Sunday, February 21, 2010

B6. Cash flows and NPV for a Replacement Decision

B6. (Cash Flows and NPV for a Replacement Decision)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter , Problems

B6. (Cash Flows and NPV for a Replacement Decision) Andrew Thompson Interests (ATI) is using a mechanical switching system that it bought five years ago for $400,000. This mechanical system is being depreciated straight line to an estimated salvage value of zero over a 10-year life. Thus, the annual depreciation charge is $40,000 and current book value is $200,000. At the end of its life, the actual salvage value is expected to be $25,000. If ATI sold this equipment today, it would fetch $100,000. ATI is evaluating a new digital switching system that will cost $500,000. The digital system is depreciated straight line to a zero salvage value over a five-year life. At the end of the five years, ATI expects to sell the system for $150,000. The new digital system should have a favorable impact on operating cash flows, increasing revenues by $100,000 annually and decreasing cash operating expenses by $50,000 annually. The new equipment has no effect on the investment in working capital. ATI is in the 40% tax bracket and has a 12% cost of capital. Consider each of the following questions assuming that ATI sells the old mechanical switching system and replaces it with the new digital system.
a. What is the net investment?
b. What is the after-tax net operating cash flow for each of the five years?
c. What is the after-tax salvage value?
d. What is the NPV of this investment?

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B5. Cash Flows and NPV for a New Project

B5. (Cash Flows and NPV for a New Project)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter , Problems

B5. (Cash Flows and NPV for a New Project) Syracuse Roadbuilding Company is considering the purchase of a new tandem box dump truck. The truck costs $95,000, and an additional $5,000 is needed to paint it with the firm logo and install radio equipment. Assume the truck falls into the MACRS three-year class. The truck will generate no additional revenues, but it will reduce cash operating expenses by $35,000 per year. The truck will be sold for $40,000 after its five-year life. An inventory investment of $4,000 is required during the life of the investment. Syracuse Roadbuilding is in the 45% income tax bracket.
a. What is the net investment?
b. What is the after-tax net operating cash flow for each of the five years?
c. What is the after-tax salvage value?
d. Assuming a 10% cost of capital, what is the NPV of this investment?
c. What is the WACC?

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A10. Dividend Adjustment Model

A10. (Dividend Adjustment Model)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter , Problems

A10. (Dividend Adjustment Model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm’s chief financial officer would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.

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B2. Dividend Policy

B2. (Dividend Policy)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter , Problems

B2. (Dividend Policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cash dividends on its common stock. Historically, its payout ratio has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow shown below in mill ions.
a. Over the five-year period, what is the maximum overall payout ratio the firm could
achieve without triggering a securities issue?
b. Recommend a reasonable dividend policy for paying out discretionary cash flow in years 1 through 5.

1 2 3 4 5 THEREAFTER
Earnings 100 125 150 120 140 150+per year
Discretionary cash flow50 70 60 20 15 50+per year

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Saturday, February 6, 2010

B9. Estimating the WACC

B9. (Estimating the WACC)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter , Problems

B9. (Estimating the WACC) Fuerst Cola has 10,000 bonds and 400,000 shares outstanding.
The bonds have a 10% annual coupon, $1,000 face value, $1,050 market value, and 10-year maturity. The beta on the stock is 1.30 and its price per share is $40. The riskless return is 6%, the expected market return is 14%, and Fuerst Cola’s tax rate is 40%.
a. What is the after-tax cost of debt financing?
b. What is the after-tax cost of equity financing?
c. What is the WACC?

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C1. Beta and Required Return

C1. (Beta and Required Return)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 7, Problems

C1. (Beta and Required Return) The riskless return is currently 6%, and Chicago Gear has estimated the contingent returns given here.
a. Calculate the expected returns on the stock market and on Chicago Gear stock.
b. What is Chicago Gear’s beta?
c. What is Chicago Gear’s required return according to the CAPM?
Realized Return
State of the Market Probability that State Occurs Stock Market Chicago Gear
Stagnant 0.20 (10%) (15%)
Slow growth 0.35 10 15
Average growth 0.30 15 25
Rapid growth 0.15 25 35

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B20. Constant Growth Model

B20. (Constant Growth Model)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

B20. (Constant Growth Model) Medtrans is a profitable firm that is not paying a dividend on its common stock. James Weber, an analyst for A. G. Edwards, believes that Medtrans will begin paying a $1.00 per share dividend in two years and that the dividend will increase 6% annually thereafter. Bret Kimes, one of James’ colleagues at the same firm, is less optimistic. Bret thinks that Medtrans will begin paying a dividend in four years, that the dividend will be $1.00, and that it will grow at 4% annually. James and Bret agree that the required return for Medtrans is 13%.
a. What value would James estimate for this firm?
b. What value would Bret assign to the Medtrans stock?

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B18. Default Risk

B18. (Default Risk)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

B18. (Default Risk) You buy a very risky bond that promises a 9.5% coupon and return of the $1,000 principal in 10 years. You pay only $500 for the bond.
a. You receive the coupon payments for three years and the bond defaults. After liquidating the firm, the bondholders receive a distribution of $150 per bond at the end of 3.5 years. What is the realized return on your investment?
b. The firm does far better than expected and bondholders receive all of the promised interest and principal payments. What is the realized return on your investment?

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B16. Interest-Rate Risk

B16. (Interest-rate risk)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl’s bonds have identical coupon rates of 9.125% but that one issue matures in 1 year, one in 7 years, and the third in 15 years. Assume that a coupon payment was made yesterday.
a. If the yield to maturity for all three bonds is 8%, what is the fair price of each bond?
b. Suppose that the yield to maturity for all of these bonds changed instantaneously to 7%. What is the fair price of each bond now?
c. Suppose that the yield to maturity for all of these bonds changed instantaneously again, this time to 9%. Now what is the fair price of each bond?
d. Based on the fair prices at the various yields to maturity, is interest-rate risk the same, higher, or lower for longer-versus shorter-maturity bonds?

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A14. Stock Valuation

A14. (Stock Valuation)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

A14. (Stock Valuation) Suppose Toyota has non-maturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter). What is the stock worth?

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A12. Required Return for a Preferred Stock

A12. (Required Return for a Preferred Stock)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

A12. (Required Return for a Preferred Stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is nongrowing. What is the required return on James River preferred stock?

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A10. Dividend Discount Model

A10. (Dividend Discount Model)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

A10. (Dividend Discount Model) Assume RHM is expected to pay a total cash dividen of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments. What is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?

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A1. Bond Valuation

A1. (Bond Valuation)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter 5, Problems

A1. (Bond Valuation) A $1,000 Face Value Bond Has A Remaining Maturity Of 10 Years And A Required Return Of 9%. The Bond's Coupon Rate Is 7.4%. What Is The Fair Value Of This Bond?

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Monday, February 1, 2010

A5. Cost of Limited Partner Capital

A5. (Cost of Limited Partner Capital)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 21, Problems

A5. (Cost of Limited Partner Capital)
What is the cost of limited partner capital if a limited partner invests $50 million at time zero and receives net distributions of $8 million for the next 10 years?

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A2. Comparing Borrowing Costs

A2. (Comparing Borrowing Costs)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 20, Problems

A2. (Comparing Borrowing Costs)
Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000, the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)?

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A1. Bond Covenants

A1. (Bond Covenants)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 20, Problems

A1. (Bond Covenants)
Dallas Instruments has a large bond issue whose covenants require: (1)that DI's interest coverage ratio exceeds 4.0; (2) that DI's ratio of tangible assets to long term debt exceeds 1.50; and (3) that cumulative dividends and share repurchases not exceed 60% of cumulative earnings since the date of the issuance of the bonds. DI has earnings before interest and taxes of $70 million and interest expense of $14 million. Tangible assets are $400 million and long-term debt is $175 million. Since the bonds were issued, DI has earned $200 million, paid dividends of $40 million, and repurchased $40 million of common stock. Is DI in compliance with its bond covenants?

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A8. Accounting for Stock Dividends and Stock Splits

A8. (Accounting for Stock Dividends and Stock Splits)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 18, Problems

A8. (Accounting for Stock Dividends and Stock Splits)
Shore Electronics Corporation's common stock is selling for $44 per share, and its common stockholders' equity is shown here.
a. Show the impact of a 50% stock dividend. (Hint: This is a large stock dividend, not a small one.)
b. Show the impact of a 3-for-2 stock split.
c. Describe how the stock market would react to each event. How would you explain the difference in reaction?

Paid-in capital ($4 par value; 5,000,000 shares) $ 20,000,000
Capital contributed in excess of par value 30,000,000
Retained earnings 50,000,000
Common stockholders' equity $100,000,000

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B1. Choosing Financial Targets

B1. (Choosing Financial Targets)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 17, Problems

B1. (Choosing Financial Targets)
Bixton Company's new chief financial officer is evaluating Bixton's capital structure. She is concerned that the firm might be underleveraged, even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry. Her staff prepared the industry comparison shown here.
a. Bixton's objective is to achieve a credit standing that falls, in the words of the chief financial officer, "comfortably within the ‘A' range." What target range would you recommend for each of the three credit measures?
b. Before settling on these target ranges, what other factors should Bixton's chief financial officer consider?
c. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?

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A4. WACC with Rebalancing

A4. (WACC with Rebalancing)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 17, Problems

A4. (WACC with Rebalancing)
Nathan's Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r = 43%. Nathan's rebalances its capital structure each year to a target of L = 0.52. T * = 0.20. Nathan's can borrow currently at a rate of rd = 26%. What is Nathan's WACC?

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A2. MACRS Depreciation

A2. (MACRS Depreciation)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 10, Problems

A2. (MACRS Depreciation)
Modigliani Jet Ski Company has purchased several firm cars for a total of $150,000. They are classed as five-year property.
a. What is the annual depreciation charge for these assets?
b. If Modigliani's marginal tax rate is 40%, what is the annual depreciation tax shield?
c. Discounted at 8%, what is the present value of the depreciation tax shields?

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B1. Beta

B1. (Beta)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 7, Problems

B1. (Beta)
What is the beta of an asset whose correlation coefficient with the market portfolio’s returns is 0.62 and variance is 0.1 if the variance of the market portfolio’s return is 0.0025?

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A1. Net Income and Net Cash Flows

A1. (Net Income and Net Cash Flows)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 10, Problems

A1. (Net Income and Net Cash Flows)
Julie Stansfield has a bicycle rental shop with annual revenues of $200,000. Cash operating expenses for rent, labor, and utilities are $70,000. Depreciation is $40,000. Julie's tax rate is 40%.
a. What should be Julie's net income?
b. What is her net cash flow?

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A5. Investment Criteria

A5. (Investment Criteria)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 9, Problems

A5. (Investment criteria)
Compute the NPV, IRR, and payback period for the following investment. The cost of capital is 10%.
YEAR 0 1 2 3
Cash flow -200,000 100,000 100,000 150,000

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A4. Investment Criteria

A4.(Investment Criteria)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 9, Problems

A4.(Investment Criteria)
An investment of $100 returns exactly $100 in one year. The cost of capital is 10%.
a. What are the payback, NPV, and IRR for this investment?
b. Is this a profitable investment?

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A4. Estimating the WACC with Three Sources of Capital

A4. (Estimating the WACC with Three Sources of Capital)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 8, Problems

A4.(Estimating the WACC with three sources of capital)
Eschevarria Research has the capital structure given here. If Eschevarria's tax rate is 30%, what is its WACC?

BOOK VALUE MARKET VALUE BEFORE-TAX COST
Bonds $1,000 $1,000 8%
Preferred stock 400 300 9%
Common stock 600 1,700 14%

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A1. Calculating the WACC

A1. (Calculating the WACC)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set IV:
Chapter 8, Problems

A1. (Calculating the WACC)
The required return on debt is 8%, the required return on equity is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt, what is the weighted average cost of capital?

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A7. Economic Order Quantity

A7. (Economic Order Quantity)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter Problems

A7. (Economic Order Quantity) Knoxville Accountants LLP consumes 100,000 packets of plain copier paper annually. The usage is roughly constant throughout the year. The carrying cost of this inventory is $2.00 per unit average inventory per year. The ordering and delivery cost is a fixed $100 per order. a. What is the economic order quantity? b. How many orders will be placed per year using the EOQ? c. What is the average inventory level? d. What is the total annual inventory cost?

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A1. NPV of Granting Credit

A1. (NPV of Granting Credit)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter Problems

A1. (NPV of granting credit) A credit sale of $15,000 has a 95% probability of being repaid in two months and a 5% probability of a complete default. If the investment in the sale is $12,000 and the opportunity cost of funds is 15% per year, what is the NPV of granting credit?

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A12. Cost of Bank Loan

A12. (Cost of Bank Loan)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter Problems

A12. (Cost of bank loan) A bank loan agreement calls for an interest rate equal to prime rate plus 1%. If prime rate averages 9% and non-interest-earning compensating balances equal to 10% of the loan must be maintained, what are the APR and the APY of the loan assuming annual payments?

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A3. Cash Conversion Cycle

A3. (Cash Conversion Cycle)

Corporate Financial Management (3rd Edition)
Emery, Douglas R., Finnerty, John D., & Stowe, John D. (2007)

Individual assignment: Text Problem Set
Chapter Problems

A3. (Cash conversion cycle) Dennis Lasser has collected some information about a food wholesaler in order to estimate its cash conversion cycle. The accumulated information is given. What will Dennis find the cash conversion cycle to be?

Inventory turnover = 10x Inventory conversion period = 365/10 = 36.5 days
Receivables turnover = 20x Receivables collection period = 365/20 = 18.25 days
Payables turnover = 25x Payables deferral period = 365/25 = 14.6 day

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