Problem set

2-4

Talbot enterprises recently reported an EBITDA of $8 Million and net income of $2.4 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for depreciation and amortization?

4-8

You want to buy a car, and a local bank will lend you 20,000,The loan will be fully amortized over 5 years(60 Months) and the nominal interest rate will be 12% with interest paid monthly. What will be the monthly loan payment? What will be the loan's EAR?

4-13

Find the present value of the following ordinary annuities (see note to Problem 2-4):

a. $400 per year for 10 years at 10 percent.

b. $200 per year for 5 years at 5 percent.

c. $400 per year for 5 years at 0 percent.

d. Now rework parts a, b, and c assuming that payments are made at the beginning of each year; that is, they are annuities due.

4-21

Hanebury Corporation’s current sales were $12 million. Sales were $6 million 5 years earlier.

a. To the nearest percentage point, at what rate have sales been growing?

b. Suppose someone calculated the sales growth for Hanebury Corporation in part a as follows: “Sales doubled in 5 years. This represents a growth of 100 percent in 5 years, so, dividing 100 percent by 5, we find the growth rate to be 20 percent per year.” Explain what is wrong with this calculation.

5-9

The Garraty Company has two bonds issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S a maturity of 1 year.

a.) What will be the value of each of these bonds when the going rate of interest is (1) 5 percent, (2) 8 percent, and (3) 12 percent? Assume that there is only one more interest payment to be made on bond S.

b.) Why does the longer-term (15) year bond fluctuate more when interest rates change than does the shorter-term bond (1-year)?

5-13

You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?

6-6

Calculate the stocks expected return and standard deviation.

The market and Stock J have the following probability distributions:

a. Calculate the expected rates of return for the market and Stock J. b. Calculate the standard deviations for the market and Stock J.

6-8

As an equity analyst you are concerned with what will happen to the required return to Universal Toddler Industries's stock as market conditions change. Suppose rRF = 5%, rM = 12%, and bUTI = 1.4.

a. Under current conditions, what is rUTI, the required rate of return on UTI Stock?

b. Now suppose rRF(1) increases to 6% or (2) decreases to 4%. The slope of the SML remains constant. How would this affect rM and rUTI?

c. Now assume rRF remains at 5% but rM (1) increases to 14% or (2) falls to 11%. The slope of the SML does not remain constant. How would these changes affect rUTI?

7-17

Kendra 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 company's weighted average cost of capital is 12%.

1. 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.) Round your answer to the nearest cent.

2. Calculate the value of Kendra's operations.

8-3

Assume you have been given the following information on Purcell Industries:

Black-Scholes Model Current stock price = $15 Strike price of option = $15 Time to maturity of option = 6 months Risk-free rate = 6% Variance of stock price = 0.12

d1 = 0.24495 N(d1) = 0.59675 d2 = 0.00000 N(d2) = 0.50000 According to the Black-Scholes Option Pricing Model, what is the options value.

9-7

Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd = 6%, rps = 5.8%, and rs = 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?

9-11

Radon Homes’ current EPS is $6.50. It was $4.42 five years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36. a. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) b. Calculate the next expected dividend per share, D1 .(Hint: D0 = 0.4($6.50) = $2.60.) Assume that the past growth rate will continue. c. What is Radon Homes’ cost of equity, rs?

12-1 ( don’t answer use for problem 12-2)

Broussard Skateboard sales are expected to increase by 15% from $8 million in

2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013.

Broussard is already at full capacity, so its assets must grow at the same rate as

projected sales. At the end of 2013, current liabilities were $1.4 million, consisting

of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of

accruals. The after-tax profit margin is forecasted to be 6%, and the forecasted

payout ratio is 40%. Use the AFN equation to forecast Broussards additional funds

needed for the coming year.

12-2

Refer to Problem 12-1. What would be the additional funds needed if the company’s year-end 2013 assets had been $7 million? Assume that all other numbers, including sales are the same as problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company’s “capital intensity” ratio the same or different?

Questions:

13-4

What are some actions an entrenched management might take that would harm shareholders?

13-5

How is it possible for an employee stock option to be valued even if the firm’s stock price fails to meet shareholders expectations?