Chapter 11

11-1 (5 points). In 2014, Dr. Payne bought a massage machine that provided a return of 7 percent. It was financed by debt costing 5 percent. In 2015, Dr. Payne came up with a heating compound that would have a return of 14 percent. Dr. Paynes financial advisor told him it was impractical to develop and market the heating compound because it would require the issuance of common stock at a cost of 15 percent to finance the project. As a result, Dr. Payne stopped development of the heating compound. Is Dr. Payne following a logical approach to financing, given his costs of capital? Explain.

11-2 (3 points). Calculate the aftertax cost of debt under each of the following conditions.

	Yield	Corporate Tax Rate
a.	8.0%	30%
b.	9.0	35
c.	10.0	0

11-3 (2 points). NPerpetuity, Inc. issued $1,000 par value preferred stock 20 years ago. The stock provided a 7.50 percent yield at the time of issue. The preferred stock is now selling for $1,162.79. What is the current yield or cost of the preferred stock? (Disregard flotation costs.) (NOTE: Before you even do the calculation, you should be able to easily see whether or not the price will be above or below $1,000.can you see this? Do you understand why? Refer to my see-saw comments in the Chapter 10 Notes).

11-4 (6 points). The Donald Company wants to determine the optimal cost of capital point for the firm. Assume it is considering the following financial plans:

	Cost (aftertax)	Weights
Plan A
Debt	6.0%	20%
Preferred stock	11.0	10
Common equity	15.0	70
Plan B
Debt	6.5%	30%
Preferred stock	11.5	10
Common equity	16.0	60
Plan C
Debt	7.0%	40%
Preferred stock	11.7	10
Common equity	16.8	50
Plan D
Debt	9.0%	50%
Preferred stock	12.2	10
Common equity	18.5	40

a. Which of the four plans has the lowest weighted average cost of capital? (Round to two places to the right of the decimal point.)

b. Briefly discuss the results and identify why one plan is better than the others.

Chapter 12

12-1 (5 points). Spring-Has-Sprung Flowers, Inc. has earnings before depreciation and taxes of $1,190,000, depreciation of $440,000, and that it is in a 35 percent tax bracket.

a. Compute its cash flow using the following format.

Earnings before depreciation and taxes _____

Depreciation _____

Earnings before taxes _____

Taxes @ 35% _____

Earnings after taxes _____

Depreciation _____

Cash flow _____

b. Recompute the cash flow for the company if depreciation is only $240,000.

c How much cash flow is lost due to the reduced depreciation from $440,000 to $240,000.

d. As a Manager of the firm, how is this information useful to you?

12-2 (6 points). Bernies, Sander Company is considering making a $35,000 investment and is expecting the following cash flows for two potential alternatives.

Year	Investment X	Investment Y
1	$ 5,000	$10,000
2	7,000	15,000
3	9,000	20,000
4	11,000
5	12,000

a. Which of the alternatives would Bernies select under the payback method?

b. If the inflow in year six for Investment X was $90,000, would your answer change under the payback method?

12-3 (4 points). The Hillary Company will invest $80,000 in a temporary project that will generate the following cash inflows for the next three years.

Year	Cash Flow
1................	$25,000
2................	33,000
3................	45,000

The firm will also be required to spend $10,000 to close down the project at the end of the three years. If the cost of capital is 10 percent, should the investment be undertaken?

Chapter 13

13-1 (8 points). Clintons Spyware, LLP is considering the purchase of new sound equipment that will enhance surveillance capabilities. The equipment will cost $27,900. The General Partner, Mrs. Clinton, is not sure how much business the new equipment will attract, but she estimates that the increased annual cash flows for each of the next five years will have the following probability distribution. Clintons cost of capital is 15 percent.

Cash Flow	Probability
$4,570.............	.1
5,550.............	.4
7,400.............	.3
9,930.............	.2

a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.

b. What is the expected net present value?

c. Should Mrs. Clinton buy the new equipment?

NOTE: I do not expect a lengthy response, but I do expect your answer for each question will be about a paragraph with about 50 100 words.

Chapter 14

14-1 (3 points). What is a key tax characteristic associated with state and local (municipal) securities?

14-2 (3 points). How would you define efficient security markets?

14-3 (3 points). The efficient market hypothesis is interpreted in a weak form, a semistrong form, and a strong form. How can we differentiate its various forms?

14-4 (3 points). What was the primary purpose of the Securities Acts of 1933 & 1934?

Chapter 15

15-1 (3 points). Identify the benefits accruing to a company that is traded in the public securities markets.

15-2 (3 points). What are the disadvantages to being public?

15-3 (3 points). How does a leveraged buyout work? What does the debt structure of the firm normally look like after a leveraged buyout? What might be done to reduce the debt?