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Questions and Answers of
Corporate Finance
Raffalovich, Inc., is expected to maintain a constant 4.9 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.7 percent, what is the required return on the
Suppose you know that a company's stock currently sells for $58 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided
Bui Corp. pays a constant $12 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. If the required return on this stock
Rabie, Inc., has an issue of preferred stock outstanding that pays a $3.80 dividend every year, in perpetuity. If this issue currently sells for $78.45 per share, what is the required return?
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only
Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan,
What is the payback period for the following set of cash flows?Year ______________Cash Flow0 ............................. -$5,9001 ............................... 2,0002
Romboski, LLC, has identified the following two mutually exclusive projects:Year _________Cash Flow (A) ____________Cash Flow (B)0 ...................... −$65,000 ..........................
Consider the following two mutually exclusive projects:Year ________Cash Flow (X) _________Cash Flow (Y)0 .................... −$19,000 ....................... −$19,0001 .......................
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year ______________Cash Flow0 ........................ -$31,000,0001 ...........................
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?Year
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:Year _________Cash Flow (I) __________Cash Flow (II)0 ..................... -$65,000
Consider the following two mutually exclusive projects:Year _________Cash Flow (A) ____________Cash Flow (B)0 ..................... -$365,000 ........................ -$40,0001
Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent.Year _________Project M ___________Project N0 ..................
Dahlia Manufacturing has the following two possible projects. The required return is 12 percent.Year __________Project Y ____________Project Z0 .................... -$31,000 ...................
Handy Enterprises has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required return
An investment project provides cash inflows of $875 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,600? What if it is
An investment has an installed cost of $673,658. The cash flows over the four-year life of the investment are projected to be $228,701, $281,182, $219,209, and $190,376. If the discount rate is
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.Year
Chamberlain Corp. is evaluating a project with the following cash flows:Year ________________Cash Flow0 ............................. -$19,5001 ................................. 7,9302
Suppose the company in the previous problem uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects. Calculate the MIRR of the project using all three methods
Seether, Inc., has the following two mutually exclusive projects available.Year __________Project R ___________Project S0 .................. -$55,000 ................... -$76,0001
A project has the following cash flows:Year ___________Cash Flow0 ....................... $75,0001 ...................... -43,0002 ...................... -37,000What is the IRR for this project? If
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up." As a result, the cemetery project will provide a net cash inflow of
Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?Year
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year __________________Cash Flow0 ................................ -$690,0001
You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to
A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project?Year _____________Cash Flow0 ........................
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21
A project that provides annual cash flows of $1,930 for eight years costs $7,700 today. Is this a good project if the required return is 8 percent? What if it's 24 percent? At what discount rate
What is the IRR of the following set of cash flows?Year _______________Cash Flow0 ............................ −$27,0001 ............................... 11,4002 ...............................
For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent?In the previous
Ashwood Corp. has a project with the following cash flows:Year ______________Cash Flow0 ........................... $35,0001 ........................... -27,0002 ............................
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.5 million in anticipation of using it as a warehouse and distribution
In the previous problem, suppose the required return on the project is 14 percent. What is the project's NPV?In the previous problemCochrane, Inc., is considering a new three-year expansion project
In the previous problem, suppose the project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project.
In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project's Year 1 net cash flow now? Year 2? Year 3? What
Kolby's Korndogs is looking at a new sausage system with an installed cost of $735,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the
Your firm is contemplating the purchase of a new $480,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $155,000 per year. Will you accept the project? What if the pretax cost savings are
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $860 per unit; variable cost = $320 per unit; fixed costs = $3.4 million; quantity = 60,000
We are evaluating a project that costs $1,675,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected
Winnebagel Corp. currently sells 28,000 motor homes per year at $73,000 each and 7,000 luxury motor coaches per year at $115,000 each. The company wants to introduce a new portable camper to fill out
Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $120,000 for a marketing survey to determine the viability of the product. It is
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $545,000 is estimated to result in $197,000 in annual pretax cost savings. The
Consider a three-year project with the following information: initial fixed asset investment = $730,000; straight-line depreciation to zero over the five-year life; zero salvage value; price =
You are considering a new product launch. The project will cost $875,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units per
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $750 per set and have a variable cost of $360 per set. The company has spent $150,000 for a marketing study that
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year ______________Unit Sales1 ............................. 87,5002
A proposed cost-saving device has an installed cost of $585,000. The device will be used in a five year project but is classified as three-year MACRS property for tax purposes. The required initial
A proposed new investment has projected sales of $750,000. Variable costs are 55 percent of sales, and fixed costs are $182,500; depreciation is $86,000. Prepare a pro forma income statement assuming
Consider the following income statement:Sales ......................... $657,900Costs ......................... 352,900Depreciation ................. 97,500EBIT ............................... ?Taxes
A piece of newly purchased industrial equipment costs $870,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
Consider an asset that costs $635,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,400,000 and will be sold for $1,530,000 at the end of the project. If
Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset will be depreciated straight-line to zero over its
Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired
Suppose a stock had an initial price of $61 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $69. Compute the percentage total return. What was the
For Problem 9, suppose the average inflation rate over this period was 3.2 percent and the average T bill rate over the period was 4.3 percent.a. What was the average real return on the stock?b. What
Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?In Problem 10For Problem 9, suppose the average inflation
You purchased a zero-coupon bond one year ago for $176.38. The market interest rate is now 9 percent. If the bond had 20 years to maturity when you originally purchased it, what was your total return
You bought a share of 4.5 percent preferred stock for $96.18 last year. The market price for your stock is now $98.21. What is your total return for last year?
You bought a stock three months ago for $34.18 per share. The stock paid no dividends. The current share price is $35.07. What is the APR of your investment? The EAR?
Refer to Table 10.1. What was the average real return for Treasury bills from 1926 through 1932?
Refer back to Figure 10.10. What range of returns would you expect to see 68 percent of the time for long-term corporate bonds? What about 95 percent of the time?
Refer back to Figure 10.10. What range of returns would you expect to see 68 percent of the time for large-company stocks? What about 95 percent of the time?
You find a certain stock that had returns of 11 percent, -15 percent, 32 percent, and 8 percent for four of the last five years. If the average return of the stock over this period was 10 percent,
Rework Problem 1 assuming the ending share price is $54.In Problem 1Suppose a stock had an initial price of $61 per share, paid a dividend of $1.40 per share during the year, and had an ending share
A stock has had returns of -26 percent, 6 percent, 34 percent, 25 percent, 28 percent, and 19 percent over the last six years. What are the arithmetic and geometric returns for the stock?
A stock has had the following year-end prices and dividends:Year _________Price _________Dividend1 .................. $ 99.15 ................ -2 ................... 107.11 ............ $1.603
You bought one of Rocky Mountain Manufacturing Co.'s 8 percent coupon bonds one year ago for $1,032.15. These bonds make annual payments and mature nine years from now. Suppose you decide to sell
Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than -3.7
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel® to answer the following questions:a. What
You purchased 250 shares of a particular stock at the beginning of the year at a price of $68.12. The stock paid a dividend of $.85 per share, and the stock price at the end of the year was $76.45.
Suppose you bought a bond with a coupon rate of 7.5 percent one year ago for $941. The bond sells for $949 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment
Using the following returns, calculate the average returns, the variances, and the standard deviations for X and Y._____________________Returns______Year ____________X ____________Y__1
You've observed the following returns on Doyscher Corporation's stock over the past five years: -12 percent, 21 percent, 27 percent, 6 percent, and 17 percent.What was the arithmetic average return
You recently graduated from college, and your job search led you to S&S Air. Since you felt the company's business was headed skyward, you accepted the job offer. As you are finishing your employment
What are the portfolio weights for a portfolio that has 135 shares of Stock A that sell for $71 per share and 95 shares of Stock B that sell for $84 per share?
Consider the following information:Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio?What is the variance of this portfolio? The
You own a stock portfolio invested 15 percent in Stock Q, 25 percent in Stock R, 40 percent in Stock S, and 20 percent in Stock T. The betas for these four stocks are .85, .91, 1.31, and 1.76,
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.42 and the total portfolio is equally as risky as the market, what must the beta be for
A stock has a beta of 1.15, the expected return on the market is 10.9 percent, and the risk-free rate is 3.8 percent. What must the expected return on this stock be?
A stock has an expected return of 13.6 percent, the risk-free rate is 3.7 percent, and the market risk premium is 7.1 percent. What must the beta of this stock be?
A stock has an expected return of 10.9 percent, its beta is .85, and the risk-free rate is 4.6 percent. What must the expected return on the market be?
A stock has an expected return of 12.5 percent and a beta of 1.15, and the expected return on the market is 11.5 percent. What must the risk-free rate be?
A stock has a beta of 1.15 and an expected return of 10.4 percent. A risk-free asset currently earns 3.8 percent.a. What is the expected return on a portfolio that is equally invested in the two
Asset W has an expected return of 12.1 percent and a beta of 1.18. If the risk-free rate is 3.7 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.25 and an expected return of 12.6 percent. Stock Z has a beta of .8 and an expected return of 9.9 percent. If the risk-free rate is 4.1 percent and the market risk premium
You own a portfolio that has $1,300 invested in Stock A and $2,100 invested in Stock B. If the expected returns on these stocks are 10 percent and 16 percent, respectively, what is the expected
You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 13.5 percent, and Stock L, with an expected return of 9.8 percent. If your goal is to create a
Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of .8 and an expected return of 11.40 percent. You want a portfolio with the same risk as the market.
You have a portfolio with the following:What is the expected return of your portfolio?
Consider the following information on a portfolio of three stocks:a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio's expected return? The
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Given this information, fill in the rest of the following table:Asset.............
You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 10.5 percent. If D
Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and stock A's beta is greater than stock B's beta by
You own a portfolio that is 35 percent invested in Stock X, 45 percent in Stock Y, and 20 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent,
Consider the following information on Stocks I and II:The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most
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