Disaster Airlines is a firm in severe financial distress. The firm can no longer pay its bills on time
and it is far behind on payments to its banks and long-term debt holders. The firm has decided to
ether be purchased by another air carrier or liquidate
Describe the difference in the timing of trade execution and the certainty of trade price between
market orders and limit orders.
SOLUTION
Market makers fill market orders immediately at the current stock price. This provides the
liquidity an investor nee
Daddi Mac, Inc., doesnt face any taxes and has $350 million in assets, currently financed
entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market
value of equity. Also, lets assume that the firms expected values fo
Suppose that JB Cos. has a capital structure of 78 percent equity, 22 percent debt, and that its
before-tax cost of debt is 11 percent while its cost of equity is 15 percent. If the appropriate
weighted average tax rate is 25 percent, what will be JBs WAC
NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely
with equity. Equity is worth $37 per share, and book value of equity is equal to market value of
equity. Also, lets assume that the firms expected values for
Daddi Mac, Inc., doesnt face any taxes and has $290 million in assets, currently financed
entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market
value of equity. Also, lets assume that the firms expected values fo
WhackAmOle has two million shares of common stock outstanding, 1.5 million shares of
preferred stock outstanding, and 50,000 bonds. If the common shares are selling for $63 per
share, the preferred shares are selling for $52 per share, and the bonds are s
Suppose that the 2013 actual and 2014 projected financial statements for Comfy Corners Catbeds
are initially shown as follows. In these tables, sales are projected to rise by 22 percent in the
coming year, and the components of the income statement and ba
KADS, Inc. has spent $400,000 on research to develop a new computer game. The firm is
planning to spend $200,000 on a machine to produce the new game. Shipping and installation
costs of the machine will be capitalized and depreciated; they total $50,000.
Problem 1-2A
Name:
Section:
Enter the appropriate amount or item in the shaded cells.
An asterisk (*) will appear next to an incorrect amount in the outlined cells.
1.
HEAVENLY TRAVEL SERVICE
Income Statement
For the Year Ended April 30, 2010
Fees earned
Suppose that the 2013 actual and 2014 projected financial statements for your firm are initially shown
as follows. In these tables, sales are projected to rise by 18 percent in the coming year, and the
components of the income statement and balance sheet
NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely
with equity. Equity is worth $37 per share, and book value of equity is equal to market value of
equity. Also, lets assume that the firms expected values for
Carnival Corp. provides cruises to major vacation destinations. Carnival operates 100 cruise
ships with a total capacity of 180,746 passengers in North America, Europe, the United
Kingdom, Germany, Australia, and New Zealand. The company also operates hot
NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely
with equity. Equity is worth $37 per share, and book value of equity is equal to market value of
equity. Also, lets assume that the firms expected values for
Suppose that the 2013 actual and 2014 projected financial statements for AFS are initially shown
as follows. In these tables, sales are projected to rise by 14 percent in the coming year, and the
components of the income statement and balance sheet that a
GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely
with equity. Equity is worth $7 per share, and book value of equity is equal to market value of
equity. Also, lets assume that the firms expected values for E
GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely
with equity. Equity is worth $7 per share, and book value of equity is equal to market value of
equity. Also, lets assume that the firms expected values for E
You are considering adding a new software title to those published by your highly successful
software company. If you add the new product, it will use capacity on your disk duplicating
machines that you had planned on using for your flagship product, Batt
On March 5, 2013, the Dow Jones Industrial Average set a new high. The index closed at
14,253.77, which was up 125.95 that day. What was the return (in percent) of the stock market
that day?
SOLUTION
FV = PV (1 + i)
14,253.77 = (14,253.77 125.95) (1 + i)
LandoToys is a profitable, medium-sized, retail company. Several years ago, it issued a 6.5
percent coupon bond, which pays interest semiannually. The bond will mature in 10 years and is
currently priced in the market as $1,037.19. The average yields to m
Consider the following three bond quotes; a Treasury note quoted at 97:27, and a corporate bond
quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury and corporate bonds
have a par value of $1,000 and the municipal bond has a par value
A 3.125 percent TIPS has an original reference CPI of 180.5. If the current CPI is 206.8, what is
the current interest payment and par value of the TIPS?
SOLUTION
Par value = 206.8 / 180.5 $1,000 = $1,145.71
Interest payment = 0.5 0.03125 $1,145.71 = $17.
A 2.75 percent TIPS has an original reference CPI of 185.4. If the current CPI is 210.7, what is
the current interest payment and par value of the TIPS?
SOLUTION
Par value = 210.7 / 185.4 $1,000 = $1,136.46
Interest payment = 0.5 0.0275 $1,136.46 = $15.63
Determine the interest payment for the following three bonds: 4.5percent coupon corporate bond
(paid semiannually), 5.15 percent coupon Treasury note, and a corporate zero coupon bond
maturing in 15 years. (Assume a $1,000 par value.)
SOLUTION
4.5 percent
Consider the following three bond quotes; a Treasury bond quoted at 106:14, a corporate bond
quoted at 96.55, and a municipal bond quoted at 100.95. If the Treasury and corporate bonds
have a par value of $1,000 and the municipal bond has a par value of $
What is the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent
for an investor in the 33 percent marginal tax bracket?
SOLUTION
Use equation 7.4:
Equivalent taxable yield =
Muni yield
3.5%
=
=5.22%
1-Tax rate 1 - 0.33
What is the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent
for an investor in the 28 percent marginal tax bracket?
SOLUTION
Use equation 7.4:
Equivalent taxable yield =
Muni yield
2.9%
=
=4.03%
1-Tax rate 1 - 0.28
Rank the following bonds in order from lowest credit risk to highest risk, all with the same time
to maturity, by their yield to maturity: Treasury bond with yield of 4.65 percent, United Airline
bond with yield of 9.07 percent, Bank of America bond with
Consider a 3.5 percent TIPS with an issue CPI reference of 185.6. At the beginning of this year,
the CPI was 193.5 and was at 199.6 at the end of the year. What was the capital gain of the TIPS
in dollars and in percentage terms?
SOLUTION
Gain = End of ye
Rank from highest credit risk to lowest risk the following bonds, with the same time to maturity,
by their yield to maturity: Treasury bond with yield of 5.55 percent, IBM bond with yield of 7.49
percent, Trump Casino bond with yield of 8.76 percent, and