8-1.(Preferred stock valuation) Pioneer preferred stock is 8-22(Preferred stock expected return)You are considering percent?

percent?
selling for $33 per share in the marketand pays a $3.60
annual dividend.
(a)What is the expected rate of return on the stock?
(b) If an investor's required rate of return is 10 percent,
what is the value of the stock for that investor?
(c)Should the investor acquire the stock?
8-4.(Preferred stock valuation) What is the value of
a preferred stock where the dividend rate is 16 percent on
a $100 par value? The appropriate discount rate for a stock
of this risk level is12 percent?
9-16(Weight average cost of capital) ABBC Inc. operates a
the purchase of 150shares of preferred stock.Your required
return is11percent. If the stock is currently selling for $40
and pays a dividend of $5.25, should you purchase stock?
8-27(Preferred stock expected return)You own 250 shares
of Dalton Resources preferred stock, which currently sells
for $ 38.50 per share and pays annual dividends of $ 3.25
per share. a.What is your expected return? b.If you
require
an 8 percent return, given the current price, should you sell
or buy more stock?
10-5 (NPV,PI,IRR claculation) You are considering two
very successful chain of yogurt and coffee shops spread independent projects, Project A and Project B. The initial
across the southwestern part of the United States and needs cash outlay associated with Project A is $50,000 and
to raise funds for its planned expansion into the Northwest. the initial cash outlay associated with Project B is $70,000.
The firms balance sheet at the close of 2009 appeared as The discount rate on both projects is 12 percent. The
follows: expected annual cash flows from each project are as
follows:
At present the firms common stock is selling for a price
equal to 2.5 times its book value, the firms investors require
an 18% return, the firms bonds command a yield to maturity
Calculate the NPV, PI, and IRR for each project and indicate
of 8%, and the firm faces a tax rate of 35 percent. At the end if the project should be accepted.
of the previous year ABBCs common stock was selling for a
price of 2.5 times its book value, and its bonds were trading
near their par value.

8-33(Common stockholder expected return) Blackburn & 9-9(Individal or component cost of capital)
Smith common stock currently sells for $ 23 per share. Compute the cost of the following:
The companys executives anticipate a constant growth rate (a.) A bond that has $ 1,000 par value (face value) and
of 10.5 percent and an end- of- year dividend of $ 2.50. a contract or coupon interest rate of 11 percent. A new issue
8-11. Dalton, Inc. has an 11.5 percent return on equity and a. What is your expected rate of return? b. If you require would have a flotation cost of 5 percent of the $ 1,125 market
retains 55 percent of its earnings for reinvestment purposes. a 17 percent return, should you purchase the stock? value. The bonds mature in 10 years. The firms average tax
It recently paid a dividend of $3.25 and the stock is currently rate is 30 percent and its marginal tax rate is 34 percent.
selling for $40. (b.) A new common stock issue that paid a $ 1.80 dividend
a. what is the growth rate of Dalton, Inc? last year. The par value of the stock is $ 15, and earnings
Growth rate = return on equity x retention rate per share have grown at a rate of 7 percent per year.
= .115 x 0.55 = 0.0633 or 6.335 This growth rate is expected to continue into the foreseeable
b. what is the expected return for Dalton's stock? future. The company maintains a constant dividend
Dividend earnings ratio of 30 percent. The price of this stock is now
Expected rate of return = + growth rate =
Selling Price $ 27.50, but 5 percent flotation costs are anticipated. 10-10(Payback period calculation) You are considering three
$3.25(1+.0633) + 0.0633 = 01496 or 14.96% (c.) Internal common equity when the current market price independent projects, project A, project B, and project C.
of the common stock is $43. The expected dividend this Given the following cash- flow information, calculate the
$40 coming year should be $3.50, increasing thereafter at a payback period for each.
c. if you require a 13 percent return, should you invest in 7 percent annual growth rate. The corporations tax rate is
9-2(Cost of interval equity)Pathos Co.'s common stock is
the firm? Since the stock has an expected rate of return of 34 percent.
currently selling for $21.50. Dividends paid last year were
14.96 percent, which is greater than the 13-percent required (d.) A preferred stock paying a 9 percent dividend on a
$.70. Flotation costs on issuing stock will be 10 percent of 9-17(Weighted average cost of capital) Crawford Enterprises
rate of return, I should invest. $150 par value. If a new issue is offered, flotation costs will is a publicly held company located in Arnold, Kansas. The
market price. The dividends and earnings per share are
projected to have an annual growth rate of 15 percent. be 12 percent of the current price of $ 175. (e.) A bond firm began as a small tool and die shop but grew over its 35-
8-12.(Common stock valuation) You intend to purchase selling to yield 12 percent after flotation costs, but before
What is the cost of internal common equity for Pathos? year life to become a leading supplier of metal fabrication
Marigo common stock at $50 per share, hold it 1 year, adjusting for the marginal corporate tax rate of 34 percent. equipment used in the farm tractor industry. At the close of
and then sell it after a dividend of $6 is paid.How much will
In other words, 12 percent is the rate that equates the net 2009 the firms balance sheet appeared as follows: If you require a 3- year payback before an investment can be
the stock price haveto appreciate for you to satisfy your
proceeds from the bond with the present value of the future accepted, which project(s) would be accepted?
required rate of return of 15%?
cash flows (principal and interest).

9-3(Cost of preferred stock) Your firm is planning to issue

preferred stock. The stock sells for $115; however, if new At present the firms common stock is selling for a price equal
stock is issued, the company would receive only $98. to its book value, and the firms bonds are selling at par.
The par value of the stock is $100, and the dividend rate is Crawfords managers estimate that the market requires a 15
14%. what is the cost of capital for the stock to your firm? percent return on its common stock, the firms bonds
command a yield to maturity of 8 percent, and the firm faces
a tax rate of 34 percent. a. What is Crawfords weighted
average cost of capital? b. If Crawfords stock price were to
8-15. The common stock of NCP paid $ 1.32 in dividends last rise such that it sold at 1.5 times book value, causing the cost
year. Dividends are expected to grow at an 8 percent annual of equity to fall to 13 percent, what would the firms cost of
rate for an indefinite number of years. capital be (assuming the cost of debt and tax rate do not
a)If NCPs current market price is $23.50 per share, change)?
9-4(Cost od debt) Sincere Stationery Corporation needs to
what is the stocks expected rate of return?
raise $500,000 to improve its manufacturing plant. It has
Rp = D1/Po+ g
decided to issue a $1,000 par value bond with a 10 percent
Rp = $1.32/$23.50 + 8%
annual coupon rate with interest paid semiannually and
5.62% + 8% = 13.62%
a 10-year maturity. The investors require a 9 percent rate of
b) If your required rate of return is 10.5 percent,
return. a. Compute the market value of the bonds.
what is the value of the stock for you?
b. How many bonds will the firm have to issue to receive the
Vcs = D/rp-g
needed funds?
Vcs = $1.32/(10.5%-8%)
c. What is the firms after-tax cost of debt if its tax rate is 34
Vcs = $1.32/0.025 = $52.8
c)Should you make the investment?
Yes, because the value of the stock is greater than
that of the market
10-11(Payback period calculation) You are considering
three independent projects, project A, project B, and project
C. Given the following cash- flow information, calculate the
payback period for each. If you require a 3- year payback
before an investment can be accepted, which project(s)
would be accepted?
10-19(Discounted payback period)You are considering a
project with the following cash flows. If the appropriate
discount rate is 10% what is the projects discount payback
period? 0 ........ -$50,000
1 ........ 20,000
2 ........ 20,000
3...... .. 20,000
4 ........ 20,000
10-24(Discounted pauback period) Sheinhardt Wig
Company is considering a project that has the following
cash flows:
If the appropriate discount rate is 10 percent, what is the
projects discounted payback?
10-25(MIRR) The Dunder Muffin Paper Company is
considering purchasing a new stamping machine that costs
$400,000. This new machine will produce cash inflows of
$150,000 each year at the end of Years 1 through 10. In
addition to the cash inflows, at the end of Year 5, there will
be a cash outflow of $200,000. The company has a required
rate of return of 12%. What is the MIRR of the investment?
10-14(NPV calculation) Calculate the NPV given the following
cash flows if the appropriate required rate of return is 10%.
YEAR CASH FLOWS
0.............. -$ 60,000
1.............. 20,000
2.............. 20,000
3.............. 10,000
4.............. 10,000
5.............. 30,000
6.............. 30,000
Should the project be accepted?
11-2(Relevant cash flow) Captain's Cereal is considering
introducing a variation of its current breakfast cereal,
Crunch Stuff. This new cereal will be similar to the old, with
the exception that it will contain sugar-coated marshmallows
shaped in the form of stars. The new cereal will be called
Crunch Stuff n' Stars. It is estimated that the sales for the
new cereal will be $25 million; however, 20 percent of those
sales will draw from former Crunch Stuff customers who
have switched to Crunch Stuff n' Stars and who would not
have switched if the new product had not been introduced.
What is the relevant sales level to consider when deciding
whether or not to introduce Crunch Stuff n' Stars?
11-10(Calculation free cash flow) You are considering new
elliptical trainers and you feel you can sell 5,000 of these
per year for five years (after which time this project is
expected to shut down when it is learned that being fit is
unhealthy). The elliptical trainers would sell for $1,000 each
with variable costs of $500 for each one produced, and
annual fixed costs associated with production would be
$1,000,000. In addition, there would be a $5,000,000 initial
expenditure associated with the purchase of new production
equipment. It is assumed that this initial expenditure will be
depreciated using the simplified straight-line method down to
zero over five years. This project will also require a one-time
initial investment of $1,000,000 in net working capital
associated with inventory, and it is assumed that this working
capital investment will be recovered when the project is shut
down. Finally, assume that the firms tax rate is 34 percent.
a) What is the initial outlay associated with this project?
b) What are the annual net cash flows associated with this
project for Years 1 through 9? c) What is the terminal cash
flow in Year 5 (that is, what is the free cash flow in Year 10
plus any additional cash flows associated with termination of
the project)? d) What is the projects NPV given a 10
percent required rate of return?
12-2(Break-even point and selling price) Parks Castings Inc.
will manufacture and sell 200,000 units next year.
Fixed costs will total $ 300,000, and variable costs will be
60% of sales. a. The firm wants to achieve a level of
earnings before interest and taxes of $ 250,000. What
selling price per unit is necessary to achieve this result?
12-3(Break-even analysis)You have developed the following
income statement for the Hugo Boss Corporation.
It represents the most recent years operations, which ended
yesterday. Your supervisor in the controllers office has just
handed you a memorandum asking for written responses to
the following questions: What is the firms break-even point
in sales dollars? If sales should increase by 30%, by what
percentage would earnings before taxes (and not income)
increase?
Sale $50,439,375
Variable cost (25,137,000)
Revenue before fixed cost $25,302,375
Fixed cost (10,143,000)
EBIT $15,159,375
Interest expenses (1,488,375)
Earings before taxes $13,671,000
Taxes 50% (6,385,500)
Net income $6,835,500
a) What is the firms break-even point in sales dollars?
b) If sales should increase by 30 percent, by what
percentage would earnings before taxes (and not
income)increase?
12-4(Break-even point&operating leverage) Footwear Inc.
manufactures a complete line of mens and womens dress
shoes for independent merchants. The average selling price
of its finished product is $ 85 per pair. The variable cost for
this same pair of shoes is $ 58. Footwear Inc. incurs fixed
costs of $ 170,000 per year. a) What is the break- even
point in pairs of shoes for the company?
b) What is the dollar sales volume the firm must achieve to
reach the break- even point?
c) What would be the firms profit or loss at the following
units of production sold: 7,000 pairs of shoes? 9,000 pairs
of shoes? 15,000 pairs of shoes?
12-5(Operating leverage) Rocky Mount Metals Company
manufactures an assortment of wood-burning stoves.
The average selling price for the various units is $ 500.
The associated variable cost is $ 350 per unit. Fixed costs for
the firm average $ 180,000 annually. a) What is the break-
even point in units for the company? b) What is the dollar
sales volume the firm must achieve to reach the break- even
point? c) What is the degree of operating leverage for a
production and sales level of 5,000 units for the firm?
(Calculate to three decimal places.) d) What will be the
projected effect on earnings before interest and taxes if the
firms sales level should increase by 20% from the volume
noted in part (c)?
13-2(Dividend payout ratio)Carson Electronics earned $ 2.4
million in net income last year and for the first time ever paid
its common stockholders a cash dividend of $ 0.02 per share.
The firm has 10 million shareholders. What was Carsons
dividend payout ratio?
13-3(Residual dividend policy) FarmCo, Inc. follows a policy
of paying out cash dividends equal to the residual amount
that remains after funding 60 percent of its planned capital
expenditures. The firm tries to maintain a 40 percent debt
and 60 percent equity capital structure and does not plan
on issuing more stock in the coming year. FarmCos CFO
has estimated that the firm will earn $ 12 million in
the current year.
a) If the firm maintains its target financing mix and does not
issue any equity next year, what is the most it could spend on
capital expenditures next year given its earnings estimate?
b) If FarmCos capital budget for next year is $ 10 million,
how much will the firm pay in dividends and what is the
resulting dividend payout percentage?
13-12(Stock splits) The debt and equity section of the
Robson Corporation Balance sheet is shown here.
The current market price of the common shares is $20.
Reconstruct the financial statement assuming that:
a) a %15 stock dividend is issued
b) Two for one stock split declared
Debt ............ $1,800,000
Common equity
Par ($2 100,000 shares) .... 200,000
Paid in Capital ....................... 400,000
Retained Earnings ................. 900,000
$3,300,000
14-1(Pro forma account receivable balance calculation)
On March 31, 2013, Mikes Bike Shop had outstanding
accounts receivable of $ 17,500. Mikes sales are roughly
evenly split between credit and cash sales, with the credit
sales collected half in the month after the sale and the
remainder 2 months after the sale. Historical and projected
sales for the bike shop are given here:
a) Under these circumstances, what should the balance in
accounts receivable be at the end of April?
b) How much cash did Mikes realize during April from sales
and collections?
14-2(Financial forecast) Zapatera Enterprises is evaluating its
financing requirements for the coming year. The firm has only
been in business for one year, but its CFO predicts that the
firms operating expenses, current assets, net fixed assets,
and current liabilities will remain at their current proportion of
sales. Last year Zapatera had $12 million in sales with net
income of $1.2 million. The firm anticipates that next years
sales will reach $15 million with net income rising to
$2 million. Given its present high rate of growth, the firm
retains all of its earnings to help defray the cost of new
investments. The firms balance sheet for the year just
ended is as follows:
Estimate Zapateras total financing requirements (total
assets) and its net funding requirements (discretionary
financing needed) for2014.
14-9(Financial forecasting-discretionary financing need) The
most recent balance sheet for the Armadillo Dog Biscuit Co.
is shown in the following table. The company is about to
embark on an advertising campaign that is expected to raise
sales from the current level of $5 million to $7 million by 15-8(Cost of commercial paper) Tri-State Enterprises plans to
the end of next year. The firm is currently operating at full issue commercial paper for the first time in the firm's 35-year
capacity and will have to increase its investment in both history. The firm plans to issue $500,000 in 180-day maturity
current and fixed assets to support the projected level of notes. The paper will carry a 10.5% rate with discounted
new sales. In fact, the firm estimates that both categories of interest and will cost Tri-State $12,000(paid in advance) to
assets will rise in direct proportion to the projected increase issue. a) What is the effective cost of credit to Tri-State?
in sales. b) What other factor should the company consider in
analyzing whether to issue the commercial paper?
14-7(Financial forecasting-percent of sales) The balance
15-16(Cost of trade credit) Calculate the effective cost of the
sheet of the Boyd Trucking Company (BTC) follows:
BTC had sales for the year ended December 31, 2013, of $ following trade credit terms when payment is made on the net
The firms net profits were 6 percent of current years sales due date:
25 million. The firm follows a policy of paying all net earnings
but are expected to rise to 7 percent of next years sales. To a. 2/ 10, net 30
out to its common stockholders in cash dividends. Thus, help support its anticipated growth in asset needs next year, b. 3/ 15, net 30
BTC generates no funds from its earnings that can be used the firm has suspended plans to pay cash dividends to its
to expand its operations. (Assume that depreciation expense stockholders. In past years, a $1.50 per share dividend was c. 3/ 15, net 45
is just equal to the cost of replacing worn- out assets.) d. 2/ 15, net 60
paid annually. Armadillos payables and accrued expenses
a) If BTC anticipates sales of $ 40 million during the coming are expected to vary directly with sales. In addition, notes
year, develop a pro forma balance sheet for the firm on payable will be used to supply the funds that are needed to
December 31, 2014. Assume that current assets vary as finance next years operations that are not forthcoming from
a percent of sales, net fixed assets remain unchanged, and other sources. a) Fill in the table and project the firms needs
accounts payable vary as a percent of sales. Use notes for discretionary financing. Use notes payable as the
payable as a balancing entry. balancing entry for future discretionary financing needs.
b) How much new financing will BTC need next year? b) Compare Armadillos current ratio and debt ratio (total
liabilities/total assets) before the growth in sales and after.
c) What limitations does the percent of sales forecast method
What was the effect of the expanded sales on these two
suffer from? Discuss briefly.
dimensions of Armadillos financial condition? c) What
difference, if any, would have resulted if Armadillos sales
had risen to $6 million in one year and $7 million only after
two years? Discuss only; no calculations arerequired.
CHAPTER 8

CHAPTER 10
CHAPTER 9
CHAPTER 11 CHAPTER 12
 CHAPTER 14

CHAPTER 13
CHAPTER 15