1.
On its 2001 balance sheet, Sherman Books had retained
earnings equal to $510 million. On its 2002 balance sheet,
retained earnings were also equal to $510 million. Which of the
following statements is most correct?
a.
The company must have had net income equal to zero in
2002
.
b. The company did not pay dividends in 2002.
c. If the company’s net income in 2002 was $200 million,
dividends paid must have also equaled $200 million.
d. If the company lost money in 2002, they must have paid
dividends.
e. None of the statements above is correct.
2.
.Aftertax returns
The XYZ Corporation has $1000,000 which it plans to invest in marketable
securities. The corporation is choosing between the following three equally
risky securities: Greenville County taxfree municipal bonds yielding 7
percent; AB corp. bonds yielding 11.5 percent; XZ corp. preferred stock
with a dividend yield of 10 percent. XYZ's corporate tax rate is 35 percent.
What is the aftertax return on the best investment alternative? (Assume the
company chooses on the basis of aftertax returns.)
3.
Aftertax returns
ABC Corporation has $50,000 which it plans to invest in marketable
securities. The corporation is choosing between the following three equally
risky securities: Spartan County taxfree municipal bonds yielding 8
percent; Ford bonds yielding 11.5 percent; GE preferred stock with a
dividend yield of 12 percent. ABC's corporate tax rate is 35 percent. What is
the aftertax return on the best investment alternative? (Assume the
company chooses on the basis of aftertax returns.)
4.
Bond value  semiannual payment
Assume that you wish to purchase a 10year bond that has a maturity value
of $1,000 and makes semiannual interest payments of $50. If you require a 10
percent nominal yield to maturity on this investment, what is the maximum
price you should be willing to pay for the bond?
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5.
Bond value  semiannual payment
Assume that you wish to purchase a 20year bond that has a maturity value
of $1,000 and makes semiannual interest payments of $40. If you require a 10
percent nominal yield to maturity on this investment, what is the maximum
price you should be willing to pay for the bond?
6.
Constant growth stock
The last dividend paid by ABC Company was $2.00. ABC’s growth rate is
expected to be a constant 4 percent. ABC's required rate of return on
equity (ks) is 9 percent. What is the current price of ABCs common stock?
7.
Constant growth stock
The last dividend paid by XYZ Company was $1.00. XYZs growth rate is
expected to be a constant 5 percent. XYZ's required rate of return on equity
(k
s
) is 10 percent. What is the current price of XYZ's common stock?
8.
7.NPV
As the director of capital budgeting for Bingo Corporation, you are evaluating two
mutually exclusive projects with the following net cash flows:
Cash flows
A
B
$150,000
$225,000
1
$55,000
$85,000
2
$70,000
$55,000
3
$70,000
$65,000
4
$75,000
$55,000
5
$80,000
$65,000
If Bingo Corporation's cost of capital is 10 percent, defend which project would you choose.
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 Spring '09
 WATSON
 Net Present Value, ABC Corporation

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