Reference no: EM131243058

Assignment 1

Complete the following problems:

1. Given the following information for the market and Stock J:

Table: Information for Stock J

- Calculate the expected return for the market and J.
- Calculate the standard deviations for the market and J.
- Calculate the CVs for the market and J.

2. You have observed the following returns over time:

Table: Returns over time

Assume that the risk-free rate is 6% and the market risk premium is 5%.
- What are the betas of Stocks X and Y?
- What are the required rates of return on Stocks X and Y?
- What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?
- If Stock X's expected return is 22%, is Stock X under- or overvalued?

Please show your work and upload by clicking submit.

Assignment 2

All questions are adapted from the textbook. Please show your work and upload.

Question 1

a) What is the value of a 10-year, $1,000 par value bond with a 10% coupon paid semi-annually if its required rate of return is 10%?

b) What would its value be if, just after it had been issued, the expected inflation rate rose by 3% causing investors to require a 13% return? Would it become a discount or premium bond?

c) What would its value be if, just after it had been issued, the expected inflation rate declined and investors require a 7% return? Would it become a discount or premium bond?

d) Suppose a 10-year, 10% semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90 producing a nominal YTM of 8%. However, the bond can be called after 5 years for a price of $1,050. What is its nominal YTC?

Question 2

Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year, its beta is 0.8, the risk-free rate is 5.2%, and the market risk premium is 6%. The dividend is expected to grow at a constant rate g, and the stock currently sells for $40 a share. What is the stock's price at the end of 3 years?

Question 3

Assume that the average firm in your company's industry is expected to grow at 6% and its dividend yield is 7%. Your company expects its dividends to grow 50% this year, 25% the following year, after which growth returns to the 6% industry average. If the last dividend paid (Do) was $1, what is the value per share of your firm's stock?

Assignment 3

All questions are adapted from the textbook. Please show your work and upload.

Question 1

The Berndt Corporation expects to have sales of $12 million. Costs excluding depreciation will be 75% of sales, and depreciation will be $1.5 million. Its tax rate is 40%. Berndt has no debt.

a) Set up an income statement. What is Berndt's net cash flow?

b) Suppose Congress changed its tax laws to allow Berndt's depreciation to double. What is Berndt's reported profit and net cash flow?

c) Suppose Congress instead of doubling reduces Berndt's depreciation by 50%. What is Berndt's reported profit and net cash flow?

d) If this were your company, which would you prefer: the doubling or the halving?

Question 2

Complete the table below for White Industries using the following data:

Debt ratio= 40%

Quick ratio= 0.8

Total assets turnover= 1.5

Days sales outstanding= 36.5 (based on a 365 day year)

Gross profit margin= 25%

Inventory turnover= 5

Assignment 4

Question 1

At year-end 2012, Wallace Landscaping's total assets were $2.17 million and its accounts payable were $560,000. Sales, which in 2012 were $3.5 million, are expected to increase by 35% in 2013. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $625,000 in 2012, and retained earnings were $395,000. Wallace has arranged to sell $195,000 of new common stock in 2013 to meet some of its financing needs. The remainder of its financing needs will be by issuing new long-term debt at the end of 2013. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends.

a) What were Wallace's total long-term debt and total liabilities in 2012?

b) How much new long-term debt financing will be needed in 2013? (Hint: AFN - New Stock = New long-term debt.)

Question 2

Summerdahl Resort's common stock is currently $36 a share. The company expects to pay a dividend of $3 a share at year-end, and the dividend growth rate is 5%a year. What is its cost of common equity?

Question 3

Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in common equity. Shi's tax rate is 40%, before-tax cost of debt is 6%, required return on preferred stock is 5.8%, and required return on common equity is 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?

Question 4

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at 7% a year. Dozier's WACC is 13%. Its cash flows for Year 1 is negative $20 million (negative implies more cash is going out than coming in), Year 2 is $30 million, and Year 3 is $40 million.

a) What is Dozier's horizon value? (Hint: Find the value of all FCSs beyond Year 3, and discount them back to Year 3.)

b) What is the current value of operations?

c) Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares of stock. What is its intrinsic price per share?

Assignment 5

Question 1

The Perez Company has the opportunity to invest in one of two mutually exclusive machines. Machine A costs $10 million but realizes after-tax inflows of $4 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $15 million, realizes after-tax cash inflows of $3.5 million per year for 8 years, after which it must be replaced. Assume zero inflation. The cost of capital is 10%. By how much would the value of the company increase if it bought the better machine? What is the equivalent annual annuity for each machine?

Question 2

Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 at the end of its 5-year operating life. The depreciation rates are 33.33%, 44.45%, 14.81%, and 7.42%. Working capital would increase by $35,000 initially, but it would be recovered at the end of Year 5. Madison's tax rate is 40%, and its WACC is 10%.

a) Calculate the project's NPV, IRR, MIRR, and payback.

b) Management is unsure about the $110,000 cost savings-it could be plus or minus 20%. What would be the NPVs under each extreme?

c) Suppose the CFO wants you to do a scenario analysis with different values of the cost savings, the machine's salvage value, and the working capital requirement. She gives you the following table:

Calculate the project's expected NPV, its standard deviation, and its coefficient of variation. Would you recommend that the project be accepted?