finance question

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Problem 5 (PAge192)

Assume D1 = $1.60, Ke =
13 percent, g = 8 percent, the constant growth dividend valuation model.

Problem 10 (Page 193)

Leland Manufacturing Company
anticipates a no constant growth pattern for dividends. Dividends at the end of
year 1 are $4.00 per share and are expected to grow by 20 percent per year
until the end of year 4 (that’s three years of growth). After year 4, dividends
are expected to grow at 5 percent as far as the company can see into the
future. All dividends are to be discounted back to present at a 13 percent rate
(Ke = 13 percent).

  • a.
    Project dividends for years 1 through 4 (the first year is already given).
    Round all values that you compute to two places to the right of the
    decimal point throughout this problem.
  • b. Find
    the present value of the dividends in part a.
  • c.
    Project the dividend for the fifth year (D5).
  • d. find the present value of all future
    dividends, beginning with the fifth year’s dividend. The present value you
    find will be at the end of the fourth year. Use as follows: P4
    = D5/(Ke ? g).
  • e.
    Discount back the value found in part d for four years at 13
    percent.
  • f. Add
    together the values from parts b and e to determine the
    present value of the stock.

Problem 14 (Page 194)

Mr. Phillips of Southwest Investment Bankers is evaluating the P/E ratio of
Madison Electronics Conveyors (MEC). The firm’s P/E is currently 17. With
earning per share of $2, the stock price is $34.

The average P/E ratio in the electronic conveyor industry is presently 16.
However, MEC has an anticipated growth rate of 18 percent versus an industry
average of 12 percent, so 2 will be added to the industry P/E by Mr. Phillips.
Also, the operating risk associated with MEC is less than that for the industry
because of its long-term contract with American Airlines. For this reason, Mr.
Phillips will add a factor of 1.5 to the industry P/E ratio.

The debt-to-total-assets ratio is not as encouraging. It is 50 percent,
while the industry ratio is 40 percent. In doing his evaluation, Mr. Phillips
decides to subtract a factor of 0.5 from the industry P/E ratio. Other ratios,
including dividend payout, appear to be in line with the industry, so Mr.
Phillips will make no further adjustment along these lines.

However, he is somewhat distressed by the fact that the firm only spent 3
percent of sales on research and development last year, when the industry norm
is 7 percent. For this reason he will subtract a factor of 1.5 from the
industry P/E ratio.

Despite the relatively low research budget, Mr. Sanders observes that the
firm has just hired two of the top executives from a competitor in the
industry. He decides to add a factor of 1 to the industry P/E ratio because of
this.

  • a.
    Determine the P/E ratio for MEC based on Mr. Phillips’s analysis.
  • b.
    Multiply this times earnings per share, and comment on whether you think
    the stock might possibly be under- or overvalued in the marketplace at its
    current P/E and price.

Problem 5 (Page 228)

A firm has assets of $1,800,000 and turns
over its assets 2.5 times per year. Return on assets is 20 percent. What is its
profit margin (return on sales)?

Problem 15 (Page 230)

The
Multi-Corporation has three different operating divisions. Financial
information for each is as follows:

Clothing Appliances Sporting
Goods

Sales $3,000

Operating Income

Net Income (a/t)

Assests

  • a.
    Which division provides the highest operating margin?
  • b.
    Which division provides the lowest after-tax profit margin?
  • c.
    Which division has the lowest after-tax return on assets?
  • d.
    Compute net income (after-tax) to sales for the entire corporation.
  • e.
    Compute net income (after-tax) to assets for the entire corporation.
  • f. The
    vice president of finance suggests the assets in the Appliances division
    be sold off for $10 million and redeployed in Sporting Goods. The new $10
    million in Sporting Goods will produce the same after-tax return on assets
    as the current $8 million in that division. Recompute net income to total
    assets for the entire corporation assuming the above suggested change.
  • g.
    Explain why Sporting Goods, which has a lower return on sales than
    Appliances, has such a positive effect on return on assets

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finance question

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10.
What is the advantage of using a composite of indicators (such as the 10 leading indicators) over
simply using an individual indicator?
12. Comment on whether each of the following three industries is sensitive to the business cycle.
If it is sensitive, does it do better in a boom period or a recession?
• a.Automobiles
• b.Pharmaceuticals
• c.Housing
2.
List the five stages of the industry life cycle. How does the pattern of cash dividend payments
change over the cycle? (A general statement is all that is required.)
3.
Why might a firm begin paying stock dividends in the growth stage?
9.
For cyclical companies, why might the current P/E ratio be misleading?
510.
Assume D1 = $1.60, Ke = 13 percent, g = 8 percent. Using Formula 7–5 on page 168, for the
constant growth dividend valuation model, compute P0.
Leland Manufacturing Company anticipates a nonconstant growth pattern for dividends.
Dividends at the end of year 1 are $4.00 per share and are expected to grow by 20 percent per
year until the end of year 4 (that’s three years of growth). After year 4, dividends are expected to
grow at 5 percent as far as the company can see into the future. All dividends are to be
discounted back to present at a 13 percent rate (Ke = 13 percent).
a.Project dividends for years 1 through 4 (the first year is already given). Round all values that
you compute to two places to the right of the decimal point throughout this problem.
b.Find the present value of the dividends in part a.
c.Project the dividend for the fifth year (D5).
d.Use Formula 7–5 on page 168 to find the present value of all future dividends, beginning with
the fifth year’s dividend. The present value you find will be at the end of the fourth year. Use
Formula 7–5 as follows: P4 = D5/(Ke ? g).
e.Discount back the value found in part d for four years at 13 percent.
f.Add together the values from parts b and e to determine the present value of the stock.
14
14.
Mr. Phillips of Southwest Investment Bankers is evaluating the P/E ratio of Madison Electronics
Conveyors (MEC). The firm’s P/E is currently 17. With earning per share of $2, the stock price is
$34.The average P/E ratio in the electronic conveyor industry is presently 16. However, MEC
has an anticipated growth rate of 18 percent versus an industry average of 12 percent, so 2 will
be added to the industry P/E by Mr. Phillips. Also, the operating risk associated with MEC is less
than that for the industry because of its long-term contract with American Airlines. For this
reason, Mr. Phillips will add a factor of 1.5 to the industry P/E ratio.he debt-to-total-assets ratio
is not as encouraging. It is 50 percent, while the industry ratio is 40 percent. In doing his

evaluation, Mr. Phillips decides to subtract a factor of 0.5 from the industry P/E ratio. Other
ratios, including dividend payout, appear to be in line with the industry, so Mr. Phillips will make
no further adjustment along these lines.However, he is somewhat distressed by the fact that the
firm only spent 3 percent of sales on research and development last year, when the industry norm
is 7 percent. For this reason he will subtract a factor of 1.5 from the industry P/E ratio.Despite
the relatively low research budget, Mr. Sanders observes that the firm has just hired two of the
top executives from a competitor in the industry. He decides to add a factor of 1 to the industry
P/E ratio because of this.
• a.Determine the P/E ratio for MEC based on Mr. Phillips’s analysis.
• b.Multiply this times earnings per share, and comment on whether you think the stock
might possibly be under- or overvalued in the marketplace at its current P/E and price.
12.
What might a high dividend-payout ratio suggest to an analyst about a company’s growth
prospects?
13.
Explain the probable impact of replacement-cost accounting on the ratios of return on assets,
debt to total assets, and tim es interest earned for a firm that has substantial old fixed assets.
5.
A firm has assets of $1,800,000 and turns over its assets 2.5 times per year. Return on assets is 20
percent. What is its profit margin (return on sales)?

15.
The Multi-Corporation has three different operating divisions. Financial information for each is
as follows:

a.Which division provides the highest operating margin?
b.Which division provides the lowest after-tax profit margin?
c.Which division has the lowest after-tax return on assets?
d.Compute net income (after-tax) to sales for the entire corporation.
e.Compute net income (after-tax) to assets for the entire corporation.
f.The vice president of finance suggests the assets in the Appliances division be sold off for $10
million and redeployed in Sporting Goods. The new $10 million in Sporting Goods will produce
the same after-tax return on assets as the current $8 million in that division. Recompute net
income to total assets for the entire corporation assuming the above suggested change.
g.Explain why Sporting Goods, which has a lower return on sales than Appliances, has such a
positive effect on return on assets.

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finance question

$7.00

Description

1.

Which
one of the following would not be considered an advantage of the
corporate form of organization?

A)

Limited
liability of owners

B)

Separate
legal existence

C)

Continuous
life

D)

Government
regulation

2.

The
par value of a stock

A)

is
legally significant.

B)

reflects
the most recent market price.

C)

is
selected by the SEC.

D)

is
indicative of the worth of the stock.

3.

A
separate paid-in capital account is used to record each of the following except
the issuance of

A)

no-par
stock.

B)

par
value stock.

C)

stated
value stock.

D)

treasury
stock above cost.

4.

Paid-In
Capital in Excess of Stated Value

A)

is
credited when no-par stock does not have a stated value.

B)

is
reported as part of paid-in capital on the balance sheet.

C)

represents
the amount of legal capital.

D)

normally
has a debit balance.

5.

The
_______________ feature of preferred stock gives the preferred stockholders
the right to receive current-year dividends and unpaid prior-year dividends
before common stockholders receive any dividends.

6.

In
the financial statements, organization costs appears

A)

immediately
below Retained Earnings in the stockholders’ equity section.

B)

in
the income statement.

C)

as
part of paid-in capital in the stockholders’ equity section.

D)

as
an intangible asset.

7.

In
published annual reports

A)

subdivisions
within the stockholders’ equity section are routinely reported in detail.

B)

capital
surplus is used in place of retained earnings.

C)

the
individual sources of additional paid-in capital are often combined.

D)

retained
earnings is often not shown separately.

8.

If
stock is issued in exchange for noncash assets, the assets should be valued
at the ____________________ of the consideration ___________________ or the
assets ____________________, whichever is more clearly evident.

9.

Beckham
Company has 1,000 shares of 6%, $100 par cumulative preferred stock
outstanding at December 31, 2010. No dividends have been paid on this stock
for 2009 or 2010. Dividends in arrears at December 31, 2010 total

A)

$0.

B)

$600.

C)

$6,000.

D)

$12,000.

10.

Renner
Corporation’s December 31, 2010 balance sheet showed the following:

8% preferred stock, $20 par
value, cumulative, 20,000 shares

authorized; 15,000 shares
issued

$ 300,000

Common stock, $10 par value,
2,000,000 shares authorized;

1,950,000 shares issued,
1,930,000 shares outstanding

19,500,000

Paid-in capital in excess of
par value – preferred stock

60,000

Paid-in capital in excess of
par value – common stock

27,000,000

Retained earnings

7,650,000

Treasury stock (20,000
shares)

630,000

Renner’s
total stockholders’ equity was

A)

$55,140,000.

B)

$46,860,000.

C)

$54,510,000.

D)

$53,880,000.

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finance question

$11.00

Description

A company currently pays a dividend of $3.75 per share, D0 = 3.75. It is estimated that the company’s dividend will grow at a rate of 17% percent per year for the next 2 years, then the dividend will grow at a constant rate of 5% thereafter. The company’s stock has a beta equal to 1.8, the risk-free rate is 7.5 percent, and the market risk premium is 5 percent. What is your estimate is the stock’s current price? Round your answer to the nearest cent.

2 The beta coefficient for Stock C is bC = 0.8, and that for Stock D is bD = – 0.5. (Stock D’s 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.)
If the risk-free rate is 8%and the expected rate of return on an average stock is 14%, what are the required rates of return on Stocks C and D? Round the answers to two decimal places.
rC = ?%
rD = ?%
For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain, and describe what would happen if the stock is not in equilibrium.

I. In this situation, the expected rate of return = 12.80%. However, the required rate of return is 10%. Investors will seek to sell the stock, dropping its price to $17.05. At this price, the stock will be in equilibrium.
II. In this situation, the expected rate of return = 10%. However, the required rate of return is 12.80%. Investors will seek to buy the stock, dropping its price to $17.05. At this price, the stock will be in equilibrium.
III. In this situation, the expected rate of return = 10%. However, the required rate of return is 12.80%. Investors will seek to sell the stock, dropping its price to $17.05. At this price, the stock will be in equilibrium.
IV. In this situation, the expected rate of return = 12.80%. However, the required rate of return is 10%. Investors will seek to buy the stock, dropping its price to $17.05. At this price, the stock will be in equilibrium.
V. In this situation, both the expected rate of return and the required rate of return are equal. Therefore, the stock is in equilibrium at its current price.

3 Brushy Mountain Mining Company’s ore reserves are being depleted, so its sales are falling. Also, its pit is getting deeper each year, so its costs are rising. As a result, the company’s earnings and dividends are declining at the constant rate of 7% per year. If D0 = $4 and rs = 12%, what is the value of Brushy Mountain Mining’s stock? Round your answer to the nearest cent.

4 nvestors require a 15% rate of return on Brooks Sisters’ stock (rs = 15%).
What would the value of Brooks’s stock be if the previous dividend was D0 = $3.75 and if investors expect dividends to grow at a constant compound annual rate of (1) – 2%, (2) 0%, (3) 3%, or (4) 10%? Round your answers to the nearest cent.
$

$

$

$

Using data from part a, what is the Gordon (constant growth) model’s value for Brooks Sisters’s stock if the required rate of return is 15% and the expected growth rate is (1) 15% or (2) 20%? Are these reasonable results? Explain.

Is it reasonable to expect that a constant growth stock would have g > rs?

5 The risk-free rate of return, rRF , is 9%; the required rate of return on the market, rM, 16%; and Schuler Company’s stock has a beta coefficient of 1.4.
If the dividend expected during the coming year, D1, is $2.75, and if g is a constant 1.75%, then at what price should Schuler’s stock sell? Round your answer to the nearest cent.
$

Now, suppose the Federal Reserve Board increases the money supply, causing a fall in the risk-free rate to 6% and rM to 12%. How would this affect the price of the stock? Round your answer to the nearest cent.
$

In addition to the change in part b, suppose investors’ risk aversion declines; this fact, combined with the decline in rRF, causes rM to fall to 10%. At what price would Schuler’s stock sell? Round your answer to the nearest cent.
$

Suppose Schuler has a change in management. The new group institutes policies that increase the expected constant growth rate to 8%. Also, the new management stabilizes sales and profits, and thus causes the beta coefficient to decline from 1.4 to 0.6. Assume that rRF and rM are equal to the values in part c. After all these changes, what is Schuler’s new equilibrium price? (Note: D1 goes to $2.92.) Round your answer to the nearest cent.

6 Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 4% a year. The required rate of return on the stock, rs, is 16%. What is the value per share of the company’s stock? Round your answer to the nearest cent.

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