the MACRS depreciation method for? five-year property. Calculate the depreciation tax shield each year for this equipment under this accelerated depreciation schedule.

d. If Markov has a choice between? straight-line and MACRS depreciation? schedules, and its marginal corporate tax rate is expected to remain? constant, which should it? choose? ? Why???

e. How might your answer to part ?(d?) change if Markov anticipates that its marginal corporate tax rate will change substantially over the next five? years?

Q 10

Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12.4 .4% to evaluate this project. Based on extensive? research, it has prepared the following incremental free cash flow projections? (in millions of? dollars): LOADING… .

a. For this? base-case scenario, what is the NPV of the plant to manufacture lightweight? trucks?

b. Based on input from the marketing? department, Bauer is uncertain about its revenue forecast. In? particular, management would like to examine the sensitivity of the NPV to the revenue assumptions. What is the NPV of this project if revenues

are 10 % higher than? forecast? What is the NPV if revenues are 10 % lower than? forecast?

c. Rather than assuming that cash flows for this project are? constant, management would like to explore the sensitivity of its analysis to possible growth in revenues and operating expenses.? Specifically, management would like to assume that? revenues, manufacturing? expenses, and marketing expenses are as given in the table for year 1 and grow by 2 %2% per year every year starting in year 2. Management also plans to assume that the initial capital expenditures? (and therefore? depreciation), additions to working? capital, and continuation value remain as initially specified in the table. What is the NPV of this project under these alternative? assumptions? How does the NPV change if the revenues and operating expenses grow by 6 %6% per year rather than by 2 %2%??

d. To examine the sensitivity of this project to the discount? rate, management would like to compute the NPV for different discount rates. Create a? graph, with the discount rate on the x?-axis and the NPV on the y?-axis, for discount rates ranging

from 5 %5% to 30 %30%. For what ranges of discount rates does the project have a positive? NPV?

Saint MBA570 Module 4 Homework

Q 1

A 1010?-year bond with a face value of $ 1 comma 000$1,000 has a coupon rate of 7.50 %7.50%?, with semiannual payments.??

a. What is the coupon payment for this? bond?

b. Enter the cash flows for the bond on a timeline.

Q 2

The following table summarizes prices of various? default-free zero-coupon bonds? ($100 face? value):

Maturity? (years)

1

2

3

4

5

Price? (per $100 face? value)

?$96.8596.85

?$92.4192.41

?$87.9087.90

?$83.2883.28

?$78.1578.15

a. Compute the yield to maturity for each bond.

b.Plot the? zero-coupon yield curve? (for the first five? years).

c.Is the yield curve upward? sloping, downward? sloping, or? flat?

Q 3

Suppose a 1010?-year, $ 1 comma 000$1,000 bond with a 7 %7% coupon rate and semiannual coupons is trading for a price of $ 1 comma 152.66$1,152.66.

a. What is the? bond’s yield to maturity? (expressed as an APR with semiannual? compounding)?

b. If the? bond’s yield to maturity changes to 8 %8% ?APR, what will the? bond’s price? be?

Q 4

Assume the? zero-coupon yields on? default-free securities are as summarized in the following? table:

Maturity

1 year

2 years

3 years

4 years

5 years

?Zero-Coupon Yields

3.603.60?%

4.204.20?%

4.504.50?%

4.804.80?%

4.904.90?%

What is the price of a? three-year, default-free security with a face value of

$ 1 comma 000$1,000

and an annual coupon rate of

6 %6%??

What is the yield to maturity for this? bond?

Q 5

The following table summarizes yields to maturity on several? 1-year, zero-coupon? securities:

Security

Yield

Treasury

2.9302.930?%

AAA Corporate

3.5063.506?%

BBB Corporate

4.0984.098?%

B Corporate

4.7714.771?%

a.What is the price? (expressed as a percentage of the face? value) of a? 1-year, zero-coupon corporate bond with a? AAA-rating and a face value of

$ 1 comma 000$1,000??

b. What is the credit spread on? AAA-rated corporate? bonds???

c. What is the credit spread on? B-rated corporate? bonds?

d.??How does the credit spread change with the bond? rating? Why?

Q 6

Anle Corporation has a current price of $ 12$12?, is expected to pay a dividend of $ 1$1 in one? year, and its expected price right after paying that dividend is $ 30$30.

a. What is? Anle’s expected dividend? yield?

b. What is? Anle’s expected capital gain? rate?

c. What is? Anle’s equity cost of? capital?

Q 7

Summit Systems will pay a dividend of $ 1.63$1.63 one year from now. If you expect? Summit’s dividend to grow by 5.3 %5.3% per? year, what is its price per share if its equity cost of capital is 11.9 .9%??

Q 8

Heavy Metal Corporation is expected to generate the following free cash flows over the next five? years:

Year

1

2

3

4

5

FCF? ($ million)

51.251.2

69.669.6

78.578.5

75.675.6

83.483.4

After? that, the free cash flows are expected to grow at the industry average of

4.4 %4.4%

per year. Using the discounted free cash flow model and a weighted average cost of capital of

13.5 .5%?:

a. Estimate the enterprise value of Heavy Metal.

b. If Heavy Metal has no excess? cash, debt of

$ 303$303

?million, and

4242

million shares? outstanding, estimate its share price.

Q 9

You read in the paper that Summit Systems will pay a dividend of $ 1.00$1.00 this year. At that point you expected? Summit’s dividend to grow by 7.0 %7.0% per year. Today you read in the paper that Summit Systems has revised its growth prospects and expects its dividends to grow at a rate of 3.0 %3.0% per year forever. If the? firm’s equity cost of capital is 11.0 .0%?:

a. What is the value of a share of Summit Systems stock based on the original expected dividend growth of 7.0 %7.0% per? year?

b. If you tried to sell your Summit Systems stock after reading this? news, what price would you be likely to? get? Why?

Q 10

Assume that Cola Co. has a share price of $ 43.13$43.13. The firm will pay a dividend of $ 1.15$1.15 in one? year, and you expect Cola Co. to raise this dividend by approximately 6.2 %6.2% per year in perpetuity.

a. If Cola? Co’s equity cost of capital is 8.1 %8.1%?, what share price would you expect based on your estimate of the dividend growth? rate?

b. Given Cola? Co’s share? price, what would you conclude about your assessment of Cola? Co’s future dividend? growth?

Saint MBA570 Module 5 Homework

Q 1

You have found three investment choices for a? one-year deposit: 11 % APR compounded? monthly, 9 %9% APR compounded? annually, and 10 % APR compounded daily. Compute the EAR for each investment choice.? (Assume that there are 365 days in the? year.)

Q 2

Your son has been accepted into college. This college guarantees that your? son’s tuition will not increase for the four years he attends college. The first $ 7 comma 500$7,500 tuition payment is due in six months. After? that, the same payment is due every six months until you have made a total of eight payments. The college offers a bank account that allows you to withdraw money every six months and has a fixed APR of 4 %4% ?(semiannual) guaranteed to remain the same over the next four years. How much money must you deposit today if you intend to make no further deposits and would like to make all the tuition payments from this? account, leaving the account empty when the last payment is? made?

Q 3

Capital One is advertising a? 60-month, 5.85 %5.85% APR motorcycle loan. If you need to borrow $ 8 comma 000$8,000 to purchase your dream Harley? Davidson, what will your monthly payment? be?

Q 4

If the rate of inflation is 5.6 %5.6%?, what nominal interest rate is necessary for you to earn a 3 %3% real interest rate on your? investment?

Q 5

Consider a project that requires an initial investment of $ 100 comma 000$100,000 and will produce a single cash flow of $ 153 comma 000$153,000 in 44 years.

a. What is the NPV of this project if the 44?-year interest rate is 5.1 %5.1% ?(EAR)?

b. What is the NPV of this project if the 44?-year interest rate is 9.9 %9.9% ?(EAR)?

c. What is the highest 44?-year interest rate such that this project is still? profitable?

Q 6

CBS’s five-year borrowing rate is 1.73 %1.73% and JPMorgan? Chases’ is 2.83 %2.83%. Which would you? prefer? $ 500$500 from CBS paid today or a promise that the firm will pay you $ 550$550 in five? years? Which would you choose if JPMorgan Chase offered you the same? alternative?

Q 7

Your best taxable investment opportunity has an EAR of 6.3 %6.3%. Your best? tax-free investment opportunity has an EAR of 2.7 %2.7%. If your tax rate is 25 %25%?, which opportunity provides the higher? after-tax interest? rate?

Q 8

Consider the price paths of the following two stocks over six time? periods:

1

2

3

4

5

6

Stock 1

$ 7$7

$ 9$9

$ 11$11

$ 9$9

$ 10$10

$ 13$13

Stock 2

$ 14$14

$ 10$10

$ 7$7

$ 15$15

$ 14$14

$ 17$17

Neither stock pays dividends. Assume you are an investor with the disposition effect and you bought at time 1 and right now it is time 3. Assume throughout this question that you do no trading? (other than what is? specified) in these stocks.

a. Which? stock(s) would you be inclined to? sell? Which would you be inclined to hold? onto?

b. How would your answer change if right now is time? 6?

c. What if you bought at time 3 instead of 1 and today is time? 6?

d. What if you bought at time 3 instead of 1 and today is time? 5?

Q 9

Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.

Firm

Dividend? ($ million)

Cost of Capital? (%/year)

S1

10.210.2

8.38.3

S2

10.210.2

12.412.4

S3

10.210.2

14.814.8

B1

102.0102.0

8.38.3

B2

102.0102.0

12.412.4

B3

102.0102.0

14.814.8

a.Using the cost of capital in the? table, calculate the market value of each firm.

b. Rank the three S firms by their market values and look at how their cost of capital is ordered. What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value? Repeat using the B firms.

c. Rank all six firms by their market values. How does this ranking order the cost of? capital? What would be the expected return for a? self-financing portfolio that went long on the firm with the largest market value and shorted the firm with the lowest market? value?

d. Repeat part

?(c?)

but rank the firms by the dividend yield instead of the market value. What can you conclude about the dividend yield ranking compared to the market value? ranking?

Q 10

Consider the following? stocks, all of which will pay a liquidating dividend one year from now and nothing in the? interim:

Market Capitalization

?($ million)

Expected Liquidating Dividend? ($ million)

Beta

Stock A

807807

1 comma 0001,000

0.670.67

Stock B

801801

1 comma 0001,000

1.411.41

Stock C

898898

1 comma 0001,000

1.311.31

Stock D

888888

1 comma 0001,000

1.071.07

a.Calculate the expected return of each stock.

b. What is the correlation between the expected return and market capitalization of the? stocks?

Saint MBA570 Module 6 Homework

Q 1

The figure below shows the? one-year return distribution for RCS stock.? Calculate:

a. The expected return.

b. The standard deviation of the return.

ABCDE05101520253035Probability %A:-30% returnB:-20% returnC:0% returnD:20% returnE:30% return

?Note: Make sure to round all intermediate calculations to at least five decimal places.

Q 2

You bought a stock one year ago for $ 48.61$48.61 per share and sold it today for $ 59.24$59.24 per share. It paid a $ 1.63$1.63 per share dividend today.

a. What was your realized? return?

b. How much of the return came from dividend yield and how much came from capital? gain?

Q 3

Using the data in the following? table, calculate the return for investing in Boeing stock? (BA) from January? 2, 2008, to January? 2, 2009, and also from January? 3, 2011, to January? 3, 2012, assuming all dividends are reinvested in the stock immediately.

Historical Stock and Dividend Data for Boeing

Date

Price

Dividend

Date

Price

Dividend

?1/2/2008

?$86.6286.62??

?1/3/2011

?$66.4066.40??

?2/6/2008

79.9179.91

?$0.400.40

?2/9/2011

72.6372.63

0.420.42

?5/7/2008

84.5584.55

0.400.40

?5/11/2011

79.0879.08

0.420.42

?8/6/2008

65.4065.40

0.400.40

?8/10/2011

57.4157.41

0.420.42

?11/5/2008

49.5549.55

0.400.40

?11/8/2011

66.6566.65

0.420.42

?1/2/2009

45.2545.25

?1/3/2012

74.2274.22

Q 4

The last four years of returns for a stock are as? follows:

Year 1

Year 2

Year 3

Year 4

negative 4.1 %?4.1%

plus 28.1 %+28.1%

plus 11.8 %+11.8%

plus 3.5 %+3.5%

a. What is the average annual? return?

b. What is the variance of the? stock’s returns?

c. What is the standard deviation of the? stock’s returns?

?Note: Notice that the average return and standard deviation must be entered in percentage format. The variance must be entered in decimal format.

Q 5

Consider an investment with the following returns over 4? years:

Year

1

2

3

4

Return

5 %5%

16 %

16 %

19 %

a.What is the compound annual growth rate? (CAGR) for this investment over the 4? years?

b. What is the average annual return of the investment over the 4? years?

c. Which is a better measure of the? investment’s past? performance? If the? investment’s returns are independent and identically? distributed, which is a better measure of the? investment’s expected return next? year?

Q 6

Consider two local banks. Bank A has 8383 loans? outstanding, each for $ 1.0$1.0 ?million, that it expects will be repaid today. Each loan has a 3 %3% probability of? default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $ 83$83 million? outstanding, which it also expects will be repaid today. It also has a 3 %3% probability of not being repaid. Calculate the? following:

a. The expected payoff of Bank A.

b. The expected payoff of Bank B.

c. The standard deviation of the overall payoff of Bank A.

d. The standard deviation of the overall payoff of Bank B.

Q 7

Suppose the market risk premium is

6 %6%

and the? risk-free interest rate is

6 %6%.

Using the data in the table? below, calculate the expected return of investing in

a.?Starbuck’s stock.

b.? Hershey’s stock.

c.? Autodesk’s stock.

Starbucks

Hershey

Autodesk

Beta

1.201.20

0.280.28

2.142.14

Why? don’t all investors hold? Autodesk’s stock rather than? Hershey’s stock?

Q 8

Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. What does the market portfolio consist of? (what are the portfolio? weights)?

Stock

?Price/Share ($)

Number of Shares Outstanding? (millions)

A

99

10

B

1818

12

C

88

3

D

4848

1

E

4646

20

Q 9

In? mid-2012, Cisco Systems had a market capitalization of $ 106$106 billion. It had? A-rated debt of $ 16$16 billion as well as cash and? short-term investments of $ 47$47 ?billion, and its estimated equity beta at the time was 1.251.25.

a. What is? Cisco’s enterprise? value?

b. Assuming? Cisco’s debt has a beta of? zero, estimate the beta of? Cisco’s underlying business enterprise.

Q 10

Unida Systems has 4444 million shares outstanding trading for $ 10$10 per share. In? addition, Unida has $ 105$105 million in outstanding debt. Suppose? Unida’s equity cost of capital is 13 %?, its debt cost of capital is 8 %8%?, and the corporate tax rate is 36 %36%.

a. What is? Unida’s unlevered cost of? capital?

b. What is? Unida’s after-tax debt cost of? capital?

c. What is? Unida’s weighted average cost of? capital?

Saint MBA570 Module 7 Homework

Q 1

Consider a project with free cash flows in one year of $ 148 comma 993$148,993 or $ 186 comma 716$186,716?, with each outcome being equally likely. The initial investment required for the project is $ 94 comma 284$94,284?, and the? project’s cost of capital is 19 %. The? risk-free interest rate is 5 %5%.

a. What is the NPV of this? project?

b. Suppose that to raise the funds for the initial? investment, the project is sold to investors as an? all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this waylong dash—that ?is, what is the initial market value of the unlevered? equity???

c. Suppose the initial $ 94 comma 284$94,284 is instead raised by borrowing at the? risk-free interest rate. What are the cash flows of the levered? equity, what is its initial value and what is the initial equity according to? MM?

Q 2

Acort Industries owns assets that will have? a(n) 80 %80% probability of having a market value of $ 54$54 million one year from now. There is a 20 %20% chance that the assets will be worth only $ 24$24 million. The current? risk-free rate is 4 %4%?, and? Acort’s assets have a cost of capital of 8 %8%.

a. If Acort is? unlevered, what is the current market value of its? equity?

b. Suppose instead that Acort has debt with a face value of $ 20$20 million due in one year. According to? MM, what is the value of? Acort’s equity in this? case?

c. What is the expected return of? Acort’s equity without? leverage? What is the expected return of? Acort’s equity with? leverage?

d. What is the lowest possible realized return of? Acort’s equity with and without? leverage?

Q 3

Suppose The Washington Post Company? (WPO) has no debt and an equity cost of capital of 9.4 %9.4%. The average? debt-to-value ratio for the software industry is 12.8 .8%. What would its cost of equity be if it took on the average amount of debt for its industry at a cost of debt of 6.2 %6.2%??

Q 4

Hubbard Industries is an? all-equity firm whose shares have an expected return of 10.9 .9%. Hubbard does a leveraged? recapitalization, issuing debt and repurchasing? stock, until its? debt-equity ratio is 0.670.67. Due to the increased? risk, shareholders now expect a return of 17.1 .1%. Assuming there are no taxes and? Hubbard’s debt is? risk-free, what is the interest rate on the? debt?

Q 5

Arnell Industries has just issued $ 15$15 million in debt? (at par). The firm will pay interest only on this debt.? Arnell’s marginal tax rate is expected to be 40 %40% for the foreseeable future.

a. Suppose Arnell pays interest of 9 %9% per year on its debt. What is its annual interest tax? shield?

b. What is the present value of the interest tax? shield, assuming its risk is the same as the? loan?

c. Suppose instead that the interest rate on the debt is 7 %7%. What is the present value of the interest tax shield in this? case?

Q 6

Rogot Instruments makes fine violins and cellos. It has $ 1.5$1.5 million in debt? outstanding, equity valued at $ 2.1$2.1 million and pays corporate income tax at rate 38 %38%. Its cost of equity is 14 % and its cost of debt is 8 %8%.

a. What is? Rogot’s pretax? WACC?

b. What is? Rogot’s (effective? after-tax) WACC?

Q 7

Rumolt Motors has 6565 million shares outstanding with a share price of $ 39$39 per share. In? addition, Rumolt has issued bonds with a total current market value of $ 2 comma 068$2,068 million. Suppose? Rumolt’s equity cost of capital is 15 %?, and its debt cost of capital is 9 %9%.

a. What is? Rumolt’s pretax weighted average cost of? capital?

b. If? Rumolt’s corporate tax rate is 40 %40%?, what is its? after-tax weighted average cost of? capital?

Q 8

Milton Industries expects free cash flow of $ 2$2 million each year. ? Milton’s corporate tax rate is 38 %38%?, and its unlevered cost of capital is 11 %. Milton also has outstanding debt of $ 9.97$9.97 ?million, and it expects to maintain this level of debt permanently.

a. What is the value of Milton Industries without? leverage?

b. What is the value of Milton Industries with? leverage?

Q 9

Markum Enterprises is considering permanently adding an additional $ 74$74 million of debt to its capital structure. ? Markum’s corporate tax rate is 38 %38%.

a. Absent personal? taxes, what is the value of the interest tax shield from the new? debt?

b. If investors pay a tax rate of 35 %35% on interest? income, and a tax rate of 30 %30% on income from dividends and capital? gains, what is the value of the interest tax shield from the new? debt?

Q 10

With its current? leverage, Impi Corporation will have net income next year of $ 6$6 million. If? Impi’s corporate tax rate is 38 %38%?, and it pays 7 %7% interest on its? debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next? year?

Saint MBA570 Module 8 Homework

Q 1

Gladstone Corporation is about to launch a new product. Depending on the success of the new? product, Gladstone may have one of four values next? year: $ 153$153 ?million, $ 136$136 ?million, $ 92$92 ?million, and $ 75$75 million. These outcomes are all equally? likely, and this risk is diversifiable. Gladstone will not make any payouts to investors during the year. Suppose the? risk-free interest rate is 5 %5% and assume perfect capital markets.

a. What is the initial value of? Gladstone’s equity without? leverage?

Now suppose Gladstone has? zero-coupon debt with a $ 100$100 million face value due next year.

b. What is the initial value of? Gladstone’s debt?

c. What is the? yield-to-maturity of the? debt? What is its expected? return?

d. What is the initial value of? Gladstone’s equity? What is? Gladstone’s total value with? leverage?

Q 2

Suppose Tefco Corp. has a value of $ 133$133 million if it continues to? operate, but has outstanding debt of $ 135$135 million that is now due. If the firm declares? bankruptcy, bankruptcy costs will equal $ 26$26 ?million, and the remaining $ 107$107 million will go to creditors. Instead of declaring? bankruptcy, management proposes to exchange the? firm’s debt for a fraction of its equity in a workout. What is the minimum fraction of the? firm’s equity that management would need to offer to creditors for the workout to be? successful?

Q 3

Kohwe Corporation plans to issue equity to raise $ 45$45 million to finance a new investment. After making the? investment, Kohwe expects to earn free cash flows of $ 11$11 million each year. Kohwe currently has 5 million shares? outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for? Kohwe’s future free cash flows is 6 %6%?, and the only capital market imperfections are corporate taxes and financial distress costs.

a. What is the NPV of? Kohwe’s investment?

b. What is? Kohwe’s share price? today?

Suppose Kohwe borrows the $ 45$45 million instead. The firm will pay interest only on this loan each? year, and maintain an outstanding balance of $ 45$45 million on the loan. Suppose that? Kohwe’s corporate tax rate is 30 %30%?, and expected free cash flows are still $ 11$11 million each year.

c. What is? Kohwe’s share price today if the investment is financed with? debt?

Now suppose that with? leverage, Kohwe’s expected free cash flows will decline to $ 10$10 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for? Kohwe’s future free cash flows is still 6 %6%.

d. What is? Kohwe’s share price today given the financial distress costs of? leverage?

Q 4

Marpor Industries has no debt and expects to generate free cash flows of $ 15$15 million each year. Marpor believes that if it permanently increases its level of debt to $ 30$30 ?million, the risk of financial distress may cause it to lose some customers and receive less favorable terms from its suppliers. As a? result, Marpor’s expected free cash flows with debt will be only $ 14$14 million per year. Suppose? Marpor’s tax rate is 40 %40%?, the risk free rate is 6 %6%?, the expected return of the market is 14 %?, and the beta of? Marpor’s free cash flows is 1.31.3 ?(with or without? leverage).

a. Estimate? Marpor’s value without leverage.

b. Estimate? Marpor’s value with the new leverage.

Q 5

Zymase is a biotechnology startup firm. Researchers at Zymase must choose one of three different research strategies. The payoffs? (after-tax) and their likelihood for each strategy are shown below. The risk of each project is diversifiable.

Strategy

Probability

Payoff

?($ million)

A

?100%

9090

B

?50%

160160

?50%

0

C

?10%

370370

?90%

2020

a. Which project has the highest expected? payoff?

b. Suppose Zymase has debt of $ 30$30 million due at the time of the? project’s payoff. Which project has the highest expected payoff for equity? holders?

c. Suppose Zymase has debt of $ 120$120 million due at the time of the? project’s payoff. Which project has the highest expected payoff for equity? holders?

d. If management chooses the strategy that maximizes the payoff to equity? holders, what is the expected agency cost to the firm from having $ 30$30 million in debt? due? What is the expected agency cost to the firm from having $ 120$120 million in debt? due?

a. Which project has the highest expected? payoff?

The project with the highest expected payoff? is:???(Select the best choice? below.)

A.

Project A

Your answer is correct.B.

Project B

C.

Project C

b. Suppose Zymase has debt of $ 30$30 million due at the time of the? project’s payoff. Which project has the highest expected payoff for equity? holders?

If Zymase has debt of $ 30$30 million due at the time of the? project’s payoff, the project with the highest expected payoff for equity holders? is:???(Select the best choice? below.)

Q 6

RFC Corp. has announced a $ 0.82$0.82 dividend. If? RFC’s price last price? cum-dividend is $ 8.24$8.24?, what should its first? ex-dividend price be? (assuming perfect capital? markets)?

Q 7

EJH Company has a market capitalization of $ 2.7$2.7 billion and 5050 million shares outstanding. It plans to distribute $ 95$95 million through an open market repurchase. Assuming perfect capital? markets:

a. What will the price per share of EJH be right before the? repurchase?

b. How many shares will be? repurchased?

c. What will the price per share of EJH be right after the? repurchase?

Q 8

The HNH Corporation will pay a constant dividend of $ 2$2 per? share, per? year, in perpetuity. Assume all investors pay a 25 %25% tax on dividends and that there is no capital gains tax. Suppose the other investments with equivalent risk to HNH stock offer an? after-tax return of 12 %.

a. What is the price of a share of HNH? stock?

b. Assume that management makes a surprise announcement that HNH will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a share of HNH stock? now?

Q 9

Assume capital markets are perfect. Kay Industries currently has $ 125$125 million invested in? short-term Treasury securities paying 6 % comma6%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a? one-time dividend payment. Assume that Kay must pay a corporate tax rate of 40 %40%?, and investors pay no taxes.

a. If the board went ahead with this? plan, what would happen to the value of Kay Industries upon the announcement of a change in? policy?

b. What would happen to the value of Kay Industries on the? ex-dividend date of the? one-time dividend?

c. Given these price? reactions, will this decision benefit? investors?

Q 10

Suppose the stock of Host Hotels? & Resorts is currently trading for $ 25$25 per share.

a. If Host issued a 20 %20% stock? dividend, what will its new share price? be?

b. If Host does a 3? : 2 stock? split, what will its new share price? be?

c. If Host does a 1? : 3 reverse? split, what will its new share price? be?