The dividend yield on a stock is similar to the current yield on a bond that
Both represent the security's annual income received form the company and then divide by its price
Which of the following typically applies to preferred stock but NOT to common stock?
-par value
-dividend yield
-cumulative dividends
-it is legally considered equity
-the dividends are tax-deductible expense
cumulative dividends
Which of the following is true about the differences between debt and common stock?
A) Debt is ownership in a firm but equity is not.
B) Creditors have voting power while stockholders do not.
C) Periodic payments made to either class of security are tax d
D
As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a _______.
dividend yield and a capital gains yield
The voting procedure where shareholders grant authority to another party/individual to vote their shares is called:
proxy voting
Conner Corporation has a stock price of $32.35 per share. The last dividend (D0) was $3.42. The dividend growth rate for the company is a constant 7%. What is the company's capital gains yield and dividend yield?
Dividend Yield=D0(1+g)/P0
= 3.42(1+.07)/32.35= 11.31%
CGY=dividend growth rate= 7%
A stock with a required rate of return of 10% sells for $30 per share. The stock's dividend is expected to grow at a constant rate of 7% per year. What is the expected year-end dividend, D1, on the stock?
P0=D1/R-g
D1=P0(R-g)=30(.1-.07)=.9
The stock of MTY Golf World currently sells for $133.75 per share. The firm has a constant dividend growth rate of 7% and just paid a dividend of $6.25. If the required rate of return is 12%, what will the stock sell for one year from now?
P1=D1(1+g)/R-g
We need D1
D1= 6.25+(6.25x.07)=6.6875
P1=6.6875(1+.07)/.12-.07=143.11
Suppose a firm is expected to increase dividends by 10% in one year and by 5% in two years. After that, dividends will increase at a rate of 3% per year indefinitely. If the last dividend was $1 and the required return is 20%, what is the price of the sto
P1=D1/(1+R) + D2(1+R)^2 + P2(1+R)^2
D1=1x1.1=1.1
D2=1.1x1.05= 1.155
D3=1.155(1.03)=1.18965
We need P2
P2=D3/(R-g)= 1.18965/(.2-.03)=6.997941176
P1= 1.1/(1.2) + 1.155/(1.2)^2 + 6.99794/(1.2)^2= 6.58
The percentage of a portfolio's total value invested in a particular asset is called that asset's:
portfolio weight
Which of the following would be considered an example of systematic risk?
I. Lower trade deficit than expected
II. Quarterly profit for GM equals expectations
III. Lower quarterly sales for IBM than expected
I only
What is the portfolio beta if 25% of your funds are invested in the market portfolio, 25% in an asset with beta of 2, and the remainder in a risk-free asset?
.25(1)+ .25(2)+ .50(0)= .75
What is the expected return on asset A if it has a beta of 0.3, the expected market return is 14%, and the risk-free rate is 5%?
E(Ri)=Rf+ [E(Rm)-Rf] x Bi
=.05+ (.14-.05)x.3= .077 or 7.7%
Which of the following is not a capital component when calculating the weighted average cost of capital (WACC)?
Accounts payable
Which of the following sources of capital is generally the most expensive for an average corporation?
Newly issued common stock
The relative risk of a proposed project is best accounted for by
Adjusting the discount rate upward if the project is judged to have above average risk.
The long-term debt of Topstone Industries is currently selling for 104.50% of its face value. The issue matures in 10 years and pays an annual coupon of 8%. What is the cost of debt (before tax)?
Rd=YTM
FV=1000
PV=-1045
N=10
PMT=80
CPT I/y=7.35%
Suppose a firm has 10.4 million shares of common stock outstanding with a par value of $1.00 per share. The current market price per share is $12.00. The firm has outstanding debt with a par value of $56.0 million selling at 102% of par. What capital stru
Market value of common= 10.4 mil x 12= 124.8 mil
Market Value of bonds/debt= 56 x 102= 57.12 mil
124.8+57.12= 181.92 mil which is total capital
Debt= 57.12/181.92= .314
JLP Industries has 6.5 million shares of common stock outstanding with a market price of $14.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and s
????
E=6.5m x 14= 91m
D=25000 x 900=22.5 m
P=10m
V=D+E+P= 123.5m
WACC= (91/123.5)x14% + (10/123.5)x10% + (22.5/123.5)x7.25% x (1-34%)= 12%
Topstone Industries' preferred stock pays an annual dividend of $4.00 per share. When issued, the shares sold for their par value of $100 per share. What is the cost of preferred stock if the current price is $125 per share?
Rp= DV/P= 4/125= 3.2%
A valuable investment given up if an alternative investment is chosen is a(n):
opportunity cost
A situation in which taking one investment prevents the taking of another is called:
mutually exclusive investment decisions
For a project with conventional cash flows, if NPV is greater than zero, then:
the IRR is greater than the firm's required rate of return
A proposed project lasts 3 years and has an initial investment of $200,000. The aftertax cash flows are estimated at $60,000 for year 1, $120,000 for year 2, and $135,000 for year 3. The firm has a target debt/equity ratio of 1.2. The firm's cost of equit
D/E=1.2
D+E=V=2.2
W0=1.2/2.2
We=1/2.2
WACC= (1.2/2.2) x 9% x (1-.34) + (1/2.2) x 14%= 9.60%
CF0=-200,000
CO1= 60,000
CO2= 120,000
CO3=135,000
NPV
I=9.6
CPT NPV= 57,185
Woodgate Inc. is considering a project with the following cash flows (in millions of dollars):
Year Cash Flow
0 -$300
1 125
2 100
3 100
4 100
What is the project's payback period?
After 1 year= 125+-300= -175
After 2 years= 100+-175= -75
Payback=2+ 75/100= 2.75 years
Woodgate Inc. is considering a project with the following after-tax operating cash flows (in millions of dollars):
Year Cash Flow
0 -$300
1 125
2 75
3 200
4 100
The project has a WACC of 10%. What is the project's IRR?
CF0=-300
CO1= 125
CO2= 75
CO3=200
CO4=100
IRR=23.42%
Cochrane, Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless
OCF=EBIT x (1-Tc) + Depreciation
We need EBIT and Depreciation
EBIT= Sales- Cost- Dep
Dep= 2.1 mil/3=700,000
EBIT= 2,150,000-1,140,000-700,000= 310,000
OCF= 310,000x(1-.35)+700,000= 901,500
You purchase a machine for $12,000, depreciated straight-line to a book value of $2,000 over its 4 year life. If the machine is sold at the end of the third year for $6,000, what are the aftertax proceeds from the sale, assuming your tax rate is 34%?
DV=12,000- (12,000-2000/4)x3=4500
After tax=
6000-[(6000-4500)x34%]=5490
Your local athletic center is planning a $1.23 million expansion to its current facility. This cost will be depreciated on straightline basis over a 20year period. The expanded area is expected to generate $524,000 in additional annual sales. Variable cos
OCF=EBITx(1-Tc)+Depreciation
Find EBIT and Depreciation
Dep=1.23 mil/20=61,500
EBIT=sales-variable costs-fixed costs-depreciation
EBIT=524,000-(524,000x.48)-79,400-61,500=131,580
OCF=131580x(1-.35)+61,500= 147,027
Given the following information and assuming straight-line depreciation to zero, what is the NPV of this project?
Initial investment = $400,000
Life = 5 years
Cost savings = $150,000 per year
Sell price of the fixed assets = $30,000 in year 5
Tax rate = 3
CF0=-400,000
CO1=126,200
CO2=126,200
CO3=126,200
CO4=126,200
CO5=(126,200+19800)=146000
Cost Savings-Depreciation=EBIT
150,000-(400,000/5)=70,000
OCF=70,000x(1-.34)+80,000=126,200
After tax salvage value=30,000-[(30,000-0)x.34]=19,800
CF0=-400,000
CO1=126