c. How do corporations go public and continue to grow? What are agency problems? What is corporate governance?
A company goes public when it sells stock to the public in an initial public as the firm grows, it might issue
additional stock or debt. An agen
j. What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are
the four most fundamental factors that affect the cost of money, or the general level of interest rates, in the economy?
The interest rat
2-6
New Balance retained earning = Previous Balance retained earning + net income DividendpaidDividend paid =
Previous Balance retained earning + net income - New Balance retained earning Dividend = $780 m + $50 m - $810
m= $830 m - $810 m= $20m
*
2-7
(1) Interest charges of $50,000,
(2) Dividends received of $15,000,
(3) Dividends paid of $25,000, and (4) income taxes.
a)What are the firms income tax liability and its after-tax income
b) What are the companys marginal and average tax rates on taxa
3-1
a. Liquidity ratios: current ratio; quick, or acid test, ratio
Liquidity ratios: indicator that determines whether a firm has enough short-term assets to cover
its immediate liabilities without selling inventory.
Current ratio; is mainly used to give
3-1
a. Liquidity ratios: current ratio; quick, or acid test, ratio
Liquidity ratios: indicator that determines whether a firm has enough short-term assets to cover
its immediate liabilities without selling inventory.
Current ratio; is mainly used to give
d. Profitability ratios: profit margin on sales; basic earning power (BEP) ratio; return on
total assets (ROA); return on common equity (ROE)
profit margin on sales : indicates the dollars in income that the firm earns on each dollar of
sales. This ratio
(3-2)
Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and
short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?
This ratio will assistances equity investors to know wheth
(3-3)
Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a drop
in its total assets turnover ratio. However, the companys sales, quick ratio, and fixed assets
turnover ratio have remained constant. What explains the
(3-4)
Profit margins and turnover ratios vary from one industry to another. What differences would
you expect to find between a grocery chain such as Safeway and a steel company? Think
particularly about the turnover ratios, the profit margin, and the Du
(3-6)
Why is it sometimes misleading to compare a companys financial ratios with those of other
firms that operate in the same industry?
Within the same industry some of the firm may operate in their growth stage of business life
cycle and some may operat
4-1
Principle amount (P)= $ 10,000
number of years (n) = 5 years
rate of interest (r) = 10%
Total amount = P*
Total amount after five years = $10,000 * [1+ (10/100)] 5
= $ 10,000 * (1+0.1)5
= $10,000* (1.61051)
= $ 16105.10
4-2
Future Value =
$5,000
Years
=
20
Discount %
=
7%
Use the following equation to calculate present value:
Present Value =
Future Value X (Present Value Interest Factor (PVIF) )
=
$5,000
X (1/1.07) ^ 20 years
=
$5,000 X 0.258
=
$1,290
4-6
300[(1 + 0.07)5-1)/0.07]
= 1725.22
4-13
Present Value of an Annuity
Find the present value of the following ordinary annuities (see the Notes to Problem 4-12).
a. $400 per year for 10 years at 10%
FVoa = PMT [(1 + i)^n) - 1) / i]
Where:
FVoa = Future
5-1
In this problem F = 1000. Since we are not given the maturity value, we can assume that it is the
same as the par value. So, C = 1000.
r = .08
i = .09
n = 12
P = F*r*[1 -(1+i)^-n]/i + C*(1+i)^-n,Therefore, the bond price is 1000*.08 * (1 - 1.09^-12)/.
5-2
Wilson Wonderss bonds have 12 years remaining to maturity. Interest is paid annually,
the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at
a price of $850. What is their yield to maturity?
100+1000-850/12/1000+850/
5-7
Bond Valuation with Semiannual payments
Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The
bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%.
What is the price of the bonds?
50*1
5-13
Yield to Maturity and Current Yield
You just purchased a bond that matures in 5 years. The bond has a face value of $1,000
and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bonds
yield to maturity?
Current price = 80/.0
(6-1) Portfolio Beta
An individual has $35,000 invested in a stock with a beta of 0.8 and another $40,000 invested in
a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her
portfolios beta?
.8*35000/75000+1.4*40000
(6-2) Required Rate of Return
Assume that the risk-free rate is 6% and that the expected return on the market is 13%. What is
the required rate of return on a stock that has a beta of 0.7?
6+.7*13-6= 10.9%
(6-7) Required Rate of Return
Suppose rRF = 9%, rM = 14%, and bi = 1.3.
a.
What is ri, the required rate of return on Stock i?
9+1.3*14-9=15.5%
b.
Now suppose rRF (1) increases to 10% or (2) decreases to 8%. The slope of the SML
remains constant. How woul
7-2
Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e.,
D = $1.50). The dividend is expected to grow at a constant rate of 7% a year. The required rate
of return on the stock, r , is 15
7-4
What is the stocks required rate of return?
$5/$50 = 10%
A company currently pays a dividend of $2 per share (D = $2). It is estimated that the companys
dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7%
t
9-2
LL Incorporateds currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL
believes it could issue new bonds at par that would provide a similar yield to maturity. If its
marginal tax rate is 35%, what is LLs after-tax cost of debt?
0.
9-4
Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock
is selling on the market for $70. Burnwood must pay flotation costs of 5% of the issue price.
What is the cost of the preferred stock?
Rps = 60(.06) / 70(1-.
9-5
Summerdahl Resorts common stock is currently trading at $36 a share. The stock is expected to
pay a dividend of $3.00 a share at the end of the year (D = $3.00), and the dividend is expected
to grow at a constant rate of 5% a year. What is its cost of
9-6
Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10year T-bond is 6%. The market risk premium is 5.5%, and the return on an average stock in the
market last year was 15%. What is the estimated cost of common
9-7
Shi Importers balance sheet shows $300 million in debt, $50 million in preferred stock, and
$250 million in total common equity. Shis tax rate is 40%, r = 6%, r = 5.8%, and r = 12%. If
Shi has a target capital structure of 30% debt, 5% preferred stock