Premium Essay

Finance Solution Guide

In: Business and Management

Submitted By swizz416
Words 531
Pages 3
Solutions Guide: This is meant as a solutions guide. Please try reworking the questions and reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own.

Chapter 10 Problems

2. LL Incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt?

rd(1 - T) = 0.08(0.65) = 5.2%.

4. Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend.The stock is selling on the market for $70.00, and Burnwood must pay flotation costs of 5% of the market price. What is the cost of the preferred stock?

rps = [pic] = [pic] = 5.41%.

5. Summerdahl Resorts' common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 _ $3.00), and the dividend is expected to grow at a constant rate of 5% a year. What is the cost of common equity?

P0 = $36; D1 = $3.00; g = 5%; rs = ?

rs = [pic] + g = ($3.00/$36.00) + 0.05 = 13.33%.

6. Booher Book Stores has a beta of 0.8. The yield on a 3-month T-bill is 4% and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5%, but the stock market return in the previous years was 15%. What is the estimated cost of common equity using the CAPM?

rs = rRF + bi(RPM) = 0.06 + 0.8(0.055) = 10.4%.

7. Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi faces a 40% tax rate and the following data: rd _ 6%, rps _ 5.8%, and rs _ 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is Shi's WACC?

30% Debt; 5% Preferred Stock; 65% Equity; rd = 6%; T = 40%; rps =…...

Similar Documents

Premium Essay

Bus Finance Ch. 3 Solutions

...of $300,000. Based on the profit margins (returns on sales), which division is superior? 3-1. Solution: Low Carb Diet Supplements Division A Division B 2. Profitability ratios (LO2) Database Systems is considering expansion into a new product line. Assets to support expansion will cost $500,000. It is estimated that Database can generate $1,200,000 in annual sales, with a 6 percent profit margin. What would net income and return on assets (investment) be for the year? 3-2. Solution: Database Systems 3. Profitability ratios (LO2) Polly Esther Dress Shops, Inc., can open a new store that will do an annual sales volume of $960,000. It will turn over its assets 2.4 times per year. The profit margin on sales will be 7 percent. What would net income and return on assets (investment) be for the year? 3-3. Solution: Polly Esther Dress Shops, Inc. 4. Profitability ratios (LO2) Billy’s Chrystal Stores, Inc., has assets of $5,000,000 and turns over its assets 1.2 times per year. Return on assets is 8 percent. What is the firm’s profit margin (return on sales)? 3-4. Solution: Billy Crystal Stores, Inc. 5. Profitability ratios (LO2) Elizabeth Tailors, Inc., has assets of $8,000,000 and turns over its assets 2.5 times per year. Return on assets is 9.5 percent. What is the firm’s profit margin (returns on sales)? 3-5. Solution: Elizabeth Tailors, Inc. 6. Profitability ratios (LO2) Dr.Zhivago Diagnostics Corp. income......

Words: 10770 - Pages: 44

Premium Essay

Corporate Finance Chapter 4 Solutions

...Solutions to Chapter 4 The Time Value of Money 1. a. b. c. d. $100/(1.08)10 = $46.32 $100/(1.08)20 = $21.45 $100/(1.04)10 = $67.56 $100/(1.04)20 = $45.64 $100 × (1.08)10 = $215.89 $100 × (1.08)20 = $466.10 $100 × (1.04)10 = $148.02 $100 × (1.04)20 = $219.11 2. a. b. c. d. 3. $100 × (1.04)113 = $8,409.45 $100 × (1.08)113 = $598,252.29 4. With simple interest, you earn 4% of $1,000 or $40 each year. There is no interest on interest. After 10 years, you earn total interest of $400, and your account accumulates to $1,400. With compound interest, your account grows to: $1,000 × (1.04)10 = $1480.24 Therefore $80.24 is interest on interest. PV = $700/(1.05)5 = $548.47 5. 4-1 6. Present Value a. $400 Years 11 Future Value $684 Interest Rate ⎡ 684 ⎤ ⎢ 400 ⎥ ⎣ ⎦ ⎡ 249 ⎤ ⎢ 183 ⎥ ⎦ ⎣ (1 / 11) − 1 = 5.00% (1 / 4 ) b. $183 4 $249 − 1 = 8.00% (1 / 7 ) c. $300 7 $300 ⎡ 300 ⎤ ⎢ 300 ⎥ ⎣ ⎦ − 1 = 0% To find the interest rate, we rearrange the basic future value equation as follows: ⎡ FV ⎤ FV = PV × (1 + r) ⇒ r = ⎢ ⎣ PV ⎥ ⎦ t (1 / t ) −1 7. You should compare the present values of the two annuities. a. ⎡ 1 ⎤ 1 − PV = $1,000 × ⎢ = $7,721.73 10 ⎥ ⎣ 0.05 0.05 × (1.05) ⎦ ⎡ 1 ⎤ 1 − PV = $800 × ⎢ = $8,303.73 15 ⎥ ⎣ 0.05 0.05 × (1.05) ⎦ b. ⎡ 1 ⎤ 1 − = $4,192.47 PV = $1,000 × ⎢ 10 ⎥ ⎣ 0.20 0.20 × (1.20) ⎦ ⎡ 1 ⎤ 1 − PV = $800 × ⎢ = $3,740.38 15 ⎥ ⎣ 0.20 0.20 × (1.20) ⎦ c. When the interest rate is low, as...

Words: 6215 - Pages: 25

Premium Essay

Solution Chapter 1 Introduction to Corporate Finance

...Solutions Manual Fundamentals of Corporate Finance (Asia Global Edition) Ross, Westerfield, Jordan, Lim and Tan Updated April 2012 CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concepts Review and Critical Thinking Questions 1. Capital budgeting (deciding whether to expand a manufacturing plant), capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt), and working capital management (modifying the firm’s credit collection policy with its customers). Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than corporate tax rates. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, and unlimited life. The treasurer’s office and the controller’s office are the two primary organizational groups that report directly to the chief financial officer. The controller’s office handles cost and financial accounting, tax management, and management information systems, while the treasurer’s office is responsible for cash and credit management, capital budgeting, and financial planning. Therefore, the study of corporate finance is concentrated within the treasury group’s functions. To......

Words: 1113 - Pages: 5

Premium Essay

Corporate Finance Ch 1 Solutions

...Solutions to Chapter 1 The Firm and the Financial Manager 1. real executive airplanes brand names financial stock investment capital budgeting financing 2. A firm might cut its labor force dramatically which could reduce immediate expenses and increase profits in the short term. Over the long term, however, the firm might not be able to serve its customers properly or it might alienate its remaining workers; if so, future profits will decrease, and the stock price will decrease in anticipation of these problems. Similarly, a firm can boost profits over the short term by using less costly materials even if this reduces the quality of the product. Once customers catch on, sales will decrease and profits will fall in the future. The stock price will fall. The moral of these examples is that, because stock prices reflect present and future profitability, the firm should not necessarily sacrifice future prospects for short-term gains. 3. The key advantage of separating ownership and management in a large corporation is that it gives the corporation permanence. The corporation continues to exist if managers are replaced or if stockholders sell their ownership interests to other investors. The corporation’s permanence is an essential characteristic in allowing corporations to obtain the large amounts of financing required by many business entities. 4. A sole proprietorship is easy to set up with a minimum of legal work. The......

Words: 3282 - Pages: 14

Premium Essay

Bloomberg Guide Finance

...EDUCATION A Bloomberg Professional Service Offering GETTING STARTED GUIDE FOR STUDENTS // 2014 CONTENTS 02 INTRODUCTION 03 BLOOMBERG TERMINAL 03 The Bloomberg Keyboard 03 Helpful Keys 04 Accessing The Application 05 Logging In 06 Bloomberg Panels 07 FUNCTIONS & SECURITIES 07 Running Functions 08 Working With Securities 10 NAVIGATION 10 Basic search (Autocomplete) 11 Full Search 12 Browsing Menus 13 PERFORMING ANALYSIS 13 Navigating Functions 14 Stock/Company Screening 15 Analyzing a Company 16 Analyzing an Index, Bond or Currency 17 EXPORTING DATA 17 The Bloomberg Excel Add-In 20 Drag & Drop 20 Printing & Other Export Options 20 GETTING HELP & LEARNING MORE 22 APPENDIX 22 Equity 22 Fundamental Analysis 23 Analytics 24 M&A Analysis 24 Fixed Income 26 Swaps 27 Money Markets 28 Structured Finance Analytics 29 Price Discovery 29 Analytics 29 Descriptive 30 Relative Value 30 Ticketing 30 Hedging 30 Additional Fixed-Income Functions 32 FI Futures & Options 33 Repo Analysis Data 33 CALCULATORS 33 High Yield/Syndicated Loans/ Distressed Research 34 Municipal Bonds INTRODUCTION For more than 20 years, Bloomberg has been committed to helping universities and colleges incorporate the Bloomberg Professional® service into their academic programs to better prepare students for the global job market. Universities and colleges around the globe use Bloomberg to bring the real world of finance into the classroom, providing students with access to the......

Words: 13167 - Pages: 53

Premium Essay

Solution Guide

...Solutions Guide:   This is meant as a solutions guide. Please try reworking the questions and reword the answers to essay type parts so as to guarantee that your answer is an original. Do not submit as your own. Garcia Manufacturing uses a job order cost system and applies overhead to production on the basis of direct labor costs. On January 1, 2010, Job No. 50 was the only job in process. The costs incurred prior to January 1 on this job were as follows: direct materials $20,000, direct labor $12,000, and manufacturing overhead $16,000. As of January 1, Job No. 49 had been completed at a cost of $90,000 and was part of finished goods inventory. There was a $15,000 balance in the Raw Materials Inventory account. During the month of January, Garcia Manufacturing began production on Jobs 51 and 52, and completed Jobs 50 and 51. Jobs 49 and 50 were also sold on account during the month for $122,000 and $158,000, respectively. The following additional events occurred during the month. Purchased additional raw materials of $90,000 on account. Incurred factory labor costs of $65,000. Of this amount $16,000 related to employer payroll taxes. Incurred manufacturing overhead costs as follows: indirect materials $17,000; indirect labor $15,000; depreciation expense $19,000, and various other manufacturing overhead costs on account $20,000. Assigned direct materials and direct labor to jobs as follows. Job No. Direct Materials Direct Labor 50 $10,000 $ 5,000 51 39...

Words: 947 - Pages: 4

Premium Essay

Finance 350 Solutions, Eight Edition

...SOLUTIONS TO END OF CHAPTER ASSIGNED PROBLEMS 3-2 NI = $3,000,000; EBIT = $6,000,000; T = 40%; Interest = ? Need to set up an income statement and work from the bottom up. EBIT $6,000,000 Interest 1,000,000 EBT $5,000,000 EBT = Taxes (40%) 2,000,000 NI $3,000,000 Interest = EBIT – EBT = $6,000,000 – $5,000,000 = $1,000,000. 3-3 EBITDA $7,500,000 (Given) Depreciation 2,500,000 Deprec. = EBITDA – EBIT = $7,500,000 – $5,000,000 EBIT $5,000,000 EBIT = EBT + Int = $3,000,000 + $2,000,000 Interest 2,000,000 (Given) EBT $3,000,000 Taxes (40%) 1,200,000 Taxes = EBT × Tax rate NI $1,800,000 (Given) 3-4 NI = $50,000,000; R/EY/E = $810,000,000; R/EB/Y = $780,000,000; Dividends = ? R/EB/Y + NI – Div = R/EY/E $780,000,000 + $50,000,000 – Div = $810,000,000 $830,000,000 – Div = $810,000,000 $20,000,000 = Div. 3-8 Statements b and d will decrease the amount of cash on a company’s balance sheet. Statement a will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement c would decrease cash; however, it is also possible that Statement c would increase cash, if the firm receives a tax refund for taxes paid in a prior year. 3-9 Ending R/E = Beg. R/E Net income Dividends $278,900,000 = $212,300,000 Net income ......

Words: 8206 - Pages: 33

Premium Essay

Solution to Assigned Problem Finance

...Solutions to Assigned Problems Chapter One 2. Example One: An individual opens a savings account at a local commercial bank with a $200 deposit. The bank loans out the $200 with other funds from other savings accounts to a local business man who is expanding his business. The local business man pays back the loan overtime with interest and the bank credits the savings account with interest. The individual withdraws money from the savings account to buy a new bike. Example Two: An individual deposits his monthly paycheck in a checking account. The bank accumulates the funds from many checking accounts and loans money to an individual buying a house. The new homeowner makes monthly mortgage payments to the bank. The bank uses the mortgage payments to cover the checks written by the person with the checking account. Example Three: An individual buys a municipal bond for an airport improvement project. The individual usually buys a municipal from a bond dealer, an investment banker marketing the bond, and the funds from the sale of the bond are delivered to the city minus a fee from the investment banker. The city uses the funds to build new facilities at the airport, for example a new parking lot. Once finished the fees received from parking are used to payback the buyer of the bond with interest. 7. The goal of the financial manager is to maximize the current share price or equity value of the firm. This goal encompasses many good business practices such as a...

Words: 16162 - Pages: 65

Premium Essay

Fi516-Solution for Study Guide for Final Exam

...Solutions for Study Guide for Final Exam 1. (TCO B) Which of the following statements concerning the MM extension with growth is NOT CORRECT? (a) The tax shields should be discounted at the unlevered cost of equity. (b) The value of a growing tax shield is greater than the value of a constant tax shield. (c) For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions. (d) For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions. (e) The total value of the firm is independent of the amount of debt it uses. (Points: 20) 2. (TCO D) Which of the following statements is most CORRECT? (a) In a private placement, securities are sold to private (individual) investors rather than to institutions. (b) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. (c) Private placements are convenient for issuers, but the convenience is offset by higher flotation costs. (d) The SEC requires that all private placements be handled by a registered investment banker. (e) Private placements can generally bring in funds faster than is the case with public offerings. (Points: 20) 3. (TCO E) Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan...

Words: 1547 - Pages: 7

Premium Essay

A Basic Guide to Finance and Accounting

...A Basic guide to finance and accounting This article will explain the importance of finance and accounting in a start-up business and also demonstrate the means that business’ can source money internally and externally. The start-up idea I will be relating this too is a car dealership in Yorkshire Mikes wheels. Internal finance is money that can be sourced from inside the business. The business in question is a small start-up business so the sources of finance are limited in terms of selling assets to free up cash; the premises are fixed assets as they are vital to the business. The cars are current assets as it is easier to turn them into cash therefore due to the nature Mikes Wheels selling cars is the objective. Profits retained from start-up businesses are usually minimal, as an owner personal savings and input are the main internal source unless a bank loan is secured. An external source of finance is the phrase used to describe funds acquired outside the business, usually used in contrast to internal sources of finance the finance is acquired from a party separate to the business e.g a) Owners who invest money in the business over a long period of time. The owner of Mikes Wheels will find himself needing to inject money into the business for a couple of years as Mikes business grows. b) Loans from a bank or from family and friends. c) Debentures are loans made to a company. d) A mortgage, which is a special type of loan for buying property where monthly payments...

Words: 1515 - Pages: 7

Free Essay

Chapter 8 Brooks Introductory Econometrics for Finance Solutions

...Solutions to the Review Questions at the End of Chapter 8 1. (a). A number of stylised features of financial data have been suggested at the start of Chapter 8 and in other places throughout the book: - Frequency: Stock market prices are measured every time there is a trade or somebody posts a new quote, so often the frequency of the data is very high - Non-stationarity: Financial data (asset prices) are covariance non-stationary; but if we assume that we are talking about returns from here on, then we can validly consider them to be stationary. - Linear Independence: They typically have little evidence of linear (autoregressive) dependence, especially at low frequency. - Non-normality: They are not normally distributed – they are fat-tailed. - Volatility pooling and asymmetries in volatility: The returns exhibit volatility clustering and leverage effects. Of these, we can allow for the non-stationarity within the linear (ARIMA) framework, and we can use whatever frequency of data we like to form the models, but we cannot hope to capture the other features using a linear model with Gaussian disturbances. (b) GARCH models are designed to capture the volatility clustering effects in the returns (GARCH(1,1) can model the dependence in the squared returns, or squared residuals), and they can also capture some of the unconditional leptokurtosis, so that even if the residuals of a linear model of the form given by the first part of the equation in part......

Words: 1541 - Pages: 7

Premium Essay

Solution to Corporate Finance

...Chapter 7: Chapter 8: Chapter 9: Chapter 10: Chapter 11: Chapter 12: Chapter 13: Chapter 14: Chapter 15: Chapter 16: Appendix 16B: Chapter 17: Chapter 18: Chapter 19: Chapter 20: Chapter 21: Chapter 22: Chapter 23: Chapter 24: Chapter 25: Chapter 26: Chapter 27: Chapter 28: Chapter 29: Chapter 30: Chapter 31: Answers to End-of-Chapter Problems Accounting Statements and Cash Flow ................................................................... Financial Planning and Growth ............................................................................... Net Present Value .................................................................................................... Net Present Value: First Principles of Finance ........................................................ How to Value Bonds and Stocks ............................................................................. The Term Structure of Interest Rates, Spot Rates, and Yields to Maturity ............. Some Alternative Investment Rules......................................................................... Net Present Value and Capital Budgeting ............................................................... Risk Analysis, Real Options, and Capital Budgeting .............................................. Capital Market Theory: An Overview ..................................................................... Return and Risk: The Capital-Asset-Pricing Model (CAPM)......

Words: 154415 - Pages: 618

Premium Essay

Finance Solution Manual

...Explain why ethics is an appropriate topic in the study of corporate finance. I. Chapter Outline 1.1 The Role of the Financial Manager A. It’s All about Cash Flows • The financial manager is responsible for making decisions that are in the best interest of the firm’s owners. • A firm generates cash flows by selling the goods and services produced by its productive assets and human capital. After meeting its obligations, the firm can pay the remaining cash, called residual cash flows, to the owners as a cash dividend, or it can keep the money and reinvest the cash in the business. • A firm is unprofitable when it fails to generate sufficient cash flows to pay operating expenses, creditors, and taxes. Firms that are unprofitable over time will be forced into bankruptcy by their creditors. In bankruptcy, the company will be reorganized, or the company’s assets will be liquidated, whichever is more valuable. If anything is left after all creditor and tax claims have been satisfied, which usually does not happen, the remaining cash, or residual, is distributed to the owners. B. Three Fundamental Decisions in Financial Management • The capital budgeting decision: Which productive assets should the firm buy? This the most important decision because they drive the firm’s success or failure. • The financing decision: How should the firm finance or pay for assets? • Working capital......

Words: 7130 - Pages: 29

Premium Essay

Finance and Accounting Midterm Study Guide

...system and its components (e.g., ledger accounts, trial balance, etc.) For the essay question worth 25 points, you should know: 1. Know about a ledger account, its different parts, the rules of debit and credit, and the meaning of the term normal balance of an account 2. Know about an accounting information system and its components (e.g., ledger accounts, trial balance, etc.) For the problem question worth 35 points, you should know: 1. Know how to prepare a single-step and multiple step income statement and calculate certain ratios based on the numbers in the income statement. A good way to prepare for this exam in addition to reading Chapters 1 through 6 is to replay the Live Lectures and review the Illustrations and solutions for the problems listed below. Helpful Textbook Illustrations * Illustration 1-1 on page 6 * Illustration 1-2 on page 7 * Illustration 1-8 on page 15 * Illustration 1-9 on page 17 * Illustration 2-1 on page 48 * Illustration 2-2 on page 49 * Illustration 2-3 on page 50 * Illustration 2-4 on page 50 * Illustration 2-5 on page 51 * Illustration 2-6 on page 51 * Illustration 2-7 on page 53 * Illustration 2-8 on page 53 * Illustration 2-9 on page 54 * Illustration 2-11 on page 56 * Illustration 3-2 on page 104 * Illustration 3-3 on page 110 * Illustration 3-4 on page 111 * Illustration 3-15 on page 115 * Illustration 3-16 on page 116 * Illustration......

Words: 845 - Pages: 4

Premium Essay

Solution Manual of Principles of Corporate Finance

...is to solve for the present value of: (1) $100 per year for 10 years, and (2) $100 per year in perpetuity, with the first cash flow at year 11. If this is a fair deal, these present values must be equal, and thus we can solve for the interest rate (r). The present value of $100 per year for 10 years is: ⎡1 ⎤ 1 PV = $100 × ⎢ − 10 ⎥ ⎣ r (r) × (1 + r) ⎦ The present value, as of year 10, of $100 per year forever, with the first payment in year 11, is: PV10 = $100/r At t = 0, the present value of PV10 is: ⎡ 1 ⎤ ⎡ $100 ⎤ PV = ⎢ × ⎥ 10 ⎥ ⎢ ⎣ (1 + r) ⎦ ⎣ r ⎦ Equating these two expressions for present value, we have: ⎡1 ⎤ ⎡ 1 ⎤ ⎡ $100 ⎤ 1 = × $100 × ⎢ − ⎥ 10 ⎥ ⎢ 10 ⎥ ⎢ ⎣ r (r) × (1 + r) ⎦ ⎣ (1 + r) ⎦ ⎣ r ⎦ Using trial and error or algebraic solution, we find that r = 7.18%. 17. Assume the amount invested is one dollar. Let A represent the investment at 12 percent, compounded annually. Let B represent the investment at 11.7 percent, compounded semiannually. Let C represent the investment at 11.5 percent, compounded continuously. After one year: FVA = $1 × (1 + 0.12)1 FVB = $1 × (1 + 0.0585)2 FVC = $1 × e(0.115 × 1) After five years: FVA = $1 × (1 + 0.12)5 FVC = $1 × e(0.115 × 5) = $1.7623 FVB = $1 × (1 + 0.0585)10 = $1.7657 = $1.7771 = $1.1200 = $1.1204 = $1.1219 13 After twenty years: FVA = $1 × (1 + 0.12)20 FVC = $1 × e(0.115 × 20) The preferred investment is C. 1 + rnominal = (1 + rreal) × (1 + inflation rate) Nominal Interest Rate 6.00% 23.20% 9.00% Inflation Rate......

Words: 74775 - Pages: 300