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FIN 5320/ FIN5320 EXAM #1
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FIN 5320/ FIN5320 Exam #1
Which of the following statement is true?
What is the profitability index for an investment with the following cash flows given a 8 percent required return?
You are considering the following two mutually exclusive projects that will not be repeated. The required rate of return is 11.25% for project A and 10.75% for project B. Which project should you accept and why?
You are analyzing two mutually exclusive projects and have developed the following information. What is the incremental IRR?
Oil Well Supply offers a 6 percent coupon bond with semiannual payments and a yield to maturity of 6.73 percent. The bonds mature in 8 years. What is the market price per bond if the face value is $1,000?
$
The value of a 25 year zero-coupon bond when the market required rate of return is 10% (semiannual) is ____.
All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?
Martin’s Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future growth, you will only buy this stock if you can earn at least a 15% rate of return. What is the maximum amount you are willing to pay to buy one share today?
The common stock of Auto Deliveries sells for $26.71 a share. The stock is expected to pay $1.90 per share next month when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 4.6 percent annually and expects to continue doing so. What is the market rate of return on this stock?
Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 14%?
Phil can afford $150 a month for 4 years for a car loan. If the interest rate is 4.4 percent compounded monthly, how much can he afford to borrow to purchase a car?
Champion Bakers uses specialized ovens to bake its bread. One oven costs $840,000 and lasts about 3 years before it needs to be replaced. The annual operating cost per oven is $10,000. What is the equivalent annual cost of an oven if the required rate of return is 10 percent? (Round your answer to whole dollars)
The Beach House has sales of $750,000 and a profit margin of 6 percent. The annual depreciation expense is $90,000. What is the amount of the operating cash flow if the company has no long-term debt?
FIN 5320/ FIN5320 EXAM #2
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FIN 5320/ FIN5320 Exam #2
A stock had returns of 6 percent, -6 percent, 4 percent, and 16 percent over the past four years. What is the standard deviation of these returns?
What are the arithmetic and geometric average returns for a stock with annual returns of 4%, 9%, -6%, and 18%?
The common stock of Jensen Shipping has an expected return of 14.40 percent. The return on the market is 10 percent and the risk-free rate of return is 4.5. What is the beta of this stock?
The Norris Co. has an improved version of its hotel stand. The investment cost is expected to be $72 million and will return $13.5 million for 5 years in net cash flows. The ratio of debt to equity is 1 to 1. The cost of equity is 13%, the cost of debt is 9%, and the tax rate is 34%. The appropriate discount rate, assuming average risk, is:
The market has an expected rate of return of 10.2%. The long-term government bond is expected to yield 4.2% and the U.S. Treasury bill is expected to yield 3.8%. The inflation rate is 3.1%. What is the market risk premium?
The expected return on JK stock is 13.26 percent while the expected return on the market is 11.1 percent. The beta of JK stock is 1.3. What is the risk-free rate of return?
Your best friend works in the finance office of the Delta Corporation. You are aware that this friend trades Delta stock based on information he overhears in the office. You know that this information is not known to the general public. Your friend continually brags to you about the profits he earns trading Delta stock. Based on this information, you would tend to argue that the financial markets are at best _____ form efficient.
You purchased 200 shares of ABC stock on July 15th. On July 20th, you purchased another 100 shares and then on July 22st you purchased your final 200 shares of ABC stock. The company declared a dividend of $1.10 a share on July 5th to holders of record on Friday, July 23rd. The dividend is payable on July 31st. How much dividend income will you receive on July 31st from ABC?
Which one of the following is an argument in favor of a low dividend policy?
L.A. Clothing has expected earnings before interest and taxes of $2,300, an unlevered cost of capital of 15 percent and a tax rate of 35 percent. The company also has $3,000 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm?
Your firm has a pre-tax cost of debt of 7% and an unlevered cost of capital of 13%. Your tax rate is 35% and your cost of equity is 15.26%. What is your debt-equity ratio?
Wild Flowers Express has a debt-equity ratio of .60. The pre-tax cost of debt is 9% while the unlevered cost of capital is 14%. What is the cost of equity if the tax rate is 34%?
A firm has a market value equal to its book value. Currently, the firm has excess cash of $700 and other assets of $6,300. Equity is worth $7,000. The firm has 500 shares of stock outstanding and net income of $810. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?
Robinson’s has 15,000 shares of stock outstanding with a par value of $1.00 per share and a market price of $36 a share. The balance sheet shows $15,000 in the common stock account, $315,000 in the capital in excess of par account, and $189,000 in the retained earnings account. The firm just announced a 3-for-2 stock split. What will the market price per share be after the split?
The Tinslow Co. has 125,000 shares of stock outstanding at a market price of $93 a share. The company has just announced a 5-for-3 stock split. How many shares of stock will be outstanding after the split?
FIN 5320/ FIN5320 HOMEWORK #1 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #1 SOLUTION
Problem 2–3 Market Values and Book Values
Problem 2–4 Calculating Taxes
Problem 2–5 Calculating OCF
Problem 2–6 Calculating Net Capital Spending
Problem 2–7 Building a Balance Sheet
Problem 2–11 Cash Flows
Problem 2–13 Building an Income Statement
Problem 3–1 DuPont Identity
Problem 3–4 EFN
Problem 3–6 Sustainable Growth
Problem 3–12 Ratios and Foreign Companies
Problem 3–14 Days’ Sales in Receivables
Problem 3–16 Calculating the Cash Coverage Ratio
Problem 3–19 Full-Capacity Sales
Problem 3–30 Sustainable Growth Rate
FIN 5320/ FIN5320 HOMEWORK #2 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #2 SOLUTION
Problem 4–12 Present Value and Multiple Cash Flows
Problem 4–13 Calculating Annuity Present Value
Problem 4–24 Calculating Rates of Return
Problem 4–28 Annuity Present Values
Problem 4–30 Balloon Payments
Problem 4–33 Growing Annuity
Problem 4–35 Present Value and Interest Rates
Problem 4–41 EAR versus APR
Problem 4–42 Present Value and Break-Even Interest
Problem 4–52 Annuities
Problem 4–56 Balloon Payments
Problem 4–62 Calculating EAR with Points
Problem 4–66 Future Value and Multiple Cash Flows
Problem 4–68 Calculating Interest Rates
FIN 5320/ FIN5320 HOMEWORK #3 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #3 SOLUTION
Problem 5–3 Calculating Discounted Payback
Problem 5–1 Calculating Payback Period and NPV
Problem 5–6 Calculating IRR
Problem 5–8 Calculating Profitability Index
Problem 5–11 NPV versus IRR
Problem 5–12 Problems with Profitability Index
Problem 5–13 Problems with IRR
Problem 5–15 Profitability Index versus NPV
Problem 5–17 Comparing Investment Criteria
Problem 5–19 Comparing Investment Criteria
FIN 5320/ FIN5320 HOMEWORK #4 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #4 SOLUTION
Problem 6–1 Calculating Project NPV
Problem 6–2 Calculating Project NPV
Problem 6–6 Project Evaluation
Problem 6–8 Calculating Salvage Value
Problem 6–10 Calculating EAC
Problem 6–20 Calculating Project NPV
Problem 6–21 Calculating NPV and IRR for a Replacement
Problem 6–25 Calculating Project NPV
Problem 6–26 EAC and Inflation
Problem 6–29 Calculating Required Savings
Problem 6–31 Financial Break-Even Analysis
Problem 6–33 Replacement Decisions
FIN 5320/ FIN5320 HOMEWORK #5 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #5 SOLUTION
Problem 8–1 Valuing Bonds
Problem 8–2 Valuing Bonds
Problem 8–4 Coupon Rates
Problem 8–6 Bond Yields
Problem 8–9 Nominal and Real Returns
Problem 8–15 Interest Rate Risk
Problem 8–18 Bond Yields
FIN 5320/ FIN5320 HOMEWORK #6 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #6 SOLUTION
Problem 8–1 Valuing Bonds
Problem 8–2 Valuing Bonds
Problem 8–4 Coupon Rates
Problem 8–6 Bond Yields
Problem 8–9 Nominal and Real Returns
Problem 8–15 Interest Rate Risk
Problem 8–18 Bond Yields
FIN 5320/ FIN5320 HOMEWORK #7 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #7 SOLUTION
Problem 10–1 Calculating Returns
Problem 10–2 Calculating Yields
Problem 10–9 Calculating Returns and Variability
Problem 10–20 Arithmetic and Geometric Returns
Problem 11–13 Using CAPM
Problem 11–14 Using CAPM
Problem 11–16 Using CAPM
FIN 5320/ FIN5320 HOMEWORK #8 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #8 SOLUTION
Problem 13–1 Calculating Cost of Equity
Problem 13–2 Calculating Cost of Debt
Problem 13–5 Calculating WACC
Problem 13–8 Book Value versus Market Value
Problem 13–12 Finding the WACC
Problem 13–21 Firm Valuation
FIN 5320/ FIN5320 HOMEWORK #9 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #9 SOLUTION
Problem 16–1 EBIT and Leverage
Problem 16–13 Calculating WACC
Problem 16–14 MM and Taxes
Problem 16–21 Cost of Capital
Problem 16–25 MM with Taxes
Problem 17–2 Agency Costs
Problem 17–8 Financial Distress
FIN 5320/ FIN5320 HOMEWORK #10 SOLUTION
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FIN 5320/ FIN5320 HOMEWORK #10 SOLUTION
Problem 19–2 Stock Dividends
Problem 19–3 Stock Splits
Problem 19–5 Regular Dividends
Problem 19–11 Homemade Dividends
Problem 19–19 Dividends versus Reinvestment
FIN 5320/ FIN5320 MINI CASE #2
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FIN 5320/ FIN5320 Mini Case #2
Mini Case #2: Capital Budgeting at Rio Negro, Inc.
Assignment Overview
Table 1: Overhaul Expenditures
Table 2: Depreciation (in %) for the 7-year Modified Accelerated Cost Recovery System
Table 3: Post-overhaul Operating Costs (Basic Overhaul)
Table 4: Post-overhaul Operating Costs (Overhaul plus new engine & control system)
Table 5: Operating Costs of New Vessel
Guidelines for Case Analysis
The following aids are permitted for this analysis:
Any other aids are unauthorized and their use constitutes a violation of academic integrity.
Cases should be typed in 12- point font, double-spaced, with
a minimum of 1 inch margins.
Your report is intended for the senior management of Rio Negro, Inc., so be sure that you write in a
professional style that is easy to follow.
FIN 5320/ FIN5320 MINI CASE 2 (FINAL).XLSX
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FIN 5320/ FIN5320 Mini Case 2 (Final).xlsx
Senior management of Rio Negro, Inc. (RNI) has been tasked with deciding the fate of the Maracas, a small dry-cargo vessel. The Maracas is a part of a larger fleet…
FIN 5320/ FIN5320 MINI CASE 2 (FINAL).DOC
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FIN 5320/ FIN5320 Mini Case 2 (Final).doc
Senior management of Rio Negro, Inc. (RNI) has been tasked with deciding the fate of the Maracas, a small dry-cargo vessel. The Maracas is a part of a larger fleet…
FIN 5320/ FIN5320 PRACTICE #1
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FIN 5320/ FIN5320 Practice #1
Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.5 million. The machinery can be sold to the Romulans today for $6.5 million. Klingon’s current balance sheet shows net fixed assets of $5.2 million, current liabilities of $2.4 million, and net working capital of $800,000. If all the current assets were liquidated today, the company would receive $2.6 million cash. (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)…
FIN 5320/ FIN5320 PRACTICE #2
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FIN 5320/ FIN5320 Practice #2
Investment X offers to pay you $4,500 per year for nine years, whereas Investment Y offers to pay you $7,000 per year for five years…
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FIN 5320/ FIN5320 PRACTICE #3
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FIN 5320/ FIN5320 Practice #3
Fuji Software, Inc., has the following mutually exclusive projects.
Companies can calculate a more precise value using fractional years. To calculate the fractional payback period, find the fraction of Year 2’s cash flows that is needed for the company to have cumulative undiscounted cash flows of $15,000. Divide the difference between the initial investment and the cumulative undiscounted cash flows as of Year 1 by the undiscounted cash flow of Year 2.
To calculate the fractional payback period, find the fraction of Year 3’s cash flows that is needed for the company to have cumulative undiscounted cash flows of $18,000. Divide the difference between the initial investment and the cumulative undiscounted cash flows as of Year 2 by the undiscounted cash flow of Year 3.
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FIN 5320/ FIN5320 PRACTICE #4
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FIN 5320/ FIN5320 Practice #4
We will use the bottom-up approach to calculate the operating cash flow for each year. We also must be sure to include the net working capital cash flows each year. So, the net income and total cash flow each year will be:
Your firm is contemplating the purchase of a new $670,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $240,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $85,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project?(Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
Now we can find the project IRR. There is an unusual feature that is a part of this project. Accepting this project means that we will reduce NWC. This reduction in NWC is a cash inflow at Year 0. This reduction in NWC implies that when the project ends, we will have to increase NWC. So, at the end of the project, we will have a cash outflow to restore the NWC to its level before the project. We also must include the aftertax salvage value at the end of the project. The IRR of the project is:
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salvage value of the asset? Refer to MACRS schedule (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
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FIN 5320/ FIN5320 PRACTICE #5
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FIN 5320/ FIN5320 Practice #5
Assume semiannual compounding, what is the price of a 15-year, zero coupon bond paying $1,000 at maturity if the YTM is (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.
When the YTM is greater than the coupon rate, the bond will sell at a discount.
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.
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FIN 5320/ FIN5320 PRACTICE #6
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FIN 5320/ FIN5320 Practice #6
The next dividend payment by ECY, Inc., will be $3.20 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. ECY stock currently sells for $63.50 per share.
What is the required return? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
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FIN 5320/ FIN5320 PRACTICE #7
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FIN 5320/ FIN5320 Practice #7
What was the dividend yield and the capital gains yield? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
You’ve observed the following returns on Mary Ann Data Corporation’s stock over the past five years: 27 percent, 13 percent, 18 percent, −14 percent, and 9 percent.
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FIN 5320/ FIN5320 PRACTICE #8
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FIN 5320/ FIN5320 Practice #8
The Dybvig Corporation’s common stock has a beta of 1.21. If the risk-free rate is 3.5 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
What is Advance’s pretax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
If the tax rate is 35 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
What is Mullineaux’s WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
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FIN 5320/ FIN5320 PRACTICE #9
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FIN 5320/ FIN5320 Practice #9
Money, Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 percent higher. If there is a recession, then EBIT will be 40 percent lower. Money is considering a $99,000 debt issue with an interest rate of 8 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem.
a-1.
Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
a-2.
Calculate the percentage changes in EPS when the economy expands or enters a recession. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)
b-1.
Assume that the company goes through with recapitalization. Calculate earnings per share (EPS) under each of the three economic scenarios. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
b-2.
Given the recapitalization, calculate the percentage changes in EPS when the economy expands or enters a recession. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
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FIN 5320/ FIN5320 PRACTICE #10
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FIN 5320/ FIN5320 Practice #10
a-1.
If Hexagon stock currently sells for $37 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? (Do not round intermediate calculations.)
a-2.
Show the new equity account balances after the stock dividend is paid. (Do not round intermediate calculations.)
b-1.
If Hexagon declared a 25 percent stock dividend, how many new shares will be distributed? (Do not round intermediate calculations.)
b-2.
Show the new equity account balances after the stock dividend is paid. (Do not round intermediate calculations.)
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FIN 5320/ FIN5320 PRACTICE EXAM #1
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FIN 5320/ FIN5320 Practice Exam #1
All else constant, the net present value of a typical investment project increases when:
It will cost $2,500 to acquire an ice cream cart. Cart sales are expected to be $1,600 a year for three years. After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years. What is the payback period?
A project has an initial cost of $8,700 and produces cash inflows of $2,700, $5,100, and $1,600 over the next three years, respectively. What is the discounted payback period if the required rate of return is 7 percent?
You are analyzing a project and have prepared the following data:
Based on the internal rate of return of _______ for this project, you should _______ the project.
Grand Adventure Properties offers a 6 percent coupon bond with annual payments. The yield to maturity is 4.85 percent and the maturity date is 8 years from today. What is the market price of this bond if the face value is $1,000?
The yield to maturity on a bond is currently 7.75 percent. The real rate of return is 4.00 percent. What is the rate of inflation?
The market price of a bond is equal to the present value of the:
Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8%. What is the current market price of a $1,000 face value bond?
$
A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon paid at the end of each year. The current price of the bond is $932. What is the yield to maturity for this bond?
How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?
The common stock of Eddie’s Engines, Inc. sells for $25.71 a share. The stock is expected to pay $1.80 per share next month when the annual dividend is distributed. Eddie’s has established a pattern of increasing its dividends by 4% annually and expects to continue doing so. What is the market rate of return on this stock?
Martha’s Vineyard recently paid a $3.60 annual dividend on its common stock. This dividend increases at an average rate of 3.5% per year. The stock is currently selling for $62.10 a share. What is the market rate of return?
Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be:
FIN 5320/ FIN5320 PRACTICE EXAM #2
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FIN 5320/ FIN5320 Practice Exam #2
The Saunders Investment Bank has the following financing outstanding.
We will begin by finding the market value of each type of financing. We will use B1 to represent the coupon bond, and B2 to represent the zero coupon bond. So, the market value of the firm’s financing is:
And the total market value of the firm is:
And the aftertax cost of debt is:
Even though the zero coupon bonds make no payments, the calculation for the YTM (or price) still assumes semiannual compounding, consistent with a coupon bond. Also remember that, even though the company does not make interest payments, the accrued interest is still tax deductible for the company.
Nina Corp. uses no debt. The weighted average cost of capital is 5 percent. If the current market value of the equity is $16 million and there are no taxes, what is EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Weston Industries has a debt–equity ratio of 1.1. Its WACC is 9.6 percent, and its cost of debt is 7.2 percent. The corporate tax rate is 35 percent.
Cavo Corporation expects an EBIT of $26,800 every year forever. The company currently has no debt, and its cost of equity is 11 percent. The corporate tax rate is 35 percent.
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