Ahram Canadian University

School of Business Administration

Fall 2017
Corporate Finance 1
Assignment 1
Group A
True or False & correct the false statement
1- Unlike equity holders, creditors are owners of the firm.
2- Interest paid to bondholders is tax deductible but dividends paid to stockholders
is not.
3- In the case of liquidation, common stockholders are paid first, followed by
preferred stockholders, followed by bondholders.
4- In the case of liquidation, bondholders are paid first, followed by preferred
stockholders, followed by common stockholders.
5- Common stock can be either privately or publicly owned.
6- Like bonds, the par value on a common stock is used as a basis for determining its
fixed dividend.
7- The number of outstanding shares of common stock is always greater than or
equal to the number of authorized shares of common stock.
8- A common stockholder has no guarantee of receiving any cash inflows, but
receives what is left after all other claims on the firm's income and assets have
been satisfied.
9- Preferred stock that provides for dividend payments based on certain formulas
allowing preferred stockholders to participate with common stockholders in the
receipt of dividends beyond a specified amount is called cumulative preferred
stock.
10- Treasury stock generally does not have voting rights, does not earn dividends, and
does not have a claim on assets in liquidation.

Problems

1- Ahmed Industries’ most recent annual dividend was $3 per share, and the firm
2019s required return is 15%. Find the market value of Lawrence’s shares when:
a. Dividends are expected to grow at 8% annually for 3 years, followed by a 7%
constant annual growth rate in years 4 to infinity.
b. Dividends are expected to grow at 8% annually for 3 years, followed by a 0 %
constant annual growth rate in years 4 to infinity.
c. Dividends are expected to grow at 0% annually for 3 years, followed by a 9 %
constant annual growth rate in years 4 to infinity.
 2- Elk County Telephone has paid the dividends shown in the following table over
the previous 6 years:

Year Dividend per share

2015 $2.87

2014 2.76

2013 2.60

2012 2.46

2011 2.37

2010 2.25

The firm's dividend per share next year is expected to be $3.02.

a. If you can earn 15% on similar-risk investments, what is the most you would
be willing to pay per share?
b. If you can earn only 12% on similar -risk investments, what is the most you
would be willing to pay per share?
3- Jones Design wishes to estimate the value of its out-standing preferred stock. The
preferred issue has an $60 par value and pays an annual dividend of $6. per share.
Similar-risk preferred stocks are currently earning a 9.3% annual rate of return.
a. What is the market value of the outstanding preferred stock?
b. If an investor purchases the preferred stock at the value calculated in part a, how
much does she gain or lose per share if she sells the stock when the required return on
similar-risk preferred stocks has risen to 12.5%? Explain.
4- Lynn Parsons is considering investing in either of two outstanding bonds. The
bonds both have $1,000 par values and10% coupon interest rates and pay annual interest.
Bond A has exactly 8 years to maturity, and bond B has 18 years to maturity.
a. Calculate the present value of bond A if the required return is (1) 5%, (2) 10%, and
(3) 11%.
b. Calculate the present value of bond B if the required return is (1) 10%, (2) 8%, and
(3) 11%.
c. From your findings in parts a and b, discuss the relationship between time to
maturity and changing required returns.
d. If Lynn wanted to minimize interest rate risk, which bond should she purchase?
Why?
 5- Country Wallpapers is considering investing in one of three mutually exclusive
projects, E, F, and G. The firm’s cost of capital, r, is 15%. The firm has gathered the
basic cash flow and risk index data for each project as shown in the following table.

Project (j)

E F G

Initial Investment
(CF0) -$50,000 -$100,000 -$80,000

Year (t) Cash Inflows

1 $20,000 $35,000 $20,000

2 20,000 50,000 40,000

3 20,000 50,000 60,000

For Each Project

a. Find the payback period
b. Find the Net Present Value
c. Find the IRR
d. Which project do you recommend that the firm accept?