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Corporate Finance
Header Motor Inc. paid a $ 3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return?
Honeywag common stock is expected to pay $ 1.85 in dividends next year, and the market price is projected to be $ 42.50 per share by year- end. If investors require a rate of return of 11 percent,
The common stock of NCP paid $ 1.32 in dividends last year. Dividends are expected to grow at an 8 percent annual rate for an indefinite number of years. a. If NCP’s current market price is $
Abercrombie & Fitch’s common stock pays a dividend of $ 0.70. It is currently selling for $ 34.14. If the firm’s investors require a 10 percent return on their investment from buying Abercrombie
Schlumberger is selling for $ 64.91 per share and paid a dividend of $ 1.10 last year. The dividend is expected to grow at 4 percent indefinitely. What is the stock’s expected rate of return?
The preferred stock of Armlo pays a $ 2.75 dividend. What is the value of the stock if your required return is 9 percent?
You own 250 shares of Dalton Resources preferred stock, which currently sells for $ 38.50 per share and pays annual dividends of $ 3.25 per share. a. What is your expected return? b. If you require
You are planning to purchase 100 shares of preferred stock and must choose between Stock A and Stock B. Stock A pays an annual dividend of $ 4.50 and is currently selling for $ 35. Stock B pays an
Solitron preferred stock is selling for $ 42.16 per share and pays $ 1.95 in dividends. What is your expected rate of return if you purchase the security at the market price?
You are planning to purchase 100 shares of preferred stock and must choose between stock in Kristen Corporation and Titus Corporation. Your required rate of return is 9 percent. If the stock in
You own 150 shares of James Corporation preferred stock at a market price of $ 22 per share. James pays dividends of $ 1.55. What is your expected rate of return? If you have a required rate of
You are considering the purchase of 150 shares of preferred stock. Your required return is 11 percent. If the stock is currently selling for $ 40 and pays a dividend of $ 5.25, should you purchase
You are considering the purchase of Davis stock at a market price of $ 36.72 per share. Assume the stock pays an annual dividend of $ 2.33. What would be your expected return? Should you purchase the
Blackburn & Smith common stock currently sells for $ 23 per share. The company’s executives anticipate a constant growth rate of 10.5 percent and an end- of- year dividend of $ 2.50. a. What is
Made- It common stock currently sells for $ 22.50 per share. The company’s executives anticipate a constant growth rate of 10 percent and an end- of- year dividend of $ 2. a. What is your expected
The common stock of ZaldiCo. is selling for $ 32.84 per share. The stock recently paid dividends of $ 2.94 per share and has a projected constant growth rate of 9.5 percent. If you purchase the
The market price for Hobart common stock is $ 43 per share. The price at the end of 1 year is expected to be $ 48, and dividends for next year should be $ 2.84. What is the expected rate of return?
If you purchased 125 shares of common stock that pays an end- of- year dividend of $ 3, what is your expected rate of return if you purchased the stock for $ 30 per share? Assume the stock is
Daisy executives anticipate a growth rate of 12 percent for the company’s common stock. The stock is currently selling for $ 42.65 per share and pays an end- of- year dividend of $ 1.45. What is
Pioneer preferred stock is selling for $ 33 per share in the market and pays a $ 3.60 annual dividend. a. What is the expected rate of return on the stock? b. If an investor’s required rate of
You are considering an investment in one of two preferred stocks, TCF Capital or TAYC Capital Trust. TCF Capital pays an annual dividend of $ 2.69, while TAYC Capital pays an annual dividend of $
You are considering an investment in Double Eagle Petroleum’s preferred stock. The preferred stock pays a dividend of $ 2.31. Your required return is 12 percent. Value the stock.
Crosby Corporation common stock paid $ 1.32 in dividends last year and is expected to grow indefinitely at an annual 7 percent rate. What is the value of the stock if you require an 11 percent
The Fisayo Corporation wants to achieve a steady 7 percent growth rate. If it can achieve a 12 percent return on equity, what percentage of earnings must Fisayo retain for investment purposes?
In 2009, ExxonMobil (XOM) acquired XTO Energy for $ 41 billion. The acquisition pro vided ExxonMobil an opportunity to engage in the development of shale and unconventional natural gas resources
Why do firms calculate their weighted average cost of capital?
In computing the cost of capital, which sources of capital should be considered?
How does a firm’s tax rate affect its cost of capital? What is the effect of the flotation costs associated with a new security issue on a firm’s weighted average cost of capital?
a. Distinguish between internal common equity and new common stock. b. Why is there a cost associated with internal common equity? c. Describe two approaches that could be used in computing the
What might we expect to see in practice in the relative costs of different sources of capital?
Match the following terms with their definitions:
Clearview Productions is a publicly held company whose common stock has recently been selling for $ 50.00 a share. The firm is expected to pay an annual cash dividend of $ 5.00 a share next year,
Compute the cost for the following sources of financing: a. A $ 1,000 par value bond with a market price of $ 970 and a coupon interest rate of 10 percent. Flotation costs for a new issue would be
a. Rework Problem 9- 12 as follows: Assume an 8 percent coupon rate. What effect does changing the coupon rate have on the firm’s after- tax cost of capital? b. Why is there a change?
Caraway Seeds estimated its weighted average cost of capital to be 9.2% based on the fact that its after- tax cost of debt financing was 6 percent and its cost of equity was 10 percent. What
Crawford Enterprises is a publicly held company located in Arnold, Kansas. The firm began as a small tool and die shop but grew over its 35- year life to become a leading supplier of metal
The capital structure for the Carion Corporation is provided here. The company plans to maintain its debt structure in the future. If the firm has a 5.5 percent after- tax cost of debt, a 13.5
ABBC Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part of the United States and needs to raise funds for its planned expansion into the Northwest.
Newcomb Vending Company manages soft drink dispensing machines in western Tennessee for several of the major bottling companies in the area. When a machine malfunctions the company sends out a repair
PT Inc. is an integrated oil company headquartered in Dallas, Texas. The company has three operating divisions: oil exploration and production (commonly referred to as E& P), pipelines, and refining.
Compute the cost of the following: a. A bond that has $ 1,000 par value (face value) and a contract or coupon interest rate of 11 percent. A new issue would have a flotation cost of 5 percent of
In May of this year Newcastle Mfg. Company’s capital investment review committee received two major investment proposals. One of the proposals was put forth by the firm’s domestic manufacturing
Belton Oil and Gas Inc. is a Houston- based independent oil and gas firm. In the past Belton’s managers have used a single firmwide cost of capital of 13 percent to evaluate new investments.
Belton is issuing a $ 1,000 par value bond that pays 7 percent annual interest and matures in 15 years. Investors are willing to pay $ 958 for the bond. Flotation costs will be 11 percent of market
The preferred stock of Julian Industries sells for $ 36 and pays $ 3.00 in dividends. The net price of the security after issuance costs is $ 32.50. What is the cost of capital for the preferred
The Zephyr Corporation is contemplating a new investment to be financed 33 percent from debt. The firm could sell new $ 1,000 par value bonds at a net price of $ 945. The coupon interest rate is 12
Pathos Co.’s common stock is currently selling for $ 23.80. Dividends paid last year were $ 0.70. Flotation costs on issuing stock will be 10 percent of market price. The dividends and earnings
Nealon Energy Corporation engages in the acquisition, exploration, development, and production of natural gas and oil in the continental United States. The company has grown rapidly over the last 5
ExxonMobil (XOM) is one of the half- dozen major oil companies in the world. The firm has four primary operating divisions (upstream, downstream, chemical, and global services) as well as a number of
Why is capital budgeting such an important process? Why are capital- budgeting errors so costly?
What are the disadvantages of using the payback period as a capital- budgeting technique? What are its advantages? Why is it so frequently used?
In some countries, the expropriation (seizure) of foreign investments is a common practice. If you were considering an investment in one of those countries, would the use of the payback period
Briefly compare and contrast the NPV, PI, and IRR criteria. What are the advantages and disadvantages of using each of these methods?
What are mutually exclusive projects? Why might the existence of mutually exclusive projects cause problems in the implementation of the discounted cash- flow capital- budgeting criteria?
What are common reasons for capital rationing? Is capital rationing rational?
What causes the time- disparity ranking problem? What reinvestment rate assumptions are associated with the NPV and IRR capital- budgeting criteria?
When might two mutually exclusive projects having unequal lives be incomparable? How should managers deal with this problem?
Determine the IRR on the following projects: a. An initial outlay of $ 10,000 resulting in a single free cash flow of $ 17,182 after 8 years b. An initial outlay of $ 10,000 resulting in a single
Big Steve’s, a maker of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $ 100,000 and will generate free cash inflows of
Mooby’s is considering building a new theme park. After estimating the future cash flows, but before the project could be evaluated, the economy picked up and with that surge in the economy
The Tiffin Barker Corporation is considering introducing a new currency verifier that has the ability to identify counterfeit dollar bills. The required rate of return on this project is 12 percent.
Calculate the NPV given the following cash flows if the appropriate required rate of return is 10%. YEAR CASH FLOWS 0.............. -$ 60,000 1.............. 20,000 2..............
Calculate the NPV given the following cash flows if the appropriate required rate of return is 10%. YEAR CASH FLOWS 0............ -$ 70,000 1............ 30,000 2............
Calculate the MIRR given the following cash flows if the appropriate required rate of return is 10% (use this as the reinvestment rate).YEAR CASH FLOWS0....... -$ 50,0001....... 25,0002.......
Calculate the PI given the following cash flows if the appropriate required rate of return is 10%. YEAR CASH FLOWS 0.......... -$ 55,000 1.......... 10,000 2.......... 10,000 3..........
Gio€™s Restaurants is considering a project with the following expected cash flows:If the project€™s appropriate discount is 12 percent, what is the project€™s discounted payback?
You are considering a project with the following cash flows:If the appropriate discount rate is 10 percent, what is the project’s discounted payback period?
Assuming an appropriate discount rate of 11 percent, what is the discounted payback period on a project with an initial outlay of $ 100,000 and the following cash flows? Year 1 = $ 30,000 Year 2 =
Determine the IRR on the following projects: a. An initial outlay of $ 10,000 resulting in a free cash flow of $ 1,993 at the end of each year for the next 10 years b. An initial outlay of $
Jella Cosmetics is considering a project that costs $ 800,000, and is expected to last for 10 years and produce future cash flows of $ 175,000 per year. If the appropriate discount rate for this
Sheinhardt Wig Company is considering a project that has the following cash flows:If the appropriate discount rate is 10 percent, what is the project€™s discounted payback?
Artie’s Wrestling Stuff is considering building a new plant. This plant would require an initial cash outlay of $ 8 million and will generate annual free cash inflows of $ 2 million per year for 8
The Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital investment proposals for which the total funds available are limited to a maximum of $ 12 million. The projects are
Nanotech, Inc. currently has a production electronics facility and it is cost- prohibitive to expand this production facility. Nanotech is deciding between the following four contracts:Which project
Determine to the nearest percent the IRR on the following projects: a. An initial outlay of $ 10,000 resulting in a free cash flow of $ 2,000 at the end of year 1, $ 5,000 at the end of year 2,
The D. Dorner Farms Corporation is considering purchasing one of two fertilizer- herbicides for the upcoming year. The more expensive of the two is better and will produce a higher yield. Assume
Destination Hotels currently owns an older hotel on the best beach-front property on Hilton Head Island, and it is considering either remodeling the hotel or tearing it down and building a new
Rib & Wings- R- Us is considering the purchase of a new smoker oven for cooking barbecue, ribs, and wings. It is looking at two different ovens. The first is a relatively standard smoker and
You are considering a project with an initial cash outlay of $ 80,000 and expected free cash flows of $ 20,000 at the end of each year for 6 years. The required rate of return for this project is 10
You are considering three independent projects, project A, project B, and project C. Given the following cash- flow information, calculate the payback period for each.If you require a 3- year
Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of $ 5,000,000 and will generate annual free cash
Given the following free cash flows, determine the IRR for the three independent projects A, B, and C.
Your first assignment in your new position as assistant financial analyst at Caledonia Products is to evaluate two new capital- budgeting proposals. Because this is your first assignment, you have
Why do we focus on cash flows rather than accounting profits in making our capital- budgeting decisions? Why are we interested only in incremental cash flows rather than total cash flows?
If depreciation is not a cash- flow expense, does it affect the level of cash flows from a project in any way? Why?
If a project requires an additional investment in working capital, how should this be treated when calculating the project’s cash- flows?
How do sunk costs affect the determination of cash flows associated with an investment proposal?
In the preceding chapter we examined the payback period capital- budgeting criterion. Often this capital- budgeting criterion is used as a risk- screening device. Explain the rationale behind its
Use the concept of real options to explain why large restaurant chains often introduce new concept restaurants that have negative NPVs.
Explain how simulation works. What is the value in using a simulation approach?
Captins’ Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. The new cereal will be similar to the old with the exception that it will contain sugarcoated
Vandelay Industries is considering a new project with a 4- year life with the following cost and revenue data. This project will require an investment of $ 140,000 in new equipment. This new
Doublemeat Palace is considering a new plant for a temporary customer, and its finance department has determined the following characteristics. The company owns much of the plant and equipment to be
The Shome Corporation, a firm in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital, is considering a new project. The project involves the introduction
Hurricane Katrina brought unprecedented destruction to New Orleans and the Mississippi gulf coast in 2005. Notably, the burgeoning casino gambling industry along the Mississippi coast was virtually
You have come up with a great idea for a Tex- Mex- Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $ 6 million. You also
Hewlett- Packard has designed a new type of printer that produces professional- quality photos. These new printers took 2 years to develop, with research and development running at $ 10 million after
The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $ 30,000 5 years ago, had an expected life of 10 years and an expected salvage value of
Spartan Stores is expanding operations with the introduction of a new distribution center. Not only will sales increase but investment in inventory will de-cline due to increased efficiencies in
It’s been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing
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