American Public University - FIN 5320

1)You’ve observed the following returns on Mary Ann Data Corporation’s stock over the past five years: 13 percent, – 13 percent, 20 percent, 25 percent, and 10 percent.

 

 

a. What was the arithmetic average return on Mary Ann’s stock over this five-year period?

 

 

 

 

 

 

 

 

 

b-1. What was the variance of Mary Ann’s returns over this period?

 

 

 

 

 

 

b-2. What was the standard deviation of Mary Ann’s returns over this period?

 

 

 

 

 

 

 

 

 

 

 

 

2. A stock has had the following year-end prices and dividends:

 

 

Year	Price	Dividend
1	$ 43.37	—
2	48.35	$ .60
3	57.27	.63
4	45.35	.80
5	52.27	.85
6	61.35	.93

 

 

 

What are the arithmetic and geometric returns for the stock?

 

 

 

 

 

 

 

 

 

 

 

 

 

3. A stock has an expected return of 14.2 percent, the risk-free rate is 6.5 percent, and the market risk premium is 7.7 percent. What must the beta of this stock be?  

 

 

 

 

 

 

 

 

 

 

 

 

4. Shanken Corp. issued a 20-year, 10 percent semiannual bond 2 years ago. The bond currently sells for 93 percent of its face value. The company's tax rate is 35 percent.

 

1. What is the pretax cost of debt?

 

 

 

 

 

 

2. What is the aftertax cost of debt?

 

 

 

 

 

3. Which is more relevant, the pretax or the aftertax cost of debt?

 

 

 

 

5. Mullineaux Corporation has a target capital structure of 75 percent common stock and 25 percent debt. Its cost of equity is 14 percent, and the cost of debt is 8 percent. The relevant tax rate is 30 percent.

 

What is Mullineaux’s WACC?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. The Saunders Investment Bank has the following financing outstanding.

 

Debt:                  160,000 bonds with a coupon rate of 12 percent and a current price quote of 113.0; the bonds have 20 years to maturity. 330,000 zero coupon bonds with a price quote of 15.5 and 30 years until maturity.

 

Preferred stock: 250,000 shares of 10 percent preferred stock with a current price of $66, and a par value of

$100.

 

Common stock: 3,600,000 shares of common stock; the current price is $52, and the beta of the stock is .85.

 

Market:             The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.

 

What is the WACC for the company?

 

 

 

 

6. 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.

 

To find the required return on preferred stock, we can use the preferred stock pricing equation, which is the level perpetuity equation, so the required return on the company’s preferred stock is:

 

RP = D1 / P0

RP = $10 / $66

RP = .1515, or 15.15%

 

 

 

7. Which of the following tend to reinforce the argument that the financial markets are efficient?

 

1. Information spreads rapidly in today's world.
2. There is tremendous competition in the financial markets.
3. Market prices continually fluctuate.
4. Market prices react suddenly to unexpected news announcements.

 

I and III only II and IV only

I, II, and III only II, III, and IV only

I, II, III, and IV

 

 

 

 

 

 

 

 

8. 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?  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9. 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.

 

1. 1. What is Weston’s cost of equity capital?

 

 

 

 

 

1. 2. What is Weston’s unlevered cost of equity capital?

 

 

 

 

 

1. 1. What would the cost of equity be if the debt–equity ratio were 2?

 

 

 

 

 

 

1. 2. What would the cost of equity be if the debt–equity ratio were 1.0?

 

 

 

 

 

 

1. 3. What would the cost of equity be if the debt–equity ratio were zero?

 

 

 

10. 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.

 

a. What is the current value of the company?

 

 

 

 

 

 

1. 1. Suppose the company can borrow at 8 percent. What will the value of the firm be if the company takes on debt equal to 40 percent of its unlevered value?  

 

 

 

 

 

1. 2. Suppose the company can borrow at 8 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?

 

 

 

 

 

1. 1. What will the value of the firm be if the company takes on debt equal to 40 percent of its levered value?

 

 

 

 

 

1. 2. What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?

 

 

 

 

 

 

 

 

11. Your firm has a debt-equity ratio of .60. Your cost of equity is 11% and your after-tax cost of debt is 7%. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity?

 

9.50%

10.50%

 

11.00%

11.25%

 

12.00%

 

 

 

 

 

 

 

 

12. Roll Corporation (RC) currently has 510,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

 

1. RRC has a four-for-three stock split?

 

 

 

 

2. RC has a 10 percent stock dividend?

 

 

 

 

 

3. RC has a 43.5 percent stock dividend?

 

 

4. RC has a 4-for-7 reverse stock split?

 

 

 

 

 

5. Determine the new number of shares outstanding in parts (a) through (d).

 

 

 

 

 

 

 

 

 

 

13. The balance sheet for Levy Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding.

 

 

 

 

 

 

 

 

 

The company has declared a dividend of $1.60 per share. The stock goes ex-dividend tomorrow.

 

Ignoring any tax effects, what is the stock selling for today?

 

 

 

Ignoring any tax effects, what will it sell for tomorrow?

 

 

 

Ignoring any tax effects, what will the balance sheet look like after the dividends are paid?

 

 

 

 

 

 

14. The company with the common equity accounts shown here has declared a stock dividend of 10 percent when the market value of its stock is $34 per share.

 

 

 

 

 

15. What would be the number of shares outstanding after the distribution of the stock dividend?