Questions and Answers of Advanced Accounting

Refer to problem 9. If your marginal tax rate is 30%, and 50% of capital gains are taxable, what is the after-tax rate of return on your bond investment? In problem 9 You bought a 10-year, 5% coupon
The July 15, 2015, quoted price of a bond with a coupon rate of 4.5%, payable semiannually, maturing on March 1, 2019, is $990. If you buy the bond on July 15, 2019, what is the total price you must
a. lf the BCE bond in problem 6 has a yield to maturity of 8% 1 year from now, what will its price be? b. What will be your rate of return if you buy it today and sell it in one year? c. lf the
A Metallico bond carries a coupon rate of 8%, payable semi-annually, has 9 years until maturity, and sells at a yield to maturity of 9%. a. What interest payments do bondholders receive each year? b.
A 30-year maturity bond with $1,000 face value makes annual coupon payments and has a coupon rate of 8%. What is the bond's yield to maturity if the bond is selling for a. $900? b. $1,000? c. $1,100?
Repeat the previous problem if the bond makes semi-annual coupon payments. A 30-year maturity bond with $1,000 face value makes annual coupon payments and has a coupon rate of 8%. What is the bond's
Fill in the table below for the following zero-coupon bonds. The face value of each bond is $1,000.
lf a bond with par value of $1,000 and a coupon rate of 8% is selling at a price of $970, is the bond's yield to maturity more or less than 8%? What about the current yield?
Large Industries bonds sell for $1,065.95. The bond life is 9 years, and the yield to maturity is 7%. What must be the coupon rate on the bonds? Coupons are paid semi-annually.
You buy an 8% coupon, paid annually, 10-year maturity bond for $980. A year later, the bond price is $1,100. a. What is the yield to maturity on the bond today? What is it in one year? b. What is
A 2-year maturity bond with $1,000 face value makes annual coupon payments of $65 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of
A bond that pays coupons annually is issued with a coupon rate of 4%, maturity of 30 years, and a yield to maturity of 7%. What rate of return will be earned by an investor who purchases the bond and
Google Inc. has never paid a dividend, but in May 2015 its share price was $556.83. Does this in valid ate the dividend discount Model?
Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the dividend will increase by 5% per year indefinitely. a. What price should the stock sell at? The
Eastern Electric's recent annual dividend was $164 per share and its stock currently sells for about $27 per share. a. If investors believe the growth rate of dividends is 3% per year, what rate of
Currently, Non-Stick Gum Inc. pays no dividend. However, analysts fore· cast that in 4 years Non-Stick will pay its first annual dividend of $.50 and dividends will grow at 6% per year thereafter.
Metatrend's stock will generate earnings of $5 per share this year. The discount rate for the stock is 15% and the rate of return on reinvested earnings is also 15%. a. Find both the growth rate of
The major stock exchanges are members of the World Federation of Exchanges, found at www.world-exchanges.org. Click on "Member Exchanges," tour the world, and select three stock exchanges by clicking
Favoured stock will pay a dividend this year of $2.40 per share. Its dividend yield is 8%. At what price is the stock selling?
Start-up Industries is a new firm, which has raised $100 million by selling shares of stock. Management expects to earn a 24% rate of return on equity, which is more than the 15% rate of return
Telus, a Canadian wireless communications company, earned $2.38 per share in 2015 and paid dividends of $156 per share. Analysts fore cast an annual earnings growth rate of 7.63% for the next 5
Tattletale News Corp. has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 3 years. a. If the last dividend paid was $2, what
ToyTime's common stock's annual dividend for the next 3 years is expected to be $.50. Thereafter, the dividend is expected to grow 4% per year. Stocks of ToyTime's risk are expected to earn 11% per
Earnings per common share of ABC Industries for the current year are expected to be $3 and to grow 10% per year over the next 4 years. At the end of the 5 years, earnings growth rate is expected to
a. Create a list of preferred shares traded on the TSX using the Globe Investor filter at www. globeinvestor.com/v5/content/filters. Select "Preferred" from the "Security" menu. Find BCE's Series T
Go ca.finance.yahoo.com, enter MB.TO, and click "Go." Click on "Company Snapshot" and find out what the company does and visit its Web site. What type of information is provided to its investors?
One year ago you purchased 100 shares of Dog Bites common stock for $25. You received dividends of $.70 per share and just sold the shares for $26.25 each. What are your before - and after-tax rates
You live in British Columbia and your marginal federal tax rate is 22 %, your marginal provincial tax rate is 11.9%, the dividend gross-up factor is 125%, the federal dividend tax credit is 13.33% of
Refer back to problem 47. Suppose you bought the shares of Mighty Mixer for $50, received annual dividends of $2, and sold the shares for $55 three years after you bought them. What are your before-
You have $10,000 to invest and are considering either a consol (a perpetual bond) or preferred shares of Canada Leasing. The consol has a $ 1,000 par value, an annual coupon rate of 4 %, and never
City Garden Suppliers paid a $1 dividend yesterday. It is expected that the dividend will grow at 10% per year for 4 years, 8% per year for 10 years, and then at 5% per year thereafter. If the
Golddigger, a gold exploration and development company, currently pays no dividends. Using the company's assay reports, analysts have determined the following possible outcomes of Goldigger's
ABC Manufacturing pays dividends annually. Dividends have been growing 4% a year. Today is May 1, 2014. Its next dividend, to be paid 1 year from today, will be $1.20 per share. The company is
Suppose that a company splits its stock two-for-one, meaning it doubles the number of shares outstanding. Each shareholder is given a new share for each one previously held, so that the number of
Go to finance.yahoo.com and obtain the price-earnings ratios of Adobe Systems (ADBE) and American Electric Power (AEP). Which of these two firms seem to more of a "growth stock"? Now obtain a
At Green Construction, earnings before interest and taxes (EBIT) for the year just ended were $70 million and are not expected to grow. The company pays $ 10 million in interest each year on its
If you insulate your office for $1,000, you will save $100 a year in heating expenses. These savings will last forever. a. What is the NPV of the investment when the cost of capital is 8%? 10%? b.
A firm is considering the following projects. Its opportunity cost of capital is 10%.a. What are the payback period and discounted payback period on each project? b. Given that you wish to use
Consider these data on a proposed project:Original investment = $200Straight-line depreciation of $50 a year for 4 yearsProject life = 4 yearsa. Fill in the blanks in the table. b. Find project NPV
A project requires an initial investment of $10,000, and over its 5-year life it will generate annual cash revenues of $5,000 and cash expenses of $2,000. The firm will use straight-line
Consider the following projects:a. Calculate the profitability index for A and B assuming a 20% opportunity cost of capita l. b. Use the profitability index rule to determine which project(s) you
Consider these two projects:a. Which project has the higher NPV if the discount rate is 10%? b. Which has the higher profitability index? c. Which project is most attractive to a firm that can raise
Elm City Electronics is considering two mutually exclusive projects that differ greatly on the required investment and projected cash flow s. The initial investment required for project II is
Go to the Statistics Canada Web site at www.statcan.gc.ca and click on the "The Daily" (at the very bottom of the page). You will be able to reach a number of publications providing analyses and
The Faculty of Business at Old Renowned University wishes to buy new personal computers for its 20 full-time faculty members. The university is a nonprofit institution and does not pay any taxes. The
Visionary Inc. is examining two projects, A and B. Project A has a lower initial investment than project B and is expected to generate a steady stream of cash flows over its economic life. Project B
You wish to start a new line of software. Your initial investment in the project will be $100,000. You do not expect to generate any cash flows for the first 2 years. However, cash flows in year 3
You have joined the Projects division of GrowMore Inc. Your first job is to analyze two projects, which you have code-named "alpha" and "beta." Both projects will require the same initial investment
You are thinking of purchasing a new machine (NEW) for your business operations and replacing the existing machine (OLD), which you have used for the past 3 years. The new machine will cost $75,000
What is the discounted payback for each project if the opportunity cost of capital is 11%?
Talia's Tutus bought some equipment for a data network for $40,000 that will be depreciated in asset Class 46, which has a CCA rate of 30%. This firm's tax bracket is 35%. a. Find the CCA amount each
A firm's balance sheets for year-ends 2009 and 2010 contain the following data. What happened to investment in net working capital during 2010? All items are in millions of dollars.
Your firm purchased machinery for $10 million. The machinery falls into an asset class that has a CCA rate of 25%. The project will end after 5 years. If the equipment can be sold for $4 million at
What is the equivalent annual cost of the washer in the previous problem if the firm uses straight-line depreciation?
Fireplaces Etc. is about to launch a new range of wood stoves, priced at $110 per unit. The unit cost of the wood stoves is $65. The firm expects to sell the wood stoves over the next 5 years. The
Go to the Canada Revenue Agency Web site at www.cra-arc.gc.ca/menu-eng.html and try to get to relevant documents describing the Capital Cost Allowance system. One quick way is to do a search on the
Go to the ·Investor Relations" section of the Rogers Communications site, www.rogers. com/web/ir. From the annual reports find the net capital expenditures, capital expenditures less sales of plant
You are considering investing in a new line of entertainment products. The project has an estimated economic life of 5 years. You anticipate some immediate startup costs amounting to $25,000. In
PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $115 million on equipment with an assumed life of 5 years and an assumed salvage value of $15 million for
You are exploring the possibility of starting a project involving production of an assortment of spicy curried pickles. You had approached a marketing consultant to conduct market research and do a
Virtual Printing Inc. has devised a new technology based on which it plans to launch a new line of print media products. The firm intends to spend $160,000 in new plant and equipment and $40,000 in
Calculate the operating cash flow for the repair shop in the previous problem using all three methods suggested in the chapter: (a) Net income plus depreciation; (b) Cash inflow/ cash outflow
In a slow year, Wimpy's Burgers will produce 1 million hamburgers at a total cost of $1.75 million. In a good year, it can produce 2 million hamburgers at a total cost of $2.25 million. What are the
If a project operates at cash-flow break-even for its entire life, what must be true of the project's NPV? Define the cash-flow break-even point as the sales volume (in dollars) at which cash flow
A financial analyst based in the United States has computed both accounting and NPV breakeven sales levels for a project under consideration using straight-line depreciation over a 6-year period. The
Reconsider Wimpy's Burgers from problem l. In a slow year, Wimpy's Burgers will produce 1 million hamburgers at a total cost of $1.75 million. In a good year, it can produce 2 million hamburgers at a
Zoom Technologies, Inc., is considering expanding its operations into digital music devices. Zoom anticipates an initial investment of $1.3 million and, at best, an operational life of 3 years for
Now suppose that Hit or Miss Sports from the previous problem can expand production if the project is successful. By paying its workers overtime, it can increase production by 20,000 units; the
The project in problem 3 will last for 10 years. The discount rate is 12%. A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million.
In 1990, the S&P/TSX Composite Index was at a level of about 3,400. In 2014, it was about 13,600. Would you expect the S&P/TSX in 2014 to be more or less likely to move up or down by more than 40
You believe that a stock with the same market risk as the S&P ITSX will sell at year-end at a price of $50. The stock will pay a dividend at year-end of $2. What price will you be willing to pay for
The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year:The company goes out of business if a recession hits. Calculate the
Who would view the stock of Leaning Tower of Pita (see problem 14) as a risk-reducing investment-the owner of a gambling casino or a successful bankruptcy lawyer? Explain.
The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year:Calculate the expected return and standard deviation of Escapist. Then calculate the expected
Return to problem l. Suppose the year-end stock price after the dividend is paid is $36. What are the dividend yield and capital gains yield in this case? Why is the dividend yield unaffected? In
A stock will provide a rate of return of either - 20% or + 30%. a. If both possibilities are equally likely, calculate the expected return and standard deviation. b. If Treasury bills yield 5%, and
The expected return on Big Time Toys is 9% and its standard deviation is 20%. The expected return on Chemical Industries is 8% and its standard deviation is 25%. a. Suppose the correlation
Using the data in problem 9,a. Calculate the average rate of return and standard deviation of return for the TSX, government bonds, and Treasury bills between 2010 and 2014.b. Form a portfolio with
Using the Excel function CORREL, calculate the correlation between the return on San Tome Mining and each of the other four stocks mentioned in problem 7. Which stock offers the best diversification
Rates of return on U.S. stock, bond, and bill indexes are available to download for free at pages. stern.nyu.edu/-adamodar. Click on "Updated Data" and look for "Historical Returns on Stocks, Bonds
A large variety of mutual funds are available to Canadian investors. Some, called "sector funds," specialize in particular industries; others, known as "index funds," simply invest in the market
Using ca.Finance.Yahoo.com, download monthly stock prices for Magna International (MGA) by clicking on historical prices, then on Monthly Data. Find the December closing stock price the most recent 4
Using ca.Finance.Yahoo.com, download the monthly prices over a 5-year period for 5 Canadian companies of your choice. Calculate the monthly rates of return for each stock using "Adj. Close" (which
Use the monthly returns of the 5 companies you chose in the previous question to look at the return on an equally weighted portfolio of the 5 stocks (that is, a portfolio with equal investment in
Repeat problem 31, but for a value-weighted portfolio. Use the data from problem 30 to create a portfolio in which you invest $100 in each stock. Calculate the value of each stock investment each
The inflation rate in Canada between 1926 and 2014 averaged 3.2%. What was the average real rate of return on Treasury bills, government bonds, and common stocks in that period? Use the data in Table
The accompanying table shows quarterly stock prices on the Dar es Salaam Stock Exchange for 2010-2014. Construct 2 stock market indexes, one using equal weights, as in the Dow Jones Industrial
Using the data in problem 7, calculate the average rate of return and standard deviation of return for each stock as well as for an equal-weighted portfolio of all the stocks using Excel. Do you
Here are annual stock market, Government of Canada bond, and Treasury bill rates of return from 20 10 to 20 14:a. What were the risk premiums on the TSX and on long·tern1 government bonds in
An economy has two scenarios: boom or bust. The returns in each scenario for the market portfolio, an aggressive stock A, and a defensive stock D are in this chart.a. Find the beta of each stock. In
Reconsider the stock in the preceding problem. Suppose investors actually believe the stock will sell for $52 at year-end. Is the stock a good or bad buy? What w ill investors do? At what point will
Suppose that the TSX, with a beta of 1.0, ha s an expected return of 13% and Treasury bills provide a risk-free return of 5%.a. What would be the expected return and beta of portfolios constructed
Suppose that the S&P/ TSX Composite Index, with a beta of 1.0, ha s an expected return of 10% and Treasury bills provide a risk -free return of 4%.a. Construct a portfolio from these two assets
The table here shows betas for several Canadian companies from yahoo.finance.com. Calculate each stock's expected rate of return using the CAPM. Assume the risk-free rate of interest is 2%. Use a 7%
Go to either www.theglobeandmail.com/globe-investor or ca.finance.yahoo.com and look up the companies listed in problem 21. Briefly describe the main businesses of each company. Do you think that
If the expected market risk premium is 7% and Treasury bills yield 3%, what must be the betas of a stock that investors expect to return 13.6% and a bond with a 5.5 % expected return?
Free online betas are hard to find for Canadian stocks unless they are also listed on a U.S. stock exchange such as the NYSE, or Nasdaq. To find Canadian stocks listed on the NYSE, go to www
Using Internet resources such as www.theglobeandmail.com/globe-investor or ca.finance.yahoo.com, look up the companies listed in Table 12.2. What are the main businesses of each? On what stock
Suppose Cara Operations, www.cara.com, is considering opening a chain of coffee shops. Which of the betas shown in problem 21 is most relevant in determining the required rate of return for this
Figure 12.9 plots monthly rates of return from 2006 to 2020 for the Snake Oil mutual fund and the S&P/TSX Composite Total Return Index. Was this fund well diversified? Explain.

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