Questions and Answers of Foundations Financial Management

Calculate the aftertax cost of debt under each of the following conditions. Yield Corporate tax rate 8.0% 22% 14.0% 36% 11.5% 42%
How do corporate taxes and bankruptcy considerations change the initial M&M approach? What is the net effect?
The risk-free interest rate on one-year debt is 7 percent and the return on the market is expected to be 13 percent. A stock with a beta of 1.2 pays no dividends over the next year. If it is
Pogo Petroleum Company can issue debt yielding 9 percent. The company is paying at a 25 percent tax rate. What is the aftertax cost of debt?
Under the initial M&M approach, does the use of debt affect the cost of capital? Explain.
For the preceding problem, assume an increase in interest rates changes Rf to 7.0 percent; also assume that the market premium (Rm - Rf) changes to 6.5 percent.Compute Kf for the three betas
Why does Ke approximate Kj, or why does D1/(P0 - g) approximate Rf + βf/Rm -Rf)?
Royal Petroleum Co. can buy a piece of equipment that is anticipated to provide a 9 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns down an opportunity to
What is the difference between the net income (NI) approach, the net operating income (NOI) approach, and the traditional approach?
Assume Rf = 4 percent and Rm = 8 percent. Compute Kf for the following betas, using formula 11A-2.a. 0.7b. 1.4c. 1.7
What is the difference in dividend payments between Bombardier and TELUS nonvoting shares and their voting common shares? How do you explain the difference in their trading values?
Diploma Mills has $30 million in earnings, pays $4.25 million in interest to bondholders, and $2.95 million in dividends to preferred shareholders.a. What are the common shareholders' residual claims
Why do corporations use special categories in issuing common stock?
Anita Job owns 507 shares in the Rapid Employment Company (a firm that provides temporary work). There are 11 directors to be elected. Twenty-one thousand shares are outstanding. The firm has adopted
What are the possible disadvantages, from an investor's point of view, of being able to buy only nonvoting shares in a given company? What do you think of the increased tendency among Canadian
Michael Meyers wishes to know how many shares are necessary to elect 5 directors out of the 14 directors up for election in the Austin Power Company. There are 150,000 shares outstanding and
Why has preferred stock been a much more popular source of funds for corporations in Canada than in the United States?
Mr. Frost controls proxies for 32,000 of the 60,000 outstanding shares of Express Frozen Foods Inc. Mr. Cooke heads a dissident group that controls the remaining 28,000 shares. There are seven board
Macho Iron Works was established in 1989. Four years later, the company went public. At that time, Fred Macho, the original owner, decided to establish two classes of stock. The first represents
Madonna Fashions Inc. has issued rights to its shareholders. The subscription price is $45, and five rights are needed along with the subscription price to buy one of the new shares. The stock is
If preferred stock is riskier than bonds, why has preferred stock had lower yields than bonds in recent years?
Redirect Energy Corporation has issued rights to its shareholders. The subscription price is $25, and four rights are needed along with the subscription price to buy one of the new shares. The stock
Skyway Airlines has announced a rights offering for its shareholders. Harold Post owns 800 shares of Skyway Airlines stock. Four rights plus $60 cash are needed to buy one of the new shares. The
Todd Winningham IV has $4,000 to invest. He has been looking at Gallagher Tennis Clubs Inc. common stock. Gallagher has issued a rights offering to its common shareholders. Six rights plus $38 cash
What is an advantage of floating-rate preferred stock for the risk-averse investor?What is an advantage for the issuing corporation?
Mr. and Mrs. Anderson own five shares of Magic Tricks Corporation's common stock. The market value of the stock is $60. They also have $48 in cash. They have just received word of a rights offering.
Speculate on whether it would be easier to buy control, in general, of a company listed on the TSX or one listed on the NYSE. Which situation strikes you as being better in this regard?
Smelly Kat Industries, a public company, wishes to raise $25 million for product line expansion. Because the existing shareholders are excited by the company's prospects, a rights offering will be
What features of income trusts make them an attractive investment? Why do corporations set up income trusts?
Delovely Productions Limited wants to raise $42 million for shows. A rights offering will be used to raise the necessary capital from existing shareholders. Each of the six million shareholders will
Walker Machine Tools has five million shares of common stock outstanding. The current market price of Walker common stock is $42 per share rights-on. The company's net income this year is $15
The Avery Corporation has some excess cash that it would like to invest in marketable securities for a long-term hold. Its vice-president of finance is considering three investments (Avery
National Health Corporation (NHC) has a cumulative preferred stock issue outstanding, which has a stated annual dividend of $9 per share. The company has been losing money and has not paid preferred
Osmond Dental Products is four years in arrears on cumulative preferred stock dividends. There are 850,000 preferred shares outstanding, and the annual dividend is $6.50 per share. The vice-president
Enterprise Storage Company has 400,000 shares of cumulative preferred stock outstanding, which has a stated dividend of $4.75. It is six years in arrears in its dividend payments.a. How much in total
The treasurer of Harmon Bottling Company currently has $100,000 invested in preferred stock yielding 9 percent. He appreciates the tax advantages of preferred stock and is considering buying $100,000
Referring back to the original information in the previous problem, if the yield on the $100,000 of preferred stock is still 9 percent and the borrowing cost remains 11 percent, but the tax rate is
Hailey Transmission has two classes of preferred stock: floating-rate preferred stock and straight (normal) preferred stock. Both issues have a par value of $100. The floating-rate preferred stock
Snyder Meat Packing Co. is a small firm that has been very profitable over the past five years and has also exhibited a strong earnings growth trend. Mr. Snyder owns 35 percent of the three million
In January, the board of directors of the Montgomery Corporation, one of Canada's largest retail store chains, was having its regularly scheduled meeting to establish and declare the next quarterly
Roget's Search Engine Limited plans to pay dividends of $2.00, $3.50, and then a liquidating dividend of $20.25 over the next three years. If investors expect a 10 percent return on their investment,
Suppose Roget's Search Engine, from the previous problem, decides to forgo the dividend payments in Years 1 and 2 and instead reinvest the funds in additional projects available to the firm.
Gallagher Parades reported EPS of $3.00 and paid $0.75 in dividends. What is the payout ratio?
Discuss the major factors that may influence the firm's willingness and ability to pay dividends.
Sewell Enterprises earned $160 million last year and retained $100 million. What is the payout ratio?
Auction. com earned $420 million last year and had a 35 percent payout ratio. How much did the firm add to its retained earnings?
Describe the importance of shareholder tax rates in setting dividend policy.
Springsteen Music Company earned $820 million last year and paid out 20 percent of earnings in dividends.a. By how much did the company's retained earnings increase?b. With 100 million shares
The stock of Raptor BB Ranch is currently selling at $25.00 per share. The firm pays a dividend of $1.25 per share.a. What is the annual dividend yield?b. If the firm has a payout ratio of 50
The shares of Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 25, and 25 percent of earnings are paid out in dividends. What is the dividend yield?
How does the life cycle curve explain the relationship between corporate growth and residual dividend theory?
The shares of Chretien Golf Links Limited sell for $50.00. The firm has a P/E ratio of 20, and 30 percent of earnings are paid out in dividends. What is the dividend yield?
Why might an investor prefer capital gains to dividends?
The Resolute Bay Shipping News is selling for $65.00 the day before the stock goes ex-dividend. The annual dividend yield is 5.5 percent, and the dividends are paid quarterly. Based solely on the
Discuss a corporate repurchase announcement on the basis of market efficiency.
In doing a five-year analysis of future dividends, Newell Labs Inc. is considering the following two plans. The values represent dividends per share.a. How much, in total dividends per share, will be
What impact does a repurchase have on a firm's capital structure? Will it increase the value of the shares in the firm?
The following companies have different financial statistics. What dividend policies would you recommend for them? Explain your reasons. Turtle Co. Hare Corp. Growth rate in sales and earnings... Cash
In early 1989, Inca Ltd. paid a special dividend of US$10 a share. What was the purpose? By returning over $1 billion in total to shareholders, what was management saying to the investment community?
Goren Bridge Construction Co. has two important shareholders: Ms. Queen and the Ace Corporation. Ms. Queen is in a 31 percent combined marginal tax bracket, while the Ace Corporation is in a 36
Why do corporate executives consider a stable dividend policy important?
Below are the EPS and the dividends per share of three companies.a. What are the payout ratios for each company on an annual basis?b. Can you explain some of the reasons for such differences in
If a company, in which you hold shares, decided to increase its dividend, would that increase your expected returns from this investment?
Squash Delight Inc. had the following balance sheet:The firm has a market price of $10 a share.a. Show the effect on the equity account(s) of a two-for-one stock split.b. Show the effect on the
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $5 per share.Common stock (50,000 shares)...........$100,000Retained earnings
The Adams Corporation has earnings of $750,000, with 300,000 shares outstanding. Its P/E ratio is 8. The firm is holding $400,000 of funds to invest or pay out in dividends. If the funds are
Wilson Pharmaceuticals has done very well in the stock market during the last three years. Its stock has risen from $45 per share to $70 per share. Its P/E ratio is 20. Its current statement of net
Vegas Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years but is currently contemplating some kind of dividend. The capital accounts for the firm
Matrix Corp Inc. is considering a 15 percent stock dividend. The capital accounts are as follows:Common stock (4,000,000 shares) ........ . .. . .$ 40,000,000Retained earnings ..................... .
The Belton Corporation has $5 million in earnings after taxes and 1 million shares outstanding. The stock trades at a P/E of 10. The firm has $4 million in excess cash.a. Compute the current price of
This problem compares the aftertax income on a $35,000 investment for the following two investors resident in Ontario and two possible investments. Table 2-13 will be of assistance. Stanley Truck
The Tahitian Lottery has promised an annual stipend of $75,000, forever, and permanent residency on Tahiti. Assuming interest rates of 6 percent, how much must the Tahitian authorities set aside
You are considering investing in Black Tie Co., a holding enterprise that will pay a dividend of $2.00, which will increase by 12 percent each year over the following three years and then grow at an
Sleepy Ltd. expects its present $1.25 dividend (just paid) to grow by 20 percent over the next three years, after which it will remain the same with no growth, forever. If an investor requires a
Clarinet Inc. has an expected yield of 18 percent. It anticipates paying the same dividend of $1.10 for four more years, after which the dividend will grow at 7 percent a year indefinitely. Based on
March Hair Ltd. just paid a dividend of $1.80, which it expects to be $2.90 next year and $4.00 the next year. After that time, the dividend will likely decline to 5 percent per year, forever. With
Applied Software has a $1 ,000 par value bond outstanding that pays 12 percent interest with annual payments. The current yield to maturity on such bonds in the market is 7 percent. Compute the
The Victoria Telephone Company has a $1,000 par value bond outstanding that pays 5 percent interest with annual payments. The current yield to maturity on such bonds in the market is 8 percent.
For the previous problem, graph the relationship in a manner similar to the top half of Figure 10-2. AJ so explain why the pattern of price change occurs.Previous problemThe Victoria Telephone
The Vinny Cartier Company issued bonds in 2005 at $1,000 per bond. The bonds had a 25-year life when issued, with semiannual payments at the then annual rate of 12 percent. This return was in line
Martin Shipping Lines issued bonds ten years ago at $1,000 per bond. The bonds had a 30-year life when issued, with semiannual ayments at the then annual rate of 10 percent. This return was in line
Lance Whittingham IV specializes in buying deep discount bonds. These represent bonds that are trading at well below par value. He has his eye on a bond issued by the Leisure Time Corporation. The
Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which is also the amount of principal to be paid at maturity. The bonds are currently selling for $850. They have 10
Bonds issued by the Tyler Food Chain have a par value of $1,000, are selling for $1,080, and have 20 years remaining to maturity. Annual interest payment is 12.5 percent ($125), paid semiannually.
Pia Cloe is considering a bond investment in the Miette Music Company. The $1,000 bonds have a quoted annual interest rate of 12 percent, and the interest is paid semiannually. The yield to maturity
You are called in as a financial analyst to appraise the bonds of the Holtz Corporation. The $1,000 par value bonds have a quoted annual interest rate of 14 percent, which is paid semiannually. The
Douglas bonds mature in 10 years and have an annual coupon rate of 10.5 percent with semiannual payments. The $1 ,000 par value bond currently trades at $1 ,105 in the market. Compute the annual
A $1 ,000 par value bond has a 6 percent coupon, which is paid on a semiannual basis. It matures in either 1 year or 20 years. Current yields on similar bonds are either 4 percent or 8 percent.a.
A preferred share of Hilton Chocolate Company pays an annual dividend of $6. It has a required rate of return of 8 percent. Compute the price of a preferred share.
Airdrie Lanes preferred shares pay an annual dividend of $1.20, payable on a quarterly basis. Current yields of similar risk preferred shares are 3 percent. What is the price of each preferred share?
The Quaid Brothers Corporation has preferred shares outstanding that pay an annual dividend of $12. Each has a price of $108. What is the required rate of return (yield) on the preferred stock?
B2Y Solutions has preferred shares outstanding that pay an annual dividend of $3, payable quarterly. Each has a price of $75.00. What is the required rate of return (yield) on the preferred stock?
Stagnant Iron and Steel Co. currently pays a $4.20 annual cash dividend (D0). It plans to maintain the dividend at this level for the foreseeable future , as no future growth is anticipated. If the
Allied Coal will pay a common share dividend of $3.40 at the end of the year (D1). The required return on common shares (Ke) is 14 percent. The firm has a constant growth rate (g) of 8 percent.
Husky Kennels will pay a quarterly common share dividend of $0.20 at the end of the next quarter. The required return on common shares is 8 percent and the firm has a constant growth rate of 3
Friedman Steel Company will pay a dividend of $1.50 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.a. Compute P0. (For
The Fleming Corporation paid a dividend of $4 last year. Over the next 12 months, the dividend is expected to grow at 8 percent, which is the constant growth rate for the firm. The new dividend after
Rick's Department Stores has had the following pattern of earnings per share over the last five years:Year .....................Earnings per Share2011 .........................$4.002012
A firm will pay a $4.00 dividend at the end of year one, has a share price of $50, and a constant growth rate of 5 percent. Compute the required (expected) rate of return.
Triple Peaks Playhouse will pay a quarterly dividend of $0.40 at the end of the next quarter. It has common share price of $32.00 and a constant growth rate of 4 percent. Compute the required rate of

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