Homework 4/5

Homework Assignment #4 In dropbox Friday, February 19 by 11:59 p.m.

Chapter 12, Problem 4, page 408. Cash flow (LO12-2) Assume a firm has earnings before depreciation and taxes of $440,000 and depreciation of $140,000.

a. If it is in a 35 percent tax bracket, compute its cash flow.

b. If it is in a 20 percent tax bracket, compute its cash flow.

Chapter 12, Problem 16, page 410. Net present value method (LO12-4) Skyline Corp. will invest $130,000 in a project that will not begin to produce returns until after the 3rd year. From the end of the 3rd year until the end of the 12th year (10 periods), the annual cash flow will be $34,000. If the cost of capital is 12 percent, should this project be undertaken?

Chapter 13, Problem 2, page 439. Expected value and standard deviation (LO13-1) Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given next:

Possible Market Reaction	Sales in Units	Probabilities
Low response	20	.10
Moderate response	40	.30
High response	55	.40
Very high response	70	.20

a. What is the expected value of unit sales for the new product?

b. What is the standard deviation of unit sales?

Chapter 15, Problem 1, page 497. Dilution effect of stock issue (LO15-3) Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of $9 million in the current year. The company is considering the issuance of 1 million additional shares that will net $40 per share to the corporation.

a. What is the immediate dilution potential for this new stock issue?

b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year’s results. Should the new issue be undertaken based on earnings per share?

Chapter 16, Problem 3, page 529.Bond yields (LO16-2) Harold Reese must choose between two bonds:

Bond X pays $95 annual interest and has a market value of $900. It has 10 years to maturity.

Bond Z pays $95 annual interest and has a market value of $920. It has two years to maturity.

a. Compute the current yield on both bonds.

b. Which bond should he select based on your answer to part a?

c. A drawback of current yield is that it does not consider the total life of the bond. For example, the yield to maturity on Bond X is 11.21 percent. What is the yield to maturity on Bond Z?

d. Has your answer changed between parts b and c of this question?