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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

IO-15A. (Time disparity ranking problem) The State Spartan Corporation is considering two mutually exclusive projects. The cash flows associated with those projects are as follows:The required rate
ll-IB. (Risk-adjusted NPV) The Cake-O-Las Corporation)s considering two mutually exclusive projects. Each of these projects requires an initial outlay of $1 0,000 and will operate for five years. The
IO-16A. (Unequal lives ranking problem) The B. T Knight Corporation is considering two mutually exclusive pieces of machinery that perform the same task. The two alternatives available provide the
11-2B. (Risk-adjusted NPV) The Dorf Corporation is evaluating two mutually exclusive projects, both of which require an initial outlay of $125,000. Each project has an expected life of five years.
10-17A. (BAAs) The Andrzejewski Corporation is considering two mutually exclusive projects, one with a three-year life and one with a seven-year life. The after-tax cash flows from the two projects
11-3B. (Certainty equivalents) The Temco Corp. is considering two mutually exclusive projects.The expected values for each project's cash flows are as follows:Temco has decided to evaluate these
1O-18A. (Capital rationing) Cowboy Hat Company of Stillwater, Oklahoma, is considering seven capital invesnnent proposals, for which the funds available are limited to a maximum of $12 million.The
11-4B. (Certainty equivalents) Perumperal, Inc., has decided to use the certainty equivalent method in determining whether or not a new investment should be made. The expected cash flows associated
11-5B. (Risk-adjusted discount rates and risk classes) The Kick 'n' MacDonald Corporation is examining two capital-budgeting projects with five-year lives. The first, project A, is a replac~ment
11-6B. (Certainty equivalents) The M. Jose Company uses the certainty equivalent approach when it evaluates risky investments. The company presently has two mutually exclusive investment proposals,
11-7B. (Probability trees) The Buckeye Corporation is evaluating an investment proposal with an expected life of two years. This project will require an initial outlay of $1,300,000. The resultant
9-6B. (Net present value, profitability index, and internal rate ofreturn calculations) You are considering two independent projects, project A and project B. The initial cash outlay associated with
12-12B. (Weighted cost of capital) The capital structure for the Bias Corporation follows. The company plans to maintain its debt structure in the future. If the firm has a 6 percent after-tax cost
16-15A. (Assessing leverage use) Some financial data for three corporations are as follows:a.Which firm appears to be excessively levered?b. Which firm appears to be employing financial leverage to
17-6B. (Long-term residual dividend policy) Wells Manufacturing, Inc., has projected its investment opportunities over a five-year planning horizon. The cost of each year's investment and the amount
9-7B. (Payback period calculations) You are considering three independent projects, project A, project B, and project C. Given the following free cash flow information, calculate the payback period
16-16A. (Assessing leverage use) Some financial data and the appropriate industry norm are shown in the following table:a. Which finn appears to be using financial leverage to the most appropriate
17·8B. (Dividend policies) The earnings for Carlson Cargo, Inc., have been predicted for the next live years and are listed in the following table. There are 1 million shares outstanding.Detennine
9-9B. (Internal rate ofreturn calculations) Given the following cash flows, determine the internal rate of return for projects A, B, and C. YEAR PROJECT A PROJECT B Initial Investment: -$75,000
11. Caledonia is considering two invesnnents with one-year lives. The more expensive of the two is the better and will produce more savings. Assume these projects are mutually exclusive and that the
12-15B. As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of a new warehouse facility. You. have determined the market value
12. Caledonia is considering two additional mutually exclusive projects. The cash flows associated with these projects are as follows:The required rate of return on these projects is 11 percent.a.
16-19A. (EBlT-EPS analysis) Albany Golf Equipment is analyzing three different financing plans for a newly formed subsidiary. The plans are described as follows:In alkases, the common stock will be
13. The final two mutually exclusive projects that Caledonia is considering involve mutually exclusive' pieces of machinery that perfornl the same task. The two alternatives available provide the
IO-3B. (Calculating free cash flows) Tetious Dimensions is introducing a new product and has an expected change in EBIT of $775,000. Tetious Dimensions has a 34 percent m~rginal tax rate.This project
IO-4B. (Calculating free cash flows) Duncan Motors is introducing a new product and has an expected change in EBIT of $300,000. Duncan Motors has a 34 percent marginal rax rate. This project will
1O-8B. (Compl'ehensive problem) The Dophical 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.
16-1B. (Analysis ofrecessionary cash flows) Cappuccino Express, Inc., is considering expanding its cafe business by adding a number of new stores. Strong consideration is being given to financing the
lO-9B. (Comprehensive problem) The Kumar 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.This
lO-lOB. (Size disparity ranking problem) The Unk's Farms Corporation is considering purchasing one of two fertilizer-herbicides for the upcoming year. The more expensive of the two is the better and
10-11B. (Time disparity ranking problem) The Z. Bello Corporation is considering two mutually exclusive projects. The cash flows associated with those projects are as follows:The required rate of
10-12B. (Unequal lives ranking problem) The Battling Bishops Corporation is considering two mutually exclusive pieces of machinery that perfornl the same task. The two alternatives available provide
1O-13B. (BAAs) The Anduski Corporation is considering two mutually exclusive projects, one with a five-year life and one with a seven-year life. The after-tax cash flows from the two projects are as
lO-14B. (Capital rationing) The Taco Toast Company is considering seven capital investment projects, for which the funds available are limited to a maximum of $12 million. The projects are
ST-l. Step 1: First calculate the initial outlay.Step 2: Calculate the differential cash flows over the project's life.Thus, the cash flow in the final year will be equal to the annual net cash flow
16-11B. (Assessing levemge use) Some financial data for three corporations are as follows:a. Which firm appears to be excessively levered?b. 'Which firm appears to be employing financial leverage to
16-12B. (Assessing leverage use) Some financial data and the appropriate industry norm are shown in the following table:a. Which firm appears to be using financial leverage to the most appropriate
16-13B. (Capital structure theory) Whittier Optical Labs has an all-common-equity capital struc·ture. Pertinent financial characteristics for the company are as follows:In answering the following
16-1SB. (EBIT-EPS analysis) Mount Rosemead Health Services, Inc., is analyzing three different financing plans for a newly formed subsidiary. The plans are described as follows:In all cases, the
ST-5.- dividend in year 1 wtha. expected rate of return (kcs ) = + gro rate market price k = $2.50 + 0.105 = .2137 cs $23.00 kcs = 21.37%b. The value of the stock for you would be $38.46. Thus, the
ST-4.value (Ves) = ( last.year dividend (1 + growth rate) )reqUIred rate of return - growth rate$1.32 (1.07)0.11 - f).07= $35.31
ST,·3.dividend required rate of return= $2.75 0.09= $30.56
ST-2.dividend $3 25a. expected return = = --'- = 0.0844 = 8.44%market price $38.50b. Given your 8 percent required rate of return, the stock is worth $40.62 to you:value = dividend = $3.25 = $40.62
ST-l..16 x $100 value (VpJ = ---.12$16.12= $133.33
8-20B. (Commm sto~kholder expected return) Arthur Corporation's common stock is selling for$33.75 and recently paid dividends of$3.15 per share. The company has an expected growth rate of 7
8-19B. (Measuring growth) Thomas, Inc.'s return on equity is 13 percent and management has plans to retain 20 percent of earnings for investment in the company.a. What will be the company's growth
8-18B. (Commm stock valuation) Adam, Inco's outstanding common stock is currently selling in the market for $26. Dividends of $1.95 per share were paid last year, and the company expects annual
8-17B. (Preferred stock valuatim) Melissa Corporation's preferred shares are trading for $19.50 in the market and pay a $2.25 annual dividend. Assume that you, the investor, have a required rate of
8-16B. (Expected rate of1'eturn) Access the Internet to gather the following infonnation for First Union Corporation.a. The earnings per share and dividends per share for the past five years.b. The
8-15B. (Common stockholder expected return) In October 2003, Dorothy Corp. was expecting to pay an annual dividend of$1.20 in 2004. The firm's stock was selling for $54. The stock's beta is 0.90.a.
8-14B. (Common stock valuation) The common stock of KPD paid $1 in dividends last year.Dividends are expected to grow at an 8 percent annual rate for an indefinite number ofyears.a. IfKPD's current
8-13B. (Preferred stock valuatim) Green's preferred stock is selling for $35 in the market and pays a $4 annual dividend.a. What is the expected rate of return on the stock?b. Ifan investor's
8-12B. (Common stock valuation) The market price for M. Simpson & Coo's common stock is$44. The price at the end of one year is expected to be $47, and dividends for next year should be$2. \Nhat is
8-11B. (Common stock valuation) Honeybee common stock is expected to pay $1.85 in dividends next year, and the market price is projected to be $40 by year end. If the investor's required rate of
8-lOB. (Common stockholder expected return) The common stock of Bouncy-Bob Moore Co. is selling for $33.84. The stock recently paid dividends of$3 per share and has a projected growth rate of 8.5
8-9B. (Measuring growth) Given that a firm's return on equity is 24 percent and management plans to retain 60 percent of earnings for investment purposes, what will be the firm's growth rate?
8-8B. (Common stock valuation) Gilliland Motor, Inc., paid a $3.75 dividend last year. At a growth rate of 6 percent, what is the value of the common stock if the investors require a 20 percent rate
8:-7B. (Common stockholder expected return) Blackburn & Smith's common stock currently sells for $23 per share. The company's executives anticipate a constant growth rate of 10.5 percent and an
8-6B. (Common stock valuation) You intend to purchase Barna, Inc., common stock at $52.75 per share, hold it one year, and sell after a dividend of $6.50 is paid. How much will the stock price have
8-5B. (Preferred stockholder expected return) You own 250 shares of McCormick Resources' preferred stock, which currently sells for $38.50 per share and pays annual dividends of $3.25 per share.a.
8-4B. (Preferred stockholder expected return) Shewmaker's preferred stock is selling for $55.16 and pays $2.35 in dividends. \Nhat is your expected rate of rerum if you purchase the security at the
8-3B. (Preferred stock valuation) \Nhat is the value of a preferred stock where the dividend rate is 16 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12
8-1B. (Preferred stock valuation) Calculate the value of a preferred stock that pays a dividend of$7 per share when your required rate of return is 10 percent.8-2B. (Measming growth) If the Stanford
4. Assuming again that your required rate ofreturn for the common stock is 20 percent, but the anticipated constant growth rate changes to 12 percent, how would your answers to questions 1 and 2
3. If your required rates of return changed to 14 percent for the bond, 16 percent for the preferred stock, and 18 percent for the common stock, how would your answers to parts 1 and 2 change?
2. Which investment(s) should you accept? Why?
1. Calculate the value of each security based on your required rate of return.
Find the web page ofa company that interests you. Look for a link that takes you to investor information, about the firm. Examine the types ofinformation that the firm provides to its stockholders.
8-20A. (Common stockholder expected return) Carpenter Corporation's common stock is selling for$29.50 and recently paid dividends of$1.75 per share. The company has an expected growth rate of 4
8-19A. (Measuring gnrwth) XYZ's return on equity is 17 percent and management has plans to retain 30 percent of earnings for investment in the company.a. What will be the company's growth rate?b. How
8-18A. (Common stock valuation) Wayne, Inc.'s outstanding common stock is currently selling in the market for $33. Dividends of $2.30 per share were paid last year, and the company expects annual
8-17A. (Preferred stock valuation) Kendra Corporation's preferred shares are trading for $25 in the market and pay a $4.50 annual dividend. Assume that you, the investor, have a required rate
8-16A. (Common stockho"tder expected return) Access the Internet to gather the following informacion for Johnson & Johnson.a. The earnings per share and dividends per share for the past five years.b.
8-15A. (Common stockholder expected return) In October 2003, Michael, Inc. was expecting ro pay an annual dividend of$1.12 in 2004. The firm's stock was selling for $49. The stock's beta is 1.10.a.
8-14A. (Common stock valuation) The common stock of NCP paid $1.32 in dividends last year.Dividends are expected to gTow at an 8 percent annual rate for an indefinite number of years.a. IfNCP's
8-13A. (Preferred stock valuation) Pioneer's preferred stock is selling for $33 in the market and pays a $3.60 annual dividend.a. What is the expected rate of return on the stock?b. Ifan investor's
8-12A. (Common stockholder expected l'eturn) The market price for Hobart common stock is $43.The price at the end of one year is expected to be $48, and dividends for next year should be$2.84. What
8-11A. (Common stock valuation) Honeywag common stock is expected to pay $1.85 in dividends next year, and the market price is projected to be $42.50 by year end. If the investor's required rate of
8-10A. (Common stockholderexpected retUrn) The common stock of Zaidi Co. is selling for $32.84.The stock recently paid dividends of $2 .94 per share and has a projected constant growth rate of 9.5
8-9A. (Measuring growth) Given that a firm's return on equity is 18 percent an9 management plans to retain 40 percent of earnings for investment purposes, what will be the firm's growth rate?
8-8A. (Common stock valuation) 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
8-7A. (Common stockholder expected l·eturn) Made-It's common stock currently sells for $22.50 per share. The company's executives anticipate a constant growth rate of 10 percent and an endof-year
8-6A. (Common stock valuation) You intend to purchase Marigo common stock at $50 per share, hold it one year, and sell after a dividend of $6 is paid. How much will the stock price have to appreciate
8-5A. (Prefen'ed stockholder expected return) You own 200 shares of Somner Resources' preferred stock, which currently sells for $40 per share and pays annual dividends of $3.40 per share.a. What is
8-4A. (Preferred stockholder expected return) Solitron's preferred stock is selling for $42.16 and pays $1.95 in dividends. What is your expected rate of return if you purchase the security at the
8-3A. (Preferred stock valuation) What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12
8-2A. (Measuring growth) If Peppercline, Inc.'s return on equity is 16 percent and the management plans to retain 60 percent of earnings for investment purposes, what will be the firm's gTOwth rate?
8-1A. (Preferred stock valuation) Cdlculate the value of a preferred stock that pays a dividend of$6 per share and your required rate of return is 12 percent.
ST-5. (Common stockholder expected return) Blackburn & Smith's common stock currently sells for $23 per share. The company's executives anticipate a constam growth rate of 10.5 percent and an
ST-4. (Common stock valuation) Crosby Corporation's 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
ST-3. (Preferred stock valuation) The preferred stock of Armlo pays a $2.75 dividend. What is the value of the stock if your required return is 9 percent?
ST-2. (Preferred stockholdel' expected return) You own 250 shares uf Dalton Resources' preferred stock, which currently sells for $38.50 per share and pays annual dividends of $3.25 per share.a. What
ST-1. (Preferred stock valuation) What is the value of a preferred stock where the dividend rate is 16 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12
8-10. The cornman stockholders receive two types of return from their investment. What are they?
8-9. State how the investor's required rate of return is computed.
8-8. Define the investor's expected rate of return.
8-7. Compare valuing preferred stock and common stock.
8-6. Why is preferred stock frequently convertible? Why would it be callable?
8-5. Whatis PIK preferred stock?
8-4. Distinguish between fixed rate preferred stock and adjustable rate preferred stock. What is the rationale for a firm issuing adjustable rate preferred stock?

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