Question 1: Phoenix Company common stock is currently selling for $20 per share. Security analysts have assigned the following probability distribution to the price of (and rate of return on) Phoenix stock one year from now:
Price Rate of Return Probability
$16 -20% .25
$20 0 .30
$24 +20% .25
$28 +40% .20
Assuming that Phoenix is not expected to pay any dividends during the coming years, determine the expected rate of return on the stock.
Question 2: Elephant Company common stock has a beta of 1.2. The risk-free rate is 6% and the expected market rate of return is 12%. Determine the required rate of return on the stock.
Question 3: An Allied Northern preferred stock pays a $3.84 annual dividend. What is the value of the stock to an investor who requires a 9.5% return?
Question 4: A refrigerator manufacturer, Zero King, issued a zero coupon bond with 10 years to maturity. What is the yield-to-maturity of this bond if it is sold for $352?
Question 5: Assume that the dividend of $3.25 on Central Power Company's common stock is paid annually. This dividend is not expected to increase for the foreseeable future. Determine the value of this stock to an investor who requires a 12% rate of return.
Question 6: A DFL (degree of financial leverage) of 3.0 indicates that a 27% increase in EPS is the result of a ___________ increase in EBIT.
Question 7: Illinois Tool Company (ITC) fixed operating costs are $1,260,000 and its variable cost ratio (i.e. variable costs as a fraction of sales) is 0.70. The firm has $3,000,000 in bonds outstanding at an interest rate of 8 percent. ITC has 30,000 shares of $5 preferred stock and 150,000 shares of common stock outstanding. ITS is in the 50 percent corporate income tax bracket. Forecasted sales for next year are $9 million. What is ITS's degree of operating leverage at a sales level of $9 million?
Question 8: Suppose that ITC's degree of combined leverage (DCL) is 3.00 at a sales volume of $9 million. Determine ITC's percentage change in earnings per share (EPS) if forecasted sales increase by 20 percent to $10,800,000.
Question 9: Jac's needs to meet a target profit of $100,000 on a new joystick that sells for $25. Jac's has a fixed cost for producing the joystick of $180,000 and expects it to have a contribution margin of $20. What target volume must Jac's achieve to meet the target profit?
Question 10: Jason is interested in finding how many pumps he must sell to breakeven on a new pump he plans to produce. The price of the pump is $250 and the variable cost is 50% of the price. Jason calculated that the fixed costs will be about $400,000.