Part 1:
1. Portfolio beta:
An individual has $35.000 invested in a stock with a beta of 0.8 and another $40.000 invested in a stock with a beta of 1.4. If these are the only two investments in her portfolio, what is her portfolio's beta?
2. Required rate of return:
Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the required rate of return on a stock with a beta of 0.7?
3. Expected and required rates of return:
Assume that the risk-free rate is 5% and the market risk premium is 6%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.2?
4. Beta and required rate of return:
A stock has a required return of 11%, the risk free rate is 7%, and the market risk premium is 4%.
a. What is the stock's beta?
b. If the market risk premium increased to 6%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged.
Part 2:
1. DPS calculation:
Warr corporation just paid a dividend of $150 a share (that is, D= $1.50). The dividend is expected to grow 7% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years?
2. Constant growth valuation:
Thomas Brothers is expected to pay a $0.50 per share dividend at the end of the year (that is, D1 = $0.50). The dividend is expected to grow at a constant rate of 7% a year.The required rate of return on the stock, Rs, is 15%. What is the stock's current value per share?
3. Constant growth valuation:
Harrison Clothiers' stock currently sells for $20.00 a share. It just paid a dividend of $1.00 a share (that is, D0=$1.00). The dividend is expected to grow at a constant rate of 6% a year. What stock price is expected 1 year from now? What is the required rate of return?
4. Non-costant growth valuation:
Hart Enterprises recently paid a dividend, D0, of $1.25. It expects to have non-constant growth of 20% for 2 years followed by a constant rate of 5% thereafter. The firm's required return is 10%.
5: Corporate valuation:
Smith technologies are expected to generate $150 million in free cash flow next, and FCF is expected to grow at a constant rate of 5% per year indefinitely. Smith has no debt of preferred stock, and its WACC is 10%. If smith has 50 million shares of stock outstanding, what is the stock's value per share?
6. Preferred stock valuation:
Fee founders has perpetual preffered stock outstandiing that sells for $60 a share and pays a dividend of %5 at the end of each year. What is the required rate of return?
Part 3:
1. After-tax cost of debt;
The Heuser Company's currently outstanding bonds have a 10% coupon and a 12% yield to maturity. Heuser believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is Heuser's after-tax cost debt?
2. Cost of preferred stock:
Tunney Industries can issue perpetual preferred stock at a price of $47.50 a share. The stock would pay a constant annual dividend of $3.80 a share. What is the company's cost of preferred stock, Rp?
3. Cost of common equity:
Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company's outstanding bond is 9%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 9.96%. What is Percy's cost of common equity?
4. Cost of equity with and without flotation:
Javits & Sons' common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1= $3.00), and the constant growth rate is 5% a year.
a. What is the company's cost of common equity if all its equity comes from retained earnings?
b. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock?
5. NPV:
Project K cost $52,125, its expected net cash inflows are $12.000 per year for 8 yeas, and its WACC is 12%.
- What is the project's NPV?
- What is the project's IRR?
- What is the project's MIRR?
- What is the project's payback?
- What is the project's discounted payback?
Part 4:
1. Cash conversion cycle:
Primrose Corp has $15 million of sales, 2$ million of inventories, $3 million of receivable, and $1 million of payables. Its cost of goods sold is 80% of sales, and it finance working capital with bank loans at an 8% rate. What is Primrose's cash conversion cycle (CCC)? If Primrose could lower its inventories and receivable by 10% each and increase its payable b 10%, all without affecting sales or cost of goods sold, what would be the new CCC, now much cash would be freed up, and how would that affect pre-tax profits?
2. Receivable investment:
Lamar Lumber Company has sales of $10 million per year, all on credit terms calling for payment within 30 days; and its accounts receivable are $2 million. What is Lamar's DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar could take action that led to on-time payments?
3. AFN equation:
Carter Corporation's sales are expected to increase from $5 million in 2008 to $6 million in 2009, or by 20%. Its assets totaled $3 million at the end of 2008. Carter is at full capacity, so its assets must grow in proportion to projected sales. At the end of 2008, current liabilities are $1 million, consisting of $250.000 of accounts payable, $500.000 of notes payable, and $250.000 of accrued is 30%. Use the AFN equation to forecast the additional funds Carter will need for coming year.
What additional funds would be needed if the company's year-end 2008 assets had been $4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in problem 16-1? Is She Company's capital intensity the same or different? Explain.
Assume that the company had $3 million in assets at the end of 2008. However, now assume that the company pays no dividends. Under these assumptions, what additional funds would be needed for the coming year? Why is this AFN different from the one you found in Problem?
4. Excess capacity:
Walter Industries has $5 billion in sales and $1.7 billion in fixed assets. Currently, the company's fixed assets are operating at 90% of capacity.
a. What level of sales could Walter Industries have obtained if it had been operating at full capacity?
b. What is Walter's Target fixed assets/Sales ratio?
C. If Walter's sales increase 12%, how large of an increase in fixed assets will the company needs to meet its Target fixed assets/Sales ratio?