1) Convertible preferred stock?Valerian Corp. convertible
preferred stock has a fixed conversion ratio of 6 common shares per 1 share of
preferred stock. The preferred stock
pays a dividend of ?$7.00 per share per year.
The common stock currently sells for ?$30 per share and pays a dividend
of ?$1.00 per share per year.
a. Judging on the basis of the conversion ratio and the
price of the common? shares, what is the current conversion value of each
preferred? share???
b. If the preferred shares are selling at ?$181 ?each,
should an investor convert the preferred shares to common? shares?
c. What factors might
cause an investor not to convert from preferred to common? stock?
a. The current conversion value of each preferred share is
?$_______. ?(Round to the nearest?
dollar.)
b.??If the preferred shares are selling at ?$181 ?each,
should an investor convert the preferred shares to common? shares???(Select the
best answer? below.)
No
Yes
c. What is one factor
that might cause an investor not to convert from preferred to common?
stock????(Select the best answer? below.)
A. An investor might not convert from preferred to common
stock if the dividends they will receive on the common stock are less than what
they would receive on the preferred stock.
B. An investor might not convert from preferred to common
stock if the dividends they will receive on the common stock are greater than
what they would receive on the preferred stock.
C. An investor might not convert from preferred to common
stock if the dividends they will receive on the common stock are equal to what
they would receive on the preferred stock.
2) Today the common stock of Gresham Technology closed at
?$28.80 per? share, down ?$0.43 from yesterday.
If the company has 4.1 million shares outstanding and annual earnings of
?$8.3 ?million, what is its? P/E ratio? today?
What was its? P/E ratio? yesterday?
The? company’s P/E ratio today is ________. ?(Round to two decimal? places.)
The? company’s P/E ratio yesterday was __________. ?(Round to two decimal? places.)
3) Common stock value—All growth models Personal Finance
Problem?You are evaluating the potential purchase of a small business currently
generating ?$45,000 of? after-tax cash flow ?(D 0=?$45,000?). On the basis of a review of? similar-risk
investment? opportunities, you must earn a rate of return of 15?% on the
proposed purchase. Because you are
relatively uncertain about future cash? flows, you decide to estimate the?
firm’s value using two possible assumptions about the growth rate of cash
flows.
a. What is the?
firm’s value if cash flows are expected to grow at an annual rate of 0?% from
now to? infinity?
b. What is the? firm’s value if cash flows are expected to
grow at a constant rate of 5?% from now to? infinity?
c. What is the? firm’s value if cash flows are expected to
grow at an annual rate of 9?% for the first 2? years, followed by a constant
annual rate of 5?% from year 3 to? infinity?
a. The? firm’s value
if cash flows are expected to grow at an annual rate of 0?% from now to
infinity is ?$_____________.???(Round to the nearest? dollar.)
b. The? firm’s value if cash flows are expected to grow at a
constant rate of 5?% from now to infinity is ?$_________.???(Round to the
nearest? dollar.)
c. The? firm’s value if cash flows are expected to grow at
an annual rate of 9?% for the first 2? years, followed by a constant annual
rate of 5?% from year 3 to infinity is ?$_______.???(Round to the nearest?
dollar.)
4) Free cash flow valuation Nabor Industries is considering
going public but is unsure of a fair offering price for the company. Before
hiring an investment banker to assist in making the public? offering, managers
at Nabor have decided to make their own estimate of the? firm’s common stock
value. The? firm’s CFO has gathered data for performing the valuation using the
free cash flow valuation model.
The? firm’s weighted average cost of capital is 11%?, and it
has $ 2,250,000 of debt at market value and $450,000 of preferred stock at its
assumed market value. The estimated free
cash flows over the next 5? years, 2016 through? 2020, are given in the?
table, Beyond 2020 to? infinity, the
firm expects its free cash flow to grow by 4 %
|
Year ?(t?) |
Free cash flow ?(FCF?) |
|
|
2016 |
?$210,000 |
|
|
2017 |
?$240,000 |
|
|
2018 |
?$300,000 |
|
|
2019 |
?$350,000 |
|
|
2020 |
?$390,000 |
a. Estimate the value of Nabor? Industries’ entire company by using the free
cash flow valuation model.
b. Use your finding in part a?, along with the data
provided? above, to find Nabor? Industries’ common stock value.
c. If the firm plans to issue 200,000 shares of common?
stock, what is its estimated value per? share?
a.??The value of Nabor? Industries’ entire company is
?$ ___________???(Round to the nearest?
dollar.)
5) Management action and stock value?REH? Corporation’s most
recent dividend was $ 1.98 per? share, its expected annual rate of dividend
growth is 5?%, and the required return is now 15?%. A variety of proposals are being considered
by management to redirect the? firm’s activities. Determine the impact on share price for each
of the following proposed actions.
a. Do? nothing, which will leave the key financial variables
unchanged.
b. Invest in a new machine that will increase the dividend
growth rate to 6?% and lower the required return to 13?%.
c. Eliminate an unprofitable product? line, which will
increase the dividend growth rate to 8?% and raise the required return to 19%.
d. Merge with another? firm, which will reduce the growth
rate to 4?% and raise the required return to 18?%.
e. Acquire a subsidiary operation from another manufacturer.
The acquisition should increase the dividend growth rate to 9% and increase the
required return to 19?%.
a. If the firm does nothing that will leave the key
financial variables? unchanged, the value of the firm will be ?$ nothing. ?(Round to the nearest? cent.)
6) Assessing return and risk Swift Manufacturing is
evaluating an asset purchase. The annual
rate of return and the related probabilities given in the following table
summarize the? firm’s analysis to this? point:
|
Rate of return |
Probability |
|
|
10?% |
0.05 |
|
|
15?% |
0.05 |
|
|
20?% |
0.05 |
|
|
25?% |
0.10 |
|
|
30?% |
0.40 |
|
|
35?% |
0.15 |
|
|
40?% |
0.05 |
|
|
45?% |
0.05 |
|
|
50?% |
0.10 |
a. Compute the range of possible rates of return.
b. Compute the expected return.
c. Compute the standard deviation of the returns.
d. Compute the coefficient of variation of the returns
7) Portfolio analysis?You have been given the expected
return data shown in the first table on three assets—?F, ?G, and H—over the
period? 2016-2019:
|
Expected Return |
||||||
|
Year |
Asset F |
Asset G |
Asset H |
|||
|
2016 |
18?% |
19?% |
??? |
16?% |
??? |
|
|
2017 |
19?% |
18?% |
17?% |
|||
|
2018 |
20?% |
17?% |
18?% |
|||
|
2019 |
21?% |
16?% |
19?% |
Using these? assets, you have isolated the three investment
alternatives shown in the following? table:
|
Alternative |
Investment |
|
|
1 |
?100% of asset F |
|
|
2 |
?50% of asset F and? 50% of asset G |
|
|
3 |
?50% of asset F and? 50% of asset H |
a. Calculate the expected return over the? 4-year period for
each of the three alternatives.
b. Calculate the standard deviation of returns over the?
4-year period for each of the three alternatives.
c. Use your findings in parts a and b to calculate the
coefficient of variation for each of the three alternatives.
d. On the basis of your? findings, which of the three
investment alternatives do you? recommend? ? Why?
8) International investment returns Personal Finance
Problem?Joe? Martinez, a U.S. citizen living in? Brownsville, Texas, invested
in the common stock of? Telmex, a Mexican corporation. He purchased 2,000 shares at 17.50 pesos per
share. Twelve months? later, he sold
them at 26.00 pesos per share. He
received no dividends during that time.
a. What was? Joe’s investment return? (in percentage? terms)
for the? year, on the basis of the peso value of the? shares?
b. The exchange rate for pesos was 9.63 pesos per? US$1.00
at the time of the purchase. At the time
of the? sale, the exchange rate was 10.18 pesos per? US$1.00. Translate the purchase and sale prices into?
US$.
c. Calculate? Joe’s investment return on the basis of the? US$
value of the shares.
d. Explain why the two returns are different. Which one is more important to? Joe? ? Why?
a. ?Joe’s investment return? (in percentage? terms) for the?
year, on the basis of the peso value of the shares is _______?%. ?(Round to two decimal? places.)
b. The purchase price per share in? US$ is ?$________. ?(Round to three decimal? places.)
The sales price per share in? US$ is ?$_______. ?(Round to three decimal? places.)
c. ?Joe’s investment
return on the basis of the? US$ value of the shares is _____?%. ?(Round to two decimal? places.)
d. The two returns? differ:???(Select the best answer?
below.)
A. because of the amounts sold.
B. due to the risk of the stock.
C. because of the timing of the sale.
D. due to the change in exchange rate between the peso and
the dollar.
Your answer is correct.
Which one of the two returns is more important to? Joe? ?
Why????(Select the best answer? below.)
A. The return in part a is more important because Joe bought
the stock in pesos.
B. The return in part c is more important because as an
investor in foreign? securities, Joe must carry foreign exchange rate risk.
C. The return in part a is more important because Joe should
only be concerned with carrying stock risk not exchange rate risk.
D. The return in part c is more important because Joe is
thinking of becoming a US. citizen.
9) Portfolio betas Personal Finance Problem?Rose Berry is
attempting to evaluate two possible? portfolios, which consist of the same five
assets held in different proportions.
She is particularly interested in using beta to compare the risks of
the? portfolios, so she has gathered the data shown in the following? table:
|
Portfolio weights |
|||||
|
Asset |
Asset beta |
Portfolio A |
Portfolio B |
||
|
1 |
1.46 |
15?% |
25?% |
||
|
2 |
0.49 |
30?% |
5?% |
||
|
3 |
1.86 |
10?% |
40?% |
||
|
4 |
1.67 |
5?% |
10?% |
||
|
5 |
0.42 |
40% |
20% |
||
|
Totals |
100% |
100% |
a. Calculate the
betas for portfolios A and B.
b. Compare the risks of these portfolios to the market as
well as to each other. Which portfolio
is more? risky?
a. The beta for
portfolio A is ________. ?(Round to four
decimal? places.)
The beta for portfolio B is ______. ? (Round to four
decimal? places.)
b. Which portfolio is more? risky????(Select the best
answer? below.)
A. They are the same.
B. Portfolio B
C. Portfolio A
10) Security market line? (SML) Assume that the? risk-free
rate, Upper R Subscript Upper FRF?, is currently 3?% and that the market?
return, r Subscript mrm?, is currently 8?%.
a. Calculate the market risk premium.
b. Given the previous? data, calculate the required return
on asset A having a beta of 0.6 and asset B having a beta of 1.6.
a. The market risk premium is ___?%. ?(Round to one decimal? place.)
b. If the beta of asset A is 0.6?, the required return for
asset A is ___%. ?(Round to one decimal?
place.)
If the beta of asset B is 1.6?, the required return for
asset B is ___%. ?(Round to one decimal?
place.)
