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Principles Of Fianance: Homework Chapter 7 Homework 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 | Exam 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 | Final Exam 1 2 Gilmore, Inc., just paid a dividend of $3.05 per share on its stock. The dividends are expected to grow at a constant rate of 5.5 percent per year, indefinitely. Assume investors require a return of 10 percent on this stock.
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20
dividend per year, but the first dividend will not be paid until 20 years from
today. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Burton Corp. is growing quickly. Dividends are expected to grow at a rate of 31 percent for the next three years, with the growth rate falling off to a constant 6.6 percent thereafter.
(Hint: Calculate the first four dividends.) (Do not round
intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
Gontier Corporation stock currently sells for $64.53 per share. The market requires a
return of 8 percent on the firm’s stock. what was the most recent dividend per share paid on the stock? (Do not round
intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
You’ve collected the following information from your favorite financial website.
According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20.5 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.5 percent indefinitely. Assume investors require a return of 12 percent on SIR stock.
Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valued?
McConnell Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $1,045. The bonds make semiannual payments. What must the coupon rate be on these bonds?
5.75%
Workman Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual
payments and currently sell for 94.31 percent of par. a. What is the current
yield on the bonds?
a. 6.79%
a. 64 / 943.10 = .0679, or 6.79%
Far West Trading expects to pay an annual dividend of $1.75 per share next year. What is the anticipated dividend for Year 3 if the firm increases its dividend by 3 percent annually?
1.86
1.75 x 1.032 = 1.86
Bernard Fashionista pays a constant annual dividend of $3.75 a share and currently sells for $48.50 a share. What is the rate of return? (Round to two decimals).
7.73%
3.75 / 48.50 = .00731958 or 7.73%
Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company just announced that future dividends will be increasing by 1.2 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 9.68 percent? (Round to two decimals).
22.17%
Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?
$12.16
1.62 x 1.021
= 1.65402
Compute the price of a share of stock that pays a $2.00 per year dividend and that you expect to be able to sell in one year for $20, assuming you require a 20% return.
The price of the share is $18.33
After careful analysis, you have determined that a firm's dividends should grow at 5%, on average, in the foreseeable future. The firm's last dividend was $0.50. Compute the current price of this stock, assuming the required return is 10%.
The current stock price is $10.50
Suppose that a stock is expected to pay a $1 dividend at the end of this year and that your required return on equity investments is 11%. Using a one-period model of stock price determination, if you expect to sell a stock you buy today a year later for $16.0, you will be willing to pay for the stock the amount $__________.
$15.32
Using the one-period valuation model of stock prices, if a share of stock pays an annual dividend of $2, you require a 13.0% return on equity investments, and if you believe that you can sell the stock next year for $40, then you would be willing to pay for the stock the amount $________.
$37.16
Using the one-period model of stock price determination, at what price should a stock sell for if the required return on equity investments is 8%, the stock pays a dividend of $0.50 next year, and the stock is expected to sell next year for $30?
$28.24
Given that the price a stock is bought for is $90. Based on the one-period valuation model of stock prices, if the stock is sold a year later at the price
$130 after receiving a dividend of $2, then the required rate of return on
equity investments is _____%
46.7%
Suppose that the price a stock is bought for is $130. Based on the one-period valuation model of stock prices, if the stock is sold a year later at the price
$140 and the required rate of return on the equity investments is 14%, then
the dividend paid out for the stock is $_____. Holding every other variable the same, this implies that the dividend paid out for the stock is: __________.
$8.20 Higher
Suppose that a stock paid a dividend of $2 this year and that your required return on equity investments is 8%. Using the Gordon growth model, if you expect the dividends to grow at 6%, you will be willing to pay for the stock the amount $________.
106.00
Using the Gordon growth model of stock price determination, if a share of stock will pay a $1 dividend next year, dividends are expected to grow 4%, and people require an 11% return on equity investments, then the price of the stock is $_____.
14.29
Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $2.8 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 12.5 percent. What is the benefit of the remodeling project to Professional Properties?
A) $119,666.04 B) -$89,072.00 C) -$111,417.03 D) $105,214.70 E) $108,399.15 A) $119,666.04
NPV = -$2,800,000 + $820,000 ×{1 - [1 / (1 + .125)5]} / .125 NPV = $119,666.04
According to the Gordon growth model of stock price determination, at what price should a stock sell for if the required return on equity investments is 12%, the stock will pay a dividend of $1.80 next year, and dividends are expected to grow at a constant rate of 3%?
$20
Suppose that a stock is priced at $75. Given that a potential buyer has a required rate of return on equity investments of 7%, the expected dividend for next year when the constant rate of growth of dividends is 5% is $_______.
$1.50
If the dividend of a stock decreases, then according to the Gordon Growth Model, holding everything else constant, the price of the stock will ____________________.
decrease
A bond that pays interest annually yielded 6.75 percent last year. The inflation rate for the same period was 5.50 percent. What was the real rate of return?
1.18%
(1.0675 / 1.055) -1 x 100 = 1.18%
What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent?
A) $2,470.01 B) $2,111.41 C) $1,992.43 D) $798.48 E) $1,240.23
NPV = -$42,700 + $9,250 ×{1 - [1 / (1 + .1465)9]} / .1465 NPV = $1,992.43
The outstanding bonds of Winter Time Products provide a real rate of return of 3.60 percent. The current rate of inflation is 2.10 percent. What is the nominal rate of return on these bonds?
5.78%
The common stock of Auto Deliveries sells for $26.71 a share. The stock is expected to pay $2.00 per share next year when the annual dividend is distributed. Auto Deliveries has established a pattern of increasing its dividends by 4.9 percent annually and expects to continue doing so. What is the market rate of return on this stock?
12.39%
2.00 / 26.71 + 0.049 x 100 = 12.39%
The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period?
A) 3.79 years B) 2.87 years C) 4.23 years D) 3.23 years E) 3.41 years
Payback = 4 + ($46,700
-10,000 -10,000 -12,000 -12,000)/$12,000 = 4.23 years Metroplex Corporation will
pay a $3.10 per share dividend next year. The company pledges to increase its
dividend by 5.00 percent per year indefinitely. $32.98 3.10 / (.144 - .050) = 32.98
Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project?
Rich, but not Joe Joe, but not Rich Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero Both Joe and Rich Neither Joe nor Rich Both Joe and Rich
NPVJoe = - $25,500 + $15,800 / 1.085 + $15,300 / 1.0852 NPVJoe = $2,058.88 NPVRich = -$25,500 + $15,800 / 1.125 + $15,300 / 1.1252 NPVRich = $633.33 Both Joe and Rich should accept the project as both NPVs are positive.
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.15 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each company's stock is 9.00 percent, 12.70 percent, and 14.90 percent, respectively.
Red stock price = $2.15 / (.090 - .05) = $53.75 Yellow stock price = $2.15 / (.127 - .05) = $27.92 Blue stock price = $2.15 / (.149 - .05) = $21.72
The net present value of a project's cash inflows is $2,716 at a discount rate of 12 percent. The profitability index is 1.09 and the firm's tax rate is 34 percent. What is the initial cost of the project?
A) $2,314.07 B) $2,491.74 C) $2,428.32 D) $2,018.50 E) $2,066.67
PI = 1.09 2,716 / 1.09 = 2,491.74
Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the amount of the aftertax salvage value of the equipment?
$31,850
980,000 × 0.05 × (1 - 0.35) = 31,850
The next dividend payment by Blue Cheese, Inc., will be $1.89 per share. The dividends are anticipated to maintain a growth rate of 5 percent forever. If the stock currently sells for $38 per share, what is the required return? (Round your answer to 2 decimal places. (e.g., 32.16))
9.97%
(1.89 / 38) + 0.05 x 100 = 9.97%
A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $42,500 a year. What is the net present value of this project at a discount rate of 11.6 percent?
A) $26,391.08 B) $26,343.72 C) $23,602.18 D) $25,810.33 E) $24,399.99 B) $26,343.72
NPV = -$49,000 + (-$18,700 / 1.116) + $42,500 / 1.1162 + $42,500 / 1.1163 + $42,500 / 1.1164 NPV = $26,343.72
Graphic Designs has 68,000 shares of cumulative preferred stock outstanding. Preferred shareholders are supposed to be paid $1.60 per quarter per share in dividends. However, the firm has encountered financial problems and has not paid any dividends for the past three quarters. How much will the firm have to pay per share of preferred next quarter if the firm also wishes to pay a common stock dividend?
$4.80 $3.20 $7.50 $6.40 $1.60
4 × 1.60 = 6.40
Delta Mu Delta is considering purchasing some new equipment costing $393,000. The equipment will be depreciated on a straight-line basis to a zero-book value over the four-year life of the project. Projected net income for the four years is $16,900, $25,300, $27,700, and $18,400. What is the average accounting rate of return?
A) 11.23 percent B) 12.01 percent C) 12.49 percent D) 11.63 percent E) 10.87 percent
AAR = [($16,900 + 25,300 + 27,700 + 18,400)/4]/[($393,000 + 0)/2] = .1123, or 11.23 percent
Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land besides its current manufacturing facility that could be used for the expansion. The company bought land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. The company has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $490,000 will also be required. What is the amount of the initial cash flow for this expansion project?
835,000
295,000 + 38,000 + 12,000 +490,000 = 835,000
AZ stock closed today at $18.24, down .23. The dividend yield is 2.4 percent. What was yesterday's closing price if the firm pays a constant $.40 per share quarterly dividend?
A) $16.90 B) $16.67 C) $18.01 D) $18.47 E) $17.40
18.24 + .23 = 18.47
Miller Brothers is considering a project that will produce cash inflows of $32,500, $38,470, $40,805, and $41,268 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $184,600?
A) -7.39 percent B) -6.47 percent C) -7.62 percent D) -6.86 percent E) -6.24 percent
NPV = 0 = -$184,600 + $32,500 / (1 + IRR) + $38,470 / (1 + IRR)2 + $40,805 / (1 + IRR)3 + ($41,268) / (1 + IRR)4 IRR = -6.86 percent
A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount?
A) $5.42 B) $5.09 C) $5.25 D) $5.14 E) $4.75
Dividend = 0.0968 × 54.20 = 5.25
Today's stock market report shows that SW Companies has a PE ratio of 9.8, a dividend yield of 2.2 percent, a closing price $29.86, and a net change of .11. What is the annual dividend amount?
A) $.66 B) $1.33 C) $1.08 D) $1.28 E) $1.13
0 .022 × 29.86 = 0.66
The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not?
A) Yes, because the IRR is 12.74 percent B) Yes, because the IRR is 10.75 percent C) No, because the IRR is 10.75 percent D) No, because the IRR is 12.74 percent E) The answer cannot be determined as there are multiple IRRs A) Yes, because the IRR is 12.74 percent
Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in Year 4. What is the internal rate of return if the initial cost of the project is $142,000?
A) 9.43 percent B) 8.42 percent C) 8.29 percent D) 7.81 percent E) 7.55 percent Homework 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 | Exam 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 | Final Exam 1 2
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