1) A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm’s bond will sell for how much today.
840.60
2) A share of stock in OBA, Inc is expected to grow at a 4% rate. If next year’s dividend is projected to be $3.80 and your required return is 16%, what is the stock value?
3) What would be more valuable, receiving $500 today or receiving $625 in three years if interest rates are 8 percent? Why?
4) How much would be in your savings account in eight years after depositing $150 today if the bank pays 8 percent per year?
5) Sterling Corporation has a beta of 1.2. If the market return is 14 percent and the risk-free rate is 8 percent, was is Sterling’s expected return.
1) The betas of four stocks are 0.5, 0.3, 1.4, and 1.2. what is the beta of each portfolio invested in the following weights in each stock (listed in same order as betas)?
Portfolio A: 30%, 40%, 20% 10%
Portfolio B: 10%, 20%, 40%, 30%
Portfolio C: 10%, 40%, 10%, 40%
2) Baker & Co. has applied for a loan from the Trust Us Bank in order to invest in several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Baker & Co. to the industry. The following are the financial statements given to Trust Us Bank:
Balance Sheet 12/31/2009 12/31/2010
Cash $305 270
Accounts receivable 275 290
Inventory 600 580
Current assets 1,180 1,140
Plant and equipment 1,700 1,940
Less: acc depr (500) (600)
Net plant and equipment 1,200 1,340
Total assets $2,380 $2,480
Liabilities and Owners’ Equity
Accounts payable $150 $200
Notes payable 125 0
Current liabilities 275 200
Bonds 500 500
Owners’ equity
Common stock 165 305
Paid-in-capital 775 775
Retained earnings 665 700
Total owners’ equity 1,605 1,780
Total liabilities and owners’ equity $2,380 $2,480
Income Statement
Sales (100% credit) $1,100 $1,330
Cost of goods sold 600 760
Gross profit 500 570
Operating expenses 20 30
Depreciation 160 200
Net operating income 320 340
Interest expense 64 57
Net income before taxes 256 283
Taxes 87 96
Net income $169 $187
Compute the following ratios:
2009 2010 Industry Norms
Current ratio 5.0
Acid test ratio 3.0
Inventory turnover 2.2
Average collection period 90 days
Debt ratio .33
Times interest earned 7.0
Total asset turnover .75
Profit margin 12%
Return on total assets 9.00%
Return on equity 10.43%
3) The firm of KMP wishes to establish a fund that in 20 years will accumulate to $25,000,000. The fund will be used to repay an outstanding bond issue. The firm plans to make deposits that will earn 6% to this fund at the beginning of each of the 20 years. What must the deposit amount be?
4) The Baugh X-Ray company paid $2.00 common stock dividend last year. The company’s policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of growth changes to 3 percent per year from year five on. What is the value of the stock if the required rate of return is 8%?
5. You are thinking of buying a house at the beach when you retire in 20 years. The average price for the house you want is $175,000 today.
A: How much would you need to deposit today (as a lump sum), to pay cash for the house if the house price increases at the rate of 5% per year and you can earn 12% on your investment?
B: How much would you need to at the end of each year, to pay cash for the house if the house price increases at the rate of 5% per year and you can earn 12% on your investment?
6. Ajax, Inc. is expecting to issue new debt at par with a cost of 6%, and to issue new preferred stock with a $2.00 per share dividend at $20 a share. Common stock is currently selling for $25 a share. Ajax expects to pay a dividend of $2.50 per share next year, and a market analysis indicates dividends will grow at a rate of 3% per year. The marginal tax rate is 40%.
A) What is the cost of debt, the cost of preferred stock and the cost of common stock? (note cost of each)
B) If Ajax raises capital using a capital structure of 40% debt, 10% preferred stock and 50% common stock, what is the cost of capital for Ajax, Inc.?
