Group assignment
1. Explain the capital budgeting evaluation techniques.
2. What is weighted average cost of capital? And differentiate it from coupon interest rate for
bond?
3. Explain the at least four assets management ratios.
4.
5. Percy Motors has a target capital structure of 40% debt and 60% common equity, with no
preferred stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax
rate is 40%. Percy’s CFO estimates that the company’s WACC is 9.96%. What is Percy’s
cost of common equity?
6. Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock
is currently selling for $97.00; but flotation costs will be 5% of the market price, so the net
price will be $92.15 per share. What is the cost of the preferred stock, including flotation?
7. It is now January 1, 2009. Today you will deposit $1,000 into a savings account that pays
8%.
a. If the bank compounds interest annually, how much will you have in your account on
January 1, 2012?
b. What will your January 1, 2012, balance be if the bank uses quarterly compounding?
c. Suppose you deposit $1,000 in three payments of $333.333 each on January 1 of 2010,
2011, and 2012. How much will you have in your account on January 1, 2012, based on
8% annual compounding?
d. How much will be in your account if the three payments begin on January 1, 2009?
8. You want to buy a house within 3 years, and you are currently saving for the down payment.
You plan to save $5,000 at the end of the first year, and you anticipate that your annual
savings will increase by 10% annually thereafter. Your expected annual return is 7%. How
much will you have for a down payment at the end of Year 3?
9. Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a
correlation coefficient with the market of –0.3, and a beta coefficient of –0.5. Stock B has an
expected return of 12%, a standard deviation of returns of 10%, a 0.7 correlation with the
market, and a beta coefficient of 1.0. Which security is riskier? Why?
10. Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is
the required rate of return on a stock with a beta of 0.7?
11. A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is
4%.
a. What is the stock’s beta?
b. If the market risk premium increased to 6%, what would happen to the stock’s required
rate of return? Assume that the risk-free rate and the beta remain unchanged
12. A company’s preferred stock currently trades at $80 per share and pays a $6 annual dividend
per share. Ignoring flotation costs, what is the firm’s cost of preferred stock?
13. A firm’s common stock has expected dividend of $1.50, market price of $30.00, growth rate
of constant 5%, and flotation cost of 4%. If the firm must issue new stock, what is its cost of
new external equity?
14. The Heuser Company’s currently outstanding bonds have a 10% coupon and a 12% yield to
maturity. Heuser believes it could issue new bonds at par that would provide a similar yield
to maturity. If its marginal tax rate is 35%, what is Heuser’s after-tax cost of debt?
15. Tunney Industries can issue perpetual preferred stock at a price of $47.50 a share. The stock
would pay a constant annual dividend of $3.80 a share. What is the company’s cost of
preferred stock?
16. Assume the following information is given
Lakomenza Company
Income Statements
Variables 2001 2000
Sales 3,074,000 2,567,000
Less Cost of Goods Sold 2,088,000 1,711,000
Gross Profit 986,000 856,000
Selling Expenses 100,000 108,000
General and Adm. Expenses 468,000 445,000
Total Operating Expenses 568,000 553,000
Operating Profit 418,000 303,000
Less Interest Expenses 93,000 91,000
Net Profit Before Tax 325,000 212,000
Less Profit Tax (at 29%) 94,250 61,480
Net Income After Tax 230,750 150,520
Less Preferred Stock Dividends 10,000 10,000
Earning Available to Common Shareholders 220,750 140,520
EPS 2.90 1.81
Lakomenza, Balance Sheets
2001 2000
Assets
Current Assets
Cash 363,000 288,000
Marketable Securities 68,000 51,000
Accounts Receivables 503,000 365,000
Inventories 289,000 300,000
Total Current Assets 1,223,000 1,004,000
Fixed Assets (at cost)
Land and Buildings 2,072,000 1,903,000
Machinery and Equipment 1,866,000 1,693,000
Furniture and Fixture 358,000 316,000
Vehicles 275,000 314,000
Others 98,000 96,000
Total Fixed Assets 4,669,000 4,322,000
Less Acc. Depreciation 2,295,000 2,056,000
Net Fixed Assets 2,374,000 2,266,000
Total Assets 3,597,000 3,270,000
Liabilities and Owners' Equity
Current Liabilities
Accounts Payable 382,000 270,000
Notes Payable 79,000 99,000
Accruals 159,000 114,000
Total Current Liabilities 620,000 483,000
Long-Term Debts 1,023,000 967,000
Total Liabilities 1,643,000 1,450,000
Shareholder's Equity
Preferred Stock –Cumulative, 2000 Share issued and Outstanding 200,000 200,000
Common Stock, Shares issued and Outstanding in 2001, 76,262; in 2000, 76,244 191,000 190,000
Paid- in Capita in Excess of Par on Common Stock 428,000 418,000
Retained Earnings 1,135,000 1,012,000
Total Stockholders' Equity 1,954,000 1,820,000
Total Liabilities and Stockholders' Equity 3,597,000 3,270,000
Required: Calculate the liquidity, activity, leverage, profit and market ratios and interpret these ratios