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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Return Calculations At the beginning of the year the price of Nokia was Skr 22; it paid a dividend of Skr 2 per share during the year, and had an ending share price of Skr 20.Compute the percentage
Nominal versus Real Returns Assume inflation rates have been as follows, 2017: 4.8 per cent; 2016: 4.8 per cent; 2015: 2.4 per cent; 2014: 0.9 per cent; and in 2013:4.0 per cent.Calculate the average
Bond Returns(a) What is the historical real return on long-term US government bonds? Nominal return is 5.8 per cent, inflation rate is 3.1 per cent.(b) What is the historical real return on long-term
Calculating Returns and Variability Using the returns from Problem 11.4, calculate the average returns, the variances and the standard deviations for Lockhart Group and TJC.
Risk Premiums Refer to the table below.(a) Calculate the arithmetic average returns for all the indices in the table over the period 2011–2015.(b) Calculate the standard deviation of the returns
Calculating Returns and Variability You have observed the following prices for British Autos, the luxury car maker for a number of years. Jan 2009: €26.87; Jan 2010: €35.19; Jan 2011: €32.17;
Calculating Real Returns and Risk Premiums In Problem 11.8, suppose the average inflation rate over this period was 4.2 per cent and the average T-bill rate over the period was 5.1 per cent.(a) What
Calculating Real Rates You have observed the following returns on Crash-n-Burn Computer’s equity over the past 5 years: 7 per cent, –12 per cent, 11 per cent, 38 per cent, and 14 per cent.
Calculating Investment Returns You bought one of Bergen Manufacturing’s 8 per cent coupon bonds one year ago for NKr1,028.50. These bonds make annual payments and mature 6 years from now. Suppose
Calculating Returns and Variability You find a certain equity that had returns of 7 per cent, –12 per cent, 18 per cent and 19 per cent for 4 of the last 5 years. If the average return of the
Arithmetic and Geometric Returns An equity has had returns of 10 per cent, 15 per cent, 20 per cent, –12 per cent, 2 per cent, and –5 per cent over the last 6 years.What are its arithmetic and
Arithmetic and Geometric Returns An equity has had the following year-end prices and dividends:Year Price (£) Dividend (£)1 43.12−2 49.07 0.55 3 51.19 0.60 4 47.24 0.63 5 56.09 0.72 6 67.21 0.81
Using Return Distributions Suppose the returns on your company are normally distributed. The historical average share price return for your firm is 5.8 per cent with a standard deviation of 9.3 per
Using Return Distributions Refer to the table in Problem 11.7. Assuming that the returns from holding Danish equities are normally distributed, what is the approximate probability that your money
Distributions Assume that the returns from holding Dutch equities are normally distributed. What is the probability that the return is less than –100 per cent (think)? What are the implications for
Using Probability Distributions Refer to the table in Problem 11.7.Suppose the returns on large company UK equities are normally distributed. Based on the historical record, determine the probability
Using Probability Distributions Refer to the table in Problem 11.7.Suppose the returns on German and Danish equities are normally distributed. Based on the historical record, answer the following
Returns Go to the Yahoo! Finance website and look up the Swedish firm, SSAB AB. Click on the Historical Prices link. Find its closing price yesterday and its closing price exactly one year earlier.
Returns and Industries Choose three companies from your country, download the historical share prices for the previous year. Find the annual return, dividend yield and capital gains yield. Do you see
What advantages do the mutual funds offer compared with the company equity?
Assume that you invest 5 per cent of your salary and receive the full 5 per cent match from West Coast Yachts. What APR do you earn from the match? What conclusions do you draw about matching plans?
Assume you decide you should invest at least part of your money in large-capitalization companies based in the United Kingdom. What are the advantages and disadvantages of choosing the Skandla
The returns on the Skandla Small-Cap Fund are the most volatile of all the mutual funds offered in the retirement plan. Why would you ever want to invest in this fund? When you examine the expenses
A measure of risk-adjusted performance that is often used is the Sharpe ratio. The Sharpe ratio is calculated as the risk premium of an asset divided by its standard deviation. The standard deviation
What portfolio allocation would you choose? Why? Explain your thinking carefully.
What are the relevant cash flows for valuing a share of equity?
Does the value of a share of equity depend on how long you expect to keep it?
What is the value of a share of equity when the dividend grows at a constant rate?
Why is a preference share called preference?
How can a preference share sometimes be treated as debt and at other times be treated as equity?
What is the difference between cumulative and noncumulative dividends?
What is the difference between a securities broker and a securities dealer?
Which is bigger, the bid price or the ask price? Why?
Dividend Growth and Share Valuation Big Yellow Taxi plc has just paid a cash dividend of £2 per share. Investors require a 16 per cent return from investments such as this. If the dividend is
More Dividend Growth and Share Valuation In SelfTest Problem 7.1, what would the share sell for today if the dividend was expected to grow at 20 per cent per year for the next three years and then
Share Values Wild Horses plc has just announced that it will not pay a dividend because of atrocious trading conditions over the previous year. However, analysts expect the company to pay a dividend
Share Values A2A SpA is an Italian utility firm. Its most recent dividend was €0.013 per share. In the past year, the company has experienced financial difficulties and the share price has dropped
Share Values The next dividend payment by Cannonball AG will be €3 per share. The dividends are anticipated to maintain a 5 per cent growth rate forever. The equity currently sells for €98 per
Share Values XYZ plc will pay a dividend next year of 40p per share, and it is estimated that XYZ’s dividend will increase by 4 per cent per year forever. Investors of XYZ require a rate of return
Share Valuation Crédit Agricole SA is expected to maintain a constant 5.2 per cent growth rate in its dividends indefinitely. If the company has a dividend yield of 4.27 per cent, what is the
Share Valuation Suppose you know that a company’s equity currently sells for £47 per share, and the required return on the equity is 11 per cent. You also know that the total return on the equity
Share Valuation Vivendi SA pays a constant €1.40 dividend on its equity. The company will maintain this dividend for the next 11 years, and will then cease paying dividends for ever. If the
Valuing Preference Shares Resnor plc has an issue of preference shares outstanding that pays a £3.40 dividend every year in perpetuity. If this issue currently sells for£69 per share, what is the
Share Valuation and Required Return Red plc, Yellow plc and Blue plc each will pay a dividend of £2.35 next year. The growth rate in dividends for all three companies is 5 per cent. The required
Share Valuation Unilever NV just paid a dividend of€0.51 on its equity. The growth rate in dividends is expected to be a constant 5 per cent per year indefinitely.Investors require a 14 per cent
Non-Constant Growth Dylan Bearings is a young startup company. No dividends will be paid on the shares over the next 9 years because the firm needs to plough back its earnings to fuel growth. The
Non-Constant Dividends Bread plc has an odd dividend policy. The company has just paid a dividend of £5 per share, and has announced that it will increase the dividend by £2 per share for each of
Non-Constant Dividends Far Side SpA is expected to pay the following dividends over the next four years: €12, €10, €6 and €3. Subsequently, the company pledges to maintain a constant 5 per
Supernormal Growth Marcel AG is growing quickly.Dividends are expected to grow at a 30 per cent rate for the next three years, with the growth rate falling off to a constant 6 per cent thereafter. If
Growth Opportunities Yorkshire Property Ltd expects to earn £60 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest £10 million today and
Supernormal Growth Eva AB is experiencing rapid growth. Dividends are expected to grow at 20 per cent per year during the next three years, 15 per cent over the following year, and then 10 per cent
Negative Growth Antiques R Us is a mature manufacturing firm. The company just paid a €12 dividend, but management expects to reduce the payout by 4 per cent per year indefinitely. If you require
Finding the Dividend Teder plc shares currently sell for£64 per share. The market requires a 10 per cent return on the firm’s equity. If the company maintains a constant 4.5 per cent growth rate
Valuing Preference Shares Mark Bank just issued some new preference shares. The issue will pay a £5 annual dividend in perpetuity, beginning 4 years from now. If the market requires an 8 per cent
Using Share Price Quotes You have found the following share price quote for HBooks plc, in the financial pages of today’s newspaper. What was the closing price for this equity that appeared in
Two-Stage Dividend Growth Model Thirsty Cactus SA has just paid a dividend of €2.50 per share. The dividends are expected to grow at 25 per cent for the next eight years, and then level off to an 8
Two-Stage Dividend Growth Model Chartreuse County Choppers plc is experiencing rapid growth. The company expects dividends to grow at 20 per cent per year for the next 11 years before leveling off at
Capital Gains versus Income Consider four different equities, all of which have a required return of 15 per cent and a most recent dividend of £4.00 per share. Equities W, X and Y are expected to
Share Valuation Most corporations pay semi-annual rather than annual dividends on their equity. Barring any unusual circumstances during the year, the board raises, lowers or maintains the current
Non-Constant Growth Storico plc has just paid a dividend of £2.45 per share. The company will increase its dividend by 20 per cent next year, and will then reduce its dividend growth rate by 5
Non-Constant Growth This one is a little harder.Suppose the current share price for the firm in the previous problem is £63.82, and all the dividend information remains the same. What required
Constant Dividend Growth Model Assume an equity has dividends that grow at a constant rate forever. If you value the shares using the constant dividend growth model, how many years worth of dividends
Two-Stage Dividend Growth Regarding the two-stage dividend growth model in the chapter, show that the price of a share of equity today can be written as follows:Can you provide an intuitive
Two-Stage Dividend Growth The chapter shows that in the two-stage dividend growth model, the growth rate in the first stage, g1, can be greater than or less than the discount rate, R. Can they be
Assuming the company continues its current growth rate, what is the share price of the company’s equity?
To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a consultant. Josh was previously an equity analyst, and covered the HVAC industry. He has examined the
What is the industry average price–earnings ratio? What is the price–earnings ratio for Ragan plc? Is this the relationship you would expect between the two ratios? Why?
Carrington and Genevieve are unsure how to interpret the price–earnings ratio. After some head scratching, they’ve come up with the following expression for the price–earnings ratio:Beginning
Assume the company’s growth rate slows to the industry average in five years. What future return on equity does this imply, assuming a constant payout ratio?
After discussing the share value with Josh, Carrington and Genevieve agree that they would like to increase the value of the company equity. Like many small business owners, they want to retain
What are the cash flows associated with a bond?
What is the general expression for the value of a bond?
Is it true that the only risk associated with owning a bond is that the issuer will not make all the payments?Explain.
What are the distinguishing features of debt compared with equity?
What is the indenture? What are protective covenants? Give some examples.
What does a bond rating say about the risk of fluctuations in a bond’s value resulting from interest rate changes?
Why might an income bond be attractive to a corporation with volatile cash flows? Can you think of a reason why income bonds are not more popular?
What do you think would be the effect of a put feature on a bond’s coupon? How about a convertibility feature? Why?
What is meant by a bond’s redemption yield and interest yield?
What is the difference between a bond’s clean price and dirty price?
What is the difference between a nominal and a real return? Which is more important to a typical investor?
What is the Fisher effect?
What is the term structure of interest rates? What determines its shape?
What is the Treasury yield curve?
What six components make up a bond’s yield?
Bond Values A Svenska AB bond has a 10 per cent coupon rate and a SKr1,000 face value. Interest is paid semi-annually, and the bond has 20 years to maturity. If investors require a 12 per cent yield,
Bond Yields An Ekornes ASA bond carries an 8 per cent coupon, paid semi-annually. The par value is NKr1,000, and the bond matures in 6 years. If the bond currently sells for NKr911.37, what is its
Bond Prices Staind plc has 8.5 per cent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9.75 per cent, what is the current
Bond Yields Page plc has 10 per cent coupon bonds on the market, with 9 years left to maturity. The bonds make annual payments. If the bond currently sells for £9,340 and the face value of the bonds
Valuing Bonds In March 2017, Volkswagen AG issued an eight-year bond with face value of €1,000 and paying an annual coupon of 2 per cent. What is the price of the bond if the YTM is:(a) 1 per
Coupon Rates Steen Familie NV has bonds on the market making annual payments, with 13 years to maturity, and selling for €1,045. At this price, the bonds yield 7.5 per cent. The par value of the
Bond Yields RCA Holdings plc has just issued an 18-month bond with a face value of €10,000, and an annual coupon rate of 2 per cent, paid every quarter. The issue price is €9,984.50. What is its
Bond Yields Ngata SA issued 10-year bonds 2 years ago at a coupon rate of 7.5 per cent. The bonds make semiannual payments. If these bonds currently sell for 105 per cent of par value, what is the
Coupon Rates Stand AG has bonds on the market with 17.5 years to maturity, a YTM of 8 per cent, and a current price of €924. The bonds make semi-annual payments.The par value of the bond is
Calculating Real Rates of Return If Treasury bills are currently paying 7 per cent and the inflation rate is 3.8 per cent, what is the approximate real rate of interest? The exact real rate?
Inflation and Nominal Returns Suppose the real rate is 4 per cent and the inflation rate is 4.7 per cent. What rate would you expect to see on a Treasury bill?
Nominal and Real Returns An investment offers a 15 per cent total return over the coming year. You think the total real return on this investment will be only 9 per cent.What do you believe the
Total Returns The UK government issues a five-year bond which makes annual coupon payments of 5 per cent and offers a yield of 3 per cent annually compounded.Suppose that one year later the bond
Bond Price Movements Consider the Volkswagen bond in question 6.5(c). If yields remain unchanged, what do you expect the price of this bond will be 1 year from now?In 2 years? What’s going on here?
Bond Price Movements Bond X is a premium bond making annual payments. The bond pays an 8 per cent coupon, has a YTM of 6 per cent, and has 13 years to maturity. Bond Y is a discount bond making

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