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Homework answers / question archive / 1)timco has paid 3
1)timco has paid 3.25 per share to the preferred shareholders each year for the past 20 years. We believe this will continue forever. Timco has a beta of 1.7 the risk free rate is 2% and the market is expected to earn 13%. what would be a fair price for timco stock?
2) Agency problems are likely to arise in which organizational form? Select one: limited partnership corporation subchapter 5 corporation all of the above
3)A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? $3234 $4312 $2695 $5390
4)2.100 Depreciation Earnings before interest and taxes (EBIT) S5,250 Less interest 1,020 Earnings before taxes (EBT) S4,230 Taxes 1.058 ? Net income S2.538 Other data: 500.00 Shares outstanding (millions) Common dividends (millions of $) 5888.30 Intrate on notes payable & L-T bonds 6% Federal plus state income tax rate 40% Year-end stock price S60,91 Refer to Exhibit 4.1. What is the firm's total debt to total capital ratio? Do not round your intermediate calculations. Select one: O a. 43.14% O b. 47.76% O c. 58.04% O d. 53.93% O e. 51.36%
Exhibit 4.1 The balance sheet and income statement shown below are for Koski Ine. Note that the firm has no amortization charges, it does not lease any asscts, none of its debt must he retired during the next 5 ycars, and the not payable will be rolled over. Balance Sheet (Millions of S) Assets 2019 Cash and securities $4.200 Accounts rcccivable 17.500 Inventories 20,300 Total current assets $42.000 Net plant and equipment $28,000 Total asscts $70,000 Liabilities and Equity Accounts payable Accruals $22,509 14.391 Notes payable 6,000 Total current liabilities $42.900 $11,000 Long-term bonds Total liabilities $53,900 Common stock $3.542 12.558 Retained earnings Total common equity Total liabilities and cquity $16,100 $70,000 2019 Income Statement (Millions of $) Net sales $105,000 97,650 Operating costs except depreciation Depreciation 2.100
1)Required Return = Risk free Return + Beta * (Market Return - Risk Free Return)
= 0.02 + 1.7 * (0.13 - 0.02)
= 1.72 * 0.11
= 0.1892 or 18.92%
Fair Price of Preferred Stock = Annual dividend / Required Return
= 3.25 / 0.1892
= 17.17
2)
Correct Answer-(d) all of the above
Reason-
Agency Problems-
Agency Problems arises when an agent who is appointed by the principal by entrusting him with the responsibility of managing the Organization and work in the interest of the Organization. Agency problems arises due to conflict of interest of the agent and the principal.
Every form of Organisation has its Agency problems. Because in every form of business, the principal appoints one or more agents to work in the interets of the Organisation.
Like in a corporation , the Share holders are the Principals and they appoint Board of Directors as an agent.
In limited partnership , the partners are the Principals and they appoint managers as their Agent.
Same in case of S corporations and sole proprietoship, where the employees are appinted to represent the organisation and to act as an agent.
Hence we can conclude that in every form of organisation, agency problems exists.
3)
Correct Option is 5390
Calculation of Present Value of Perpetuity
Perpetuity Value at the end of year 4 = Cash Flow / Interest rate
= 900 / 0.11
= 8181.81818181
Present Value of Perpetuity Now = Perpetuity Value at the end of year 4 * PVF @11% for year 4
= 8181.81818181 * 0.65873097413
= 5389.62 or 5390.
4)
Total debt to total equity ratio can be calculated as
=Total Debt/Total equity
=$53900/$16100
=3.3478
Note:
1.Total debt includes short term and long term debt.Short term debt includes accounts payable, notes payable and accruals.
Hence,
total debt=$22509 +$ 14391 +$6000+$11000
=$53900
2.Total equity is derived from subtracting liabilities from total assets
= Total assets -total liability
=$70000-$53900
=$16100
