Basic Managerial Finance Assignment -
Q1. Firebird Company reported the following financial information at the end of 2007:
|
in millions
|
|
Merchandise inventory
|
$240
|
|
Minority interest
|
70
|
|
Cash and equivalents
|
275
|
|
Accounts receivable
|
1,150
|
|
Accounts payable
|
225
|
|
Property & equipment
|
2,160
|
|
Accrued expenses
|
830
|
|
Current portion of long-term debt
|
120
|
|
Long-term debt
|
1,570
|
|
Retained earnings
|
4,230
|
Calculate Firebird's current assets and working capital.
|
|
Current assets
|
Working capital
|
|
A
|
$1,665 million
|
$490 million
|
|
B
|
$1,665 million
|
$420 million
|
|
C
|
$1,735 million
|
$490 million
|
Q2. The following data is from Delta's common size financial statement:
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Earnings after taxes
|
18%
|
|
Equity
|
40%
|
|
Current assets
|
60%
|
|
Current liabilities
|
30%
|
|
Sales
|
$300
|
|
Total assets
|
$1,400
|
What is Delta's total-debt-to-equity ratio?
Q3. An analyst computes the following ratios for Iridescent Carpeting Inc. and compares the results to the industry averages:
|
Financial Ratio
|
Iridescent Carpeting
|
Industry Average
|
|
Current Ratio
|
2.3x
|
1.8x
|
|
Net Profit Margin
|
22%
|
24%
|
|
Return on Equity
|
17%
|
20%
|
|
Total Debt / Total Capital
|
35%
|
56%
|
|
Times Interest Earned
|
4.7x
|
4.1x
|
Based on the above data, which of the following can the analyst conclude? Iridescent Carpeting:
A) has better short-term liquidity than its competitors.
B) has stronger profitability than its competitors.
C) is most likely a younger company than its competitors.
Q4. Using the information provided below, the return on equity (ROE) for 2003 and 2004 respectively is:
|
Ratio
|
2003
|
2004
|
|
Net profit margin
|
0.15
|
0.18
|
|
Total asset turnover
|
1.60
|
1.75
|
|
Financial leverage multiplier
|
1.00
|
1.50
|
Q5. When a company's return on equity (ROE) is 12% and the dividend payout ratio is 60%, what is the implied sustainable growth rate of earnings and dividends?
Q6. A company's required return on equity is 15% and its dividend payout ratio is 55%. If its return on equity (ROE) is 17% and its beta is 1.40, then its sustainable growth rate is closest to:
Q7. a. An analyst has gathered the following data about a firm:
- dividend payout ratio is 45%.
- beta is 1.50.
- risk-free rate is 6.5%.
- expected market return is 15%.
If the firm earned $5.00 per share in the most recent twelve months, what is the company's retention ratio?
7. b. Based on the information given in the question above, what is the firm's CAPM required return on equity?
Q8. What will $10,000 become in 5 years if the annual interest rate is 8%, compounded monthly?
Q9. A certain investment product promises to pay $25,458 at the end of 9 years. If an investor feels this investment should produce a rate of return of 14%, compounded annually, what's the most he should be willing to pay for it?
Q10. If $10,000 is invested in a mutual fund that returns 12% per year, after 30 years the investment will be worth:
Q11. An investor will receive an annuity of $5,000 a year for seven years. The first payment is to be received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity?
Q12. An investor wants to receive $1,000 at the beginning of each of the next ten years with the first payment starting today. If the investor can earn 10 percent interest, what must the investor put into the account today in order to receive this $1,000 cash flow stream?
Q13. If the real risk-free rate is 5%, and the expected rate of inflation is 1%, what is the estimated nominal risk-free rate?
Q14. Interest rates have fallen over the seven years since a $1,000 par, 10-year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently four and one-half percent? (For simplicity, assume annual payments.)
Q15. A bond is issued with the following data:
- $10 million face value.
- 9% coupon rate.
- 8% market rate.
- 3-year bond with semiannual payments.
What is the present value of the bond?
Q16. A bond with a 12% coupon, 10 years to maturity and selling at 88 has a yield to maturity of:
A) over 14%.
B) between 13% and 14%.
C) between 10% and 12%.
Q17. A preferred stock's dividend is $5 and the firm's bonds currently yield 6.25%. The preferred shares are priced to yield 75 basis points below the bond yield. The price of the preferred is closest to:
A) $90.91.
B) $5.00.
C) $80.00.
Q18. If a stock sells for $50 that has an expected annual dividend of $2 and has a sustainable growth rate of 5%, what is the market discount rate for this stock?
A) 9.0%.
B) 7.5%.
C) 10.0%.
Q19. The following data pertains to a common stock:
- It will pay no dividends for two years.
- The dividend three years from now is expected to be $1.
- Dividends are expected to grow at a 7% rate from that point onward.
If an investor requires a 17% return on this stock, what will they be willing to pay for this stock now?
A) $ 7.30.
B) $10.00.
C) $ 6.24.
Q20. Using an infinite period dividend discount model, find the value of a stock that last paid a dividend of $1.50. Dividends are expected to grow at 6 percent forever, the expected return on the market is 12 percent and the stock's beta is 0.8. The risk-free rate of return is 5 percent.
A) $34.57.
B) $26.50.
C) $32.61.
Q21. A firm is expected to have four years of growth with a retention ratio of 100%. Afterwards the firm's dividends are expected to grow 4% annually, and the dividend payout ratio will be set at 50%. If earnings per share (EPS) = $2.4 in year 5 and the required return on equity is 10%, what is the stock's value today?
A) $13.66.
B) $30.00.
C) $20.00.
Q22. Bybee is expected to have a temporary supernormal growth period and then level off to a "normal," sustainable growth rate forever. The supernormal growth is expected to be 25 percent for 2 years, 20 percent for one year and then level off to a normal growth rate of 8 percent forever. The market requires a 14 percent return on the company and the company last paid a $2.00 dividend. What would the market be willing to pay for the stock today?
A) $52.68.
B) $67.50.
C) $47.09.
Q23. A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule:
- Year 1: $3,000
- Year 2: $2,000
- Year 3: $2,000
Determine the project's NPV and IRR. NPV IRR
Q24. A firm is considering a $200,000 project that will last 3 years and has the following financial data:
- Annual after-tax cash flows are expected to be $90,000.
- Target debt/equity ratio is 0.4.
- Cost of equity is 14%.
- Cost of debt is 7%.
- Tax rate is 34%.
Determine the project's payback period and net present value (NPV).
Q25. Which of the following projects would have multiple internal rates of return (IRRs)? The cost of capital for all projects is 9.75%.
|
Cash Flows
|
Blackjack
|
Roulette
|
Keno
|
|
T0
|
-10,000
|
-12,000
|
-8,000
|
|
T1
|
10,000
|
7,000
|
4,000
|
|
T2
|
15,000
|
2,000
|
0
|
|
T3
|
-10,000
|
2,000
|
6,000
|
A) Project Blackjack only.
B) Projects Roulette and Keno.
C) Projects Blackjack and Keno.
Q26. If a stock's return is normally distributed with a mean of 16% and a standard deviation of 50%, what is the probability of a negative return in a given year?
A) 0.3745.
B) 0.5000.
C) 0.0001.
Q27. A stock portfolio's returns are normally distributed. It has had a mean annual return of 25% with a standard deviation of 40%. The probability of a return between -41% and 91% is closest to:
A) 90%.
B) 65%.
C) 95%.
Q28. An investor owns the following three-stock portfolio.
|
Stock
|
Market Value
|
Expected Return
|
|
A
|
$5,000
|
12%
|
|
B
|
$3,000
|
8%
|
|
C
|
$4,000
|
9%
|
The expected return is closest to:
A) 10.00%.
B) 29.00%.
C) 9.67%.
Q29. An investor owns the following three-stock portfolio today.
|
Stock
|
Market Value
|
Expected Annual Return
|
|
K
|
$4,500
|
14%
|
|
L
|
$6,300
|
9%
|
|
M
|
$3,700
|
12%
|
The expected portfolio value two years from now is closest to:
A) $17,975.
B) $16,150.
C) $17,870.
Q30. A security has the following expected returns and probabilities of occurrence:
|
Return
|
Probability
|
|
6.1%
|
10%
|
|
7.5%
|
40%
|
|
9.2%
|
50%
|
What is the expected return of the security?
Q31. Given a beta of 1.25 and a risk-free rate of 6%, what is the expected rate of return assuming a 12% market return?
A) 13.5%.
B) 10%.
C) 31%.
Q32. Luis Green is an investor who uses the security market line to determine whether securities are properly valued. He is evaluating the stocks of two companies, Mia Shoes and Video Systems.
The stock of Mia Shoes is currently trading at $15 per share, and the stock of Video Systems is currently trading at $18 per share. Green expects the prices of both stocks to increase by $2 in a year. Neither company pays dividends. Mia Shoes has a beta of 0.9 and Video Systems has a beta of (- 0.30). If the market return is 15% and the risk-free rate is 8%, which trading strategy will Green employ?
|
|
Mia Shoes
|
Video Systems
|
|
A
|
Sell
|
Buy
|
|
B
|
Buy
|
Sell
|
|
C
|
Buy
|
Buy
|
Q33. Hatch Corporation's target capital structure is 40% debt, 50% common stock, and 10% preferred stock. Information regarding the company's cost of capital can be summarized as follows:
- The company's bonds have a nominal yield to maturity of 7%.
- The company's preferred stock sells for $40 a share and pays an annual dividend of $4 a share.
- The company's common stock sells for $25 a share and is expected to pay a dividend of $2 a share at the end of the year (i.e., D1 = $2.00). The dividend is expected to grow at a constant rate of 7% a year.
- The company has no retained earnings.
- The company's tax rate is 40%.
What is the company's weighted average cost of capital (WACC)?