MANAGERIAL FINANCE: Practice Problems
1. Chris recently purchased a corporate bond which yields 12%. Chris is the 39% combined federal and state tax bracket. What
2. Corporate bonds issued by Porter Corporation currently yield 9%. Municipal bonds of equal risk currently yield 5%. At wha
3. The Smith Corporation had a taxable income of $480,000 from operations after all operating costs but before 1. Interest char
4. The Yvette Corporation had $23 million of taxable income.
a. What is the company's federal income tax bill of for the year?
b. Assume the firm receives an additional $3 million of interest income from some bonds it owns. What is the tax o
c. Now assume that Yvette does not receive the interest income, but does receive an additional $3 million as dividen
5. Guillermo Villa has $60,000 invested in a stock which has a beta of 1.3 and $45,000 invested in a stock with a beta of .6. If t
6. Assume that the risk-free rate is 5% and the expected return on the market is 10%. What is the required rate of return on Por
7. Assume that the risk-free is 4% and the market risk premium is 7%. What is the expected return for the overall stock market
8. Villa Inc. stock's return has the following distribution:
9. Guillermo Industries just paid a dividend of $3.00 a share (i.e., Do= $3.00). The dividend is expected to grow 8% a year for
10. Novosel Incorporated is expected to pay a $2.00 per share dividend at the end of the year (i.e., D1 = $2.00). The dividend i
11. O'bama's Gaming stock currently sells for $30.00 a share. The stock just paid a dividend of $2.50 a share (i.e., Do = $2.50)
12. Ma's Happy Solutions has preferred stock outstanding which pays a dividend of $7.50 at the end of the year. The preferred
13. Stiles Corporation issues a new series of bonds on January 1, 1982. The bonds were sold at part ($1000), had a 12% coupo
a) What was the YTM on January 1, 1982? - Explain
b) What was the price of the bonds on January 1, 1987, 5 years later, assuming that interest rates had fallen to 10%?
c) Assume price you calculated is $1150. Find the current yield, capital gains yield, and total return on January 1, 1
d) On July 1, 2005, 6.5 years before maturity, Pennington’s bonds sold for &916.42. What was the YTM, the curren
the same and why)
Now assume that you plan to purchase an outstanding Pennington bond on March 1, 2005, wh
14. A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925. If the yield to maturity remai
15. A $1,000 fave value bond has a remaining maturity of 10 years and a required return of 9%. The bond's coupon rate is 7.4%
16. Spam Corp. is financed entirely by common stock and has a beta of 1.0. The firm is expected to generate a level, perpetual
The company's stock is selling for $50. Now the firm decides to repurchase half of its shares and substitute an equal value of d
a. cost of equity
b. overall cost of capital (WACC)
c. price-earnings ratio
d. Stock price
e. stock's beta
17. You deposit $1000 for 5 years at 4% annual interest. In 5 years, you add $10000 to your account, but the rate on your accou
18. Firm A has $10,000 in assets entirely financed with equity. Firm B also has $10,000 in assets, but these assets are financed
The variable costs of production are $1, and fixed production costs are $12,000. (To ease the calculation, assume no income ta
a. What is the operating income (EBIT) for both firms?
b. What are the earnings after interest?
c. If sales increase by 10 percent to 11,000 units, by what percentage will each firm’s earnings after interest increas
d. Why are the percentage changes different?
19. Edwards Construction currently has debt outstandind with a market value of $70,000 and a cost of 8%. The company has E
What is the value of the company's equity? What is the debt-to-value ratio?
20. Templeton Extended Care Facilities, INC. is considering the acquisition of a chain of cemeteries for $370 million. Since th
The current owners have no debt financing but Templeton plans to borrow $270 million and invest only $100 million equity in
21. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you
You are now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and wou
The post-money valuation of your firm is?
22. Assume a bank loan requires a interest payment of $85 per year and a principal payment of $1,000 at the end of the loan's e
a) How much could this loan be sold for to another bank if loans of similar quality carried a 8.5 percent interest rate?
ederal and state tax bracket. What is the bond's after-tax yield?
al risk currently yield 5%. At what tax rate would Porter be indifferent between these two bonds?
ng costs but before 1. Interest charges of $75,000; 2. Dividends received of $30,000; 3. Dividends paid of $35,000; and 4. Income taxes. Wh
e bonds it owns. What is the tax on this interest income?
an additional $3 million as dividends on some stock it owns. What is the tax on this dividend income?
ed in a stock with a beta of .6. If these are his only two investments in his portfolio, what is his portfolio's beta?
the required rate of return on Porter Green Technology Inc. stock that has a beta of 0.5?
eturn for the overall stock market? What is the required rate of return on Smith Industries stock that has a beta of 1.5?
s expected to grow 8% a year for the next 3 years, and then 12% a year thereafter. What is the expected dividend per share for each of the n
(i.e., D1 = $2.00). The dividend is expected to grow at a constant rate of 9% a year. The required rate of return on the stock, rs, is 17%. Wh
of $2.50 a share (i.e., Do = $2.50). The dividend is expected to grow at a constant rate of 8% a year. What stock price is expected 1 year fro
he end of the year. The preferred stock sells for $70 a share. What is the preferred stock's required rate of return?
at part ($1000), had a 12% coupon, and matured in 30 years, on December 31, 2011. Coupon payments are made semiannually (on June 30
t interest rates had fallen to 10%? (Show in equation form, plug all the relevant numbers and without calculation, say whether the price wo
d, and total return on January 1, 1987. Explain what each of the calculated terms indicate.
42. What was the YTM, the current yield, capital gains yield, and total return at that time? (No need to calculate them, but show in equation
ngton bond on March 1, 2005, when the going rate of interest given its risk was 15.5%. How large a check must you write to complete the tr
925. If the yield to maturity remains at its current rate, what will the price be 5 years from now
%. The bond's coupon rate is 7.4%. What is the fair value of this bond?
cted to generate a level, perpetual stream of earnings and dividends. The stock has a price-earnings ratio of 8 and a cost of equity of 12.5%.
and substitute an equal value of debt. The debt is risk-free, with a 5% interest rate. The company is exempt from corporate income taxes. A
ccount, but the rate on your account changes to 8% annual interest (for existing balance and new deposit). You leave the account untouche
sets, but these assets are financed by $5,000 in debt (with a 10 percent rate of interest) and $5,000 in equity. Both firms sell 10,000 units of
calculation, assume no income tax.)
m’s earnings after interest increase? To answer the question, determine the earnings after taxes and compute the percentage increase in thes
a cost of 8%. The company has EBIT of $5,600 that is expected to continue in perpetuity. Assume there are no taxes.
meteries for $370 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be a
nvest only $100 million equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition?
on shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors.
would invest $5 million and would receive 2 million newly issued shares in return.
of $1,000 at the end of the loan's eight-year life.
.5 percent interest rate?
0; and 4. Income taxes. What are the firm's income tax liability and its after-tax income? What are the company's marginal and average tax r
per share for each of the next 5 years?
n the stock, rs, is 17%. What is the value per share of the company's stock?
rice is expected 1 year from now? What is the required rate of return on the company's stock?
semiannually (on June 30 and December 31).
, say whether the price would be above or below the par value)
hem, but show in equation form, and conclude whether they increased, decreased or stayed
ou write to complete the transaction?
A bond’s expected return is sometimes estimated by its YTM and sometimes by its YTC. Under w
a cost of equity of 12.5%.
corporate income taxes. Assuming MM are correct, calculate the following items after the refinancing:
eave the account untouched for an additional 15 years. How much do you accumulate?
h firms sell 10,000 units of output at $2.50 per unit.
percentage increase in these earnings from the answers you derived in part b.
ermined that they will be able to borrow the majority of the money needed to buy the business.
for this acquisition?
marginal and average tax rates on taxable income?
mes by its YTC. Under what conditions would the YTM provide a better estimate and when would the YTC be better? EXPLAIN
An investor has two bonds in his portfolio that both have a face value of $1000 and pay a 10% annual coupon. Bond L
% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.
What will the value of each bond be if the going interest r
nd be if the going interest rate is 5%, 8%, and 12%? Assume that there is only one more interest payment to be made on Bond S. at its matur
ade on Bond S. at its maturity, and 15 more payments on Bond L.
Why does the longer-term bond’s price vary more when interest rates c
more when interest rates change than does that of the shorter-term bond?