financial management

Chapter 4 The Valuation of Long-Term Securities Problems

10. Just today, Fawlty Foods, Inc.’s common stock paid a $1.40 annual dividend per share and had a closing price of $21. Assume that the market’s required return, or capitalization rate, for this investment is 12 percent and that dividends are expected to grow at a constant rate forever. a. Calculate the implied growth rate in dividends. b. What is the expected dividend yield? c. What is the expected capital gains yield?

11. The Great Northern Specific Railway has noncallable, perpetual bonds outstanding. When originally issued, the perpetual bonds sold for $955 per bond; today (January 1) their current market price is $1,120 per bond. The company pays a semiannual interest payment of $45 per bond on June 30 and December 31 each year.

a. As of today(January 1), what is the implied semiannual yield on these bonds?

b. Using your answer to Part (a), what is the (nominal annual ) yield on these bonds? The (effective annual) yield on these bonds?

12. Assume that everything stated in Problem 11 remains the same except that the bonds are not perpetual. Instead, they have a $1,000 par value and mature in 10 years.

a. Determine the implied semiannual yield to maturity (YTM) on these bonds. (Tip: If all you have to work with are present value tables, you can still determine an approximation of the

semiannual YTM by making use of a trial-and-error procedure coupled with interpolation. In fact, the answer to Problem 11, Part (a)- rounded to the nearest percent- gives you a good starting point for a trial-and-error approach.)

b. Using your answer to Part (a), what is the (nominal annual) YTM on these bonds? The (effective annual) YTM on these bonds?

Chapter 5 Risk and Return Self- Correction Problems

1. Suppose that your estimates of the possible one-year returns from investing in the common

stock of the A.A. Eye-Eye Corporation were as follows: Probability of 0.1 occurrence Possible return -10% 0.2 5% 0.4 20% 0.2 35% 0.1 50% a. What are the expected return and standard deviation?

b. Assume that the parameters that you just determined [under part (a)] pertain to a

normal probability distribution. What is the probability that return will be zero or less? Less than 10 percent? More than 40 percent? (Assume a normal distribution.)

Problems

2. Summer Storme is analyzing an investment. The expected one-year return on the investment

is 20 percent. The probability distribution of possible returns is approximately normal with a standard deviation of 15 percent.

a. What are the chances that the investment will result in a negative return?

b. What is the probability that the return will be greater than 10 percent? 20 percent? 30

percent? 40 percent? 50 percent?

Chapter 6 Problems 6

Stoney Mason, Inc, has sales of $6 million, a total assets turnover ratio of 6 for the year, and net profits of $120,000.

a) What is the company's return on assets or earning power?

b) The company is considering the installation of new point-of sales cash registers

throughout its stores. This equipment is expected to increase efficiency in inventory control, reduce clerical errors, and improve record keeping throughout the system. The new equipment will increase the investment in assets by 20 percent and is expected to increase the net profit margin from 2 to 3 percent. No change in sales is expected. What is the effect of the new equipment on the return on assets ratio or earning power?

Chapter 9 Problems 2

The List Company, which can earn 7 percent on money market instruments, currently has a lockbox arrangement with a New Orleans bank for its Southern customers. The bank handles $3 million a day in return for a compensating balance of 2$ million.

a) The List Company has discovered that it could divide the southern region into a

south-western region (with $1 million a day in collections, which could be handled by a Dallas bank for a $1 million compensating balance). In each case, collections would be one-half day quicker than with the New Orleans arrangement. What would be the annual savings (or cost) of dividing the southern region?

b) In an effort to retain the business, the New Orleans bank has offered to handle the

collections strictly on a fee basis (no compensating balance). What would be the maximum fee the New Orleans bank could charge and still retain List's business?