BA 350 WEEK 8 FINAL EXAMBA 350 WEEK 8 CHAPTER

27 Jul BA 350 WEEK 8 FINAL EXAMBA 350 WEEK 8 CHAPTER

BA 350 Week 8 Final
ExamBA 350 Week 8 Chapter 2 Problem 2-4,
2-7

2-4
(Income Statement)
Pearson Brothers
recently reported an EBITDA of $7.5 Million and net income of $1.8 million. It
had $2.0 million of interest expense, and its corporate tax rate was 40%. What
was its charge for depreciation and amortization?

2-7
(Corporate Tax Liability)
The Talley Corporation
had a taxable income of $365,000 from operations after all operating costs but
before (1) interest charge of $50,000, (2) dividends received of $15,000, (3)
dividends paid of $25,000, and (4) income taxes. What are the companys
marginal and average tax rates on taxable income?

Chapter 3 Problem 3-8, 3-10

3-8
(Profit Margin and Debt Ratio)
Assume you are given
the following relationships for the Clayton Corporation: Sales/total assets 1.5 Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Claytons profit margin and debt
ratio.

3-10
(Times-interest-earned ratio)
The Manor Corporation
has $500,000 of debt outstanding, and it pays an interest rate of 10% annually:
Manors annual sales are $2 million, its average tax rate is 30%, and its net
profit margin on sales is 5%. If the company does not maintain a TIE ratio of
at least 5 to 1, then its bank will refuse to renew the loan and bankruptcy
will result. What is Manors TIE ratio?

Chapter 12 Problem 12.1 12-4

12.1
(AFN Equation)
Baxter Video Products
sales are expected to increase by 20% from $5 million in 2010 to $6 million in
2011. Its assets totaled $3 million at the end of 2010. Baxter is already at
full capacity, so its assets must grow at the same rate as projected sales. At
the end of 2010, current liabilities were$1 million, consisting of $250,000 of
accounts payable, $500,000 of notes payable, and $250,000 of accruals. The
after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio
is 70%. Use the AFN equation to forecast Baxters additional funds needed for
the coming year.

12-4
(Sales Increase)
Bannister Legal Services
generated $2,000,000 in sales during 2010, and its year-end total assets were
$1,500,000. Also, at year-end 2010, current liabilities were $500,000,
consisting of $200,000 of notes payable, $200,000 of accounts payable, and
$100,000 of accruals. Looking ahead to 2011, the company estimates that its
assets must increase at the same rate as sales, its spontaneous liabilities
will increase at the same rate as sales, its profit margin will be 5%, and its
payout ratio will be 60%. How large a sales increase can the company achieve
without having to raise funds externally; that is, what is its self-supporting
growth rate?

Chapter 13 Problem 13-6,
13-7, 13-8

13-6:

Brooks Enterprises has never paid a
dividend. Free cash flow is projected to be
$80,000 and $100,000 for the next 2
years, respectively; after the second year, FCF is expected to grow at a
constant rate of 8%. The companys weighted average cost of capital is 12%.
a.
What is the terminal, or horizon, value of
operations? (Hint: Find the value of all free cash flows beyond Year 2
discounted back to Year 2.)
b. Calculate the value of Brookss operations.

13- 7

Dozier
Corporation is a fast growing supplier of office products. Analysts project the
following free cash flows (FCFs) during the next 3 years, after which FCF is
expected to grow at a constant 7% rate. Doziers weighted average cost of
capital is WACC = 13%.

YEAR
1
2 3
Free Cash Flow ($millions) -$20 $30 $40
a.)
What
is Doziers terminal, or horizon, value? (Hint: Find the value of all free cash
flows beyond year 3 discounted back to Year 3.)
b.)
What
is the current value of operations for Dozier?
c.)
Suppose
Dozier has $10 million in marketable securities, $100 million in debt, and 10
million shares of stock. What is the intrinsic price per share?

13.8

The balance sheet of Hutter
Amalgamated is shown below. If the 12/31/2010 value of operations is $756
million, what is the 12/31/2010 intrinsic market value of equity?

Assets Liabilities
and Equity

Cash $20.0 Accounts Payable
$19.0
Marketable securities
77.0 Notes
Payable 151.0
Accounts receivable
100.0
Accruals
51.0
Inventories 200.0 Total current
liabilities $221.0
Total current assets $397.0 Long term bonds 190.0
Net Plant and
equipment 279.0 Preferred stock 76.0
Common stock
(par
plus PIC) 100.0
Retained
earnings 89.0
Common equity $189.0
Total Assets $676.0 Total liabilities $676.0

Chapter 4 Problem 4-4, 4-5, 4-20, 4-22

4-4:

If you deposit money
today in an account that pays 6.5% annual interest, how long will it take to
double your money?
4-5:

You have $42,180.53 in
a brokerage account, and you plan to deposit an additional $5,000 at the end of
every future year until your account totals $250,000. You expect to earn 12%
annually on the account. How many years will it take to reach your goal?
4-20:

a. Set up an
amortization schedule for a $25,000 loan to be repaid in equal instalments at
the end of each of the next 5 years. The interest rate is 10%.
b. How large must each
annual payment be if the loan is for $50,000? Assume that the interest rate
remains at 10% and that the loan is still paid off over 5 years.
c. How large must each
payment be if the loan is for $50,000, the interest rate is 10%, and the loan
is paid off in equal installments at the end of each of the next 10 years? This
loan is for the same amount as the loan in part b, but the payments are spread
out over twice as many periods. Why are these payments not half as large as the
payments on the loan in part b?

4-22:

Washington-Pacific
invested $4 million to buy a tract of land and plant some young pine trees. The
trees can be harvested in 10 years, at which time W-P plans to sell the forest
at an expected price of $8 million. What is W-Ps expected rate of return?

Chapter 5 Problem 5-15, 5-21
5-15;

Absalom Motorss 14% coupon rate, semiannual
payment, $1,000 par value bonds that mature in 30 years are callable 5 years
from now at a price of $1,050. The bonds sell at a price of $1,353.54, and the
yield curve is flat. Assuming that interest rates in the economy are expected
to remain at their current level, what is the best estimate of the nominal
interest rate on new bonds?

5-21:

Suppose Hillard
Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par
value, a 10% coupon rate, and semiannual interest payments.
a. Two years after the bonds were issued, the
going rate of interest on bonds such as these fell to 6%. At what price would
the bonds sell?
b. Suppose that, 2 years after the initial offering,
the going interest rate had risen to 12%. At what price would the bonds sell?
c. Suppose, as in part a, that interest rates
fell to 6%, 2 years after the issue date. Suppose further that the interest
rate remained at 6% for the next 8 years. What would happen to the price of the
bonds over time?

Chapter 6 Problem 6-4, 6-10

6-4:

A stock’s returns have the following distribution:

Demand
for Probability
of Rate of return
Company’s this
Demand if this demand
Products Occuring Occurs

Weak

0.1 (50%)
Below
Average 0.2 (5)
Average 0.4 16
Above
average 0.2 25
Strong 0.1 60
1.0
Calculate the stock’s expected return, standard deviation, and coefficient of
variation.

6-10:

You have a $2 million
portfolio consisting of a $100,000 investment in each of 20different stocks.
The portfolio has a beta of 1.1. You are considering selling $100,000 worth of
one stock with a beta of 0.9 and using the proceeds to purchase another stock
with a beta of 1.4. What will the portfolios new beta be after these
transactions?

Chapter 7 Problem 7-4, 7-10

7-4:

Nicks Enchiladas Incorporated has preferred stock
outstanding that pays a dividend of $5 at the end of each year. The preferred
sells for $50 a share. What is the stocks required rate of return?

7-10:
The beta coefficient
for Stock C is bC = 0.4 and that for Stock D is bD = ?0.5. (Stock Ds beta is
negative, indicating that its rate of return rises whenever returns on most
other stocks fall. There are very few negative-beta stocks, although collection
agency and gold mining stocks are sometimes cited as examples.)
a.
If the risk-free rate is 9% and the
expected rate of return on an average stock is 13%, what are the required rates
of return on Stocks C and D?

b.
For Stock C, suppose the current price,
P0, is $25; the next expected dividend,D1, is $1.50; and the stocks expected
constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe
what would happen if the stock were not in equilibrium.

Chapter 8 Problem 8-4, 8-5, 8-6
8-4:

The current price of a
stock is $33, and the annual risk-free rate is 6%. A call option with a strike
price of $32 and with 1 year until expiration has a current value of $6.56.
What is the value of a put option written on the stock with the same exercise
price and expiration date as the call option?

8-5:
Use the Black-Scholes
Model to find the price for a call option with the following inputs: (1)
current stock price is $30, (2) strike price is $35, (3) time to expiration is
4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return
is 0.25.
8-6:

The current price of a
stock is $20. In 1 year, the price will be either $26 or $16. The annual
risk-free rate is 5%. Find the price of a call option on the stock that has a
strike price of $21 and that expires in 1 year. (Hint: Use daily compounding.)

Chapter 9 Problem 9-3, 9-8, 9-13

9-3:

Duggins
Veterinary Supplies can issue perpetual preferred stock at a price of $50 a
share with an annual dividend of $4.50 a share. Ignoring flotation costs, what
is the companys cost of preferred stock, rps?

9-8;

David Ortiz Motors has
a target capital structure of 40% debt and 60% equity. The yield to maturity on
the companys outstanding bonds is 9%, and the companys tax rate is 40%.
Ortizs CFO has calculated the companys WACC as 9.96%. What is the companys
cost of equity capital?

9-13:

Messman Manufacturing
will issue common stock to the public for $30. The expected dividend and the
growth in dividends are $3.00 per share and 5%, respectively. If the flotation
cost is 10% of the issues gross proceeds, what is the cost of external equity,
re?

BA
350 Week 8 Chapter 2 Problem 2-4, 2-7
BA
350 Week 8 Chapter 3 Problem 3-8, 3-10
BA
350 Week 8 Chapter 12 Problem 12.1 12-4
BA/350
Week 8 Chapter 13 Problem 13-6, 13-7, 13-8
BA
350 Week 8 Chapter 4 Problem 4-4, 4-5, 4-20, 4-22
BA350
Week 8 Chapter 5 Problem 5-15, 5-21
BA
350 Week 8 Chapter 6 Problem 6-4, 6-10
BA350
Week 8 Chapter 7 Problem 7-4, 7-10
BA/350
Week 8 Chapter 8 Problem 8-4, 8-5, 8-6
BA
350 Week 8 Chapter 9 Problem 9-3, 9-8, 9-13