FIN331 Financial Management and Capital Structure: Problem Set

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Financial Management and Capital Structure: Problem SetFIN3311.Which one(s) is(are) an external financing and has the flotation cost?a.Retained earningsb.Bondsc.Preferred stockd.a & be.b & c-answerRetained earnings are internal source of fund. Issuing bonds, preferred stocks, and commonstocks are external source of fund, which have the floation cost.2.The costs of financing from different sources are as follows:IEF = 5%, EEF=6%, cost of debt before tax = 5%, tax rate=20%, the size of retainedearnings=$30m. The capital structure is: We=40% and Wd=60%. Determine the WAMCC beforeand after the break point.a.4.4% 4.8%b.4.4% 5.2%c.4.6% 4.8%d.4.6% 5.2%e.4.8%5.2%5%*(1–0.2)*0.6 + 5%*0.4 = 4.4%,5%*(1–0.2)*0.6 + 6%*0.4 =4.8%3.Given D1 = $1.00 and K=10%, what is the value of the stock at 8% growth rate? If the currentprice of the stock is $50, would you buy it?a.$55, Buyb.$54, Buyc.$55, Don’td.$54,Don’te.$50, IndifferentPV=D1/(k-g)=1.00/(0.10-0.08) = $50. Since the price=PV, you are indifferent.4.For a preferred stock with the dividend amount of $2.00 each quarter, what is the PV of it with anannual discount rate of 8%? If the price of the preferred stock is $80, what is the yield (ROI, APR)of this security?a.$60, 8%b.$80, 8%c.$60, 10%d.$80,10%e.$100, 10%V0= D/k = 8/0.08 = $100. ROI = (80+8)/80 = 10%

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5.I checked the Microsoft stock price at 9:12am this morning. It was $24.88. The last 12 monthtrailing (ttm) net earnings is $14.58 billion with 9 billion shares. What is the 12 month trailingEPS and P/E ratio?a.$1.62, 15.36b.$2.26, 13.31c.$1.26, 17.88d.$2.32, 12.21e.$1.18, 20.33EPS = NE/Shares Outstanding = $14.58/9 = $1.62P/E = Price per share/Earnings per share = $24.88/$1.62 = 15.366.For a common stock with the current dividend amount of = $.70 (Do = .70), what is the (P)V of itwith an annual discount rate of 12% and the dividend is expected to grow at the rate of 10% perannum forever?a.$33.5b.$35.0c.$38.5d.$45.0e.$37.5V0= D1/ (k-g) = (0.70* 1.1)/(0.12-0.10) = 38.57.The preemptive right is important toshareholdersbecause ita.allows managers to buy additional shares below the current market price.b.willresultin higher dividends per share.c.isincludedin every corporate charter.d.protectsthe current shareholders against a dilution of their ownership interests.e.protectsbondholders, and thus enables the firm to issue debt with a relatively low interest rate.8.Which of the following statements is CORRECT?a.The constant growthmodeltakes into consideration the capital gains investors expect toearn on a stock.b.Two firms with thesameexpected dividend and growth rate must also have the same stockprice.c.It is appropriate tousethe constant growth model to estimate a stock's value even if itsgrowth rate is never expected to become constant.d.If a stock has arequiredrate of return rs= 12%, and if its dividend is expected to grow at aconstant rate of 5%, this implies that the stock’s dividend yield is also 5%.e.The price of a stockisthe present value of all expected future dividends, discounted at thedividend growth rate.Statement a is true, because the expected growth rate is also the expected capital gains yield. Allthe other statements are false.9.The FrancisCompany is expected to pay a dividend of D1= $1.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The

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company'sbetais 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. Whatis the company's current stock price?a.$28.90b.$29.62c.$30.36d.$31.12e.$31.90D1$1.25b1.15rRF4.00%RPM5.50%g6.00%rs= rRF+ b(RPM) =10.33%P0= D1/(rs−g)$28.9010.Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share.Goode's dividend is expected to grow at a constant rate of 7.00%. What was thelastdividend, D0?a.$0.95b.$1.05c.$1.16d.$1.27e.$1.40Stock price$25.00Required return11.50%Growth rate7.00%P0= D1/(rs−g), so D1= P0(rs−g) =$1.1250Last dividend = D0= D1/(1 + g)$1.0511.You must estimate the intrinsic value of Noe Technologies’ stock. The end-of-year free cashflow (FCF1) isexpected to be $27.50 million, and it is expected to grow at a constant rate of 7.0%a year thereafter. The company’s WACC is 10.0%, it has $125.0 million of long-term debt pluspreferred stock outstanding, and there are 15.0 million shares of common stock outstanding.What is the firm's estimated intrinsic value per share of common stock?a.$48.64b.$50.67c.$52.78d.$54.89e.$57.08FCF1$27.50Constant growth rate7.0%WACC10.0%Debt & preferred stock$125Shares outstanding15Total firmvalue = FCF1/(WACC−g) =$916.67Less: Value of debt & preferred-$125.00Value of equity$791.67

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Number of shares15Value per share = Equity value/Shares =$52.7812.Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00,what is itsnominal(not effective) annual rate of return?a.8.03%b.8.24%c.8.45%d.8.67%e.8.89%Pref. quarterly dividend$1.00Annual dividend = Qtrly dividend × 4 =$4.00Preferred stock price$45.00Nom. required return =Annual dividend/Price =8.89%13.Capital structure refers toa.The types of projects a firm invests in.b.The mixture of short-term and long-term debt.c.The amount of debt and equity a firm hasd.Short-term assets and short-term liabilities.e.The size, timing, and risk14.Which of the followingstatementsis CORRECT?a.When calculating the cost of debt, a company needs to adjust for taxes, because interestpayments are deductible by the paying corporation.b.When calculating the cost of preferred stock, companies must adjust for taxes, becausedividends paid on preferred stock aredeductibleby the paying corporation.c.Because of tax effects, an increase in the risk-freeratewill have a greater effect on the after-tax cost of debt than on the cost of common stock as measured by the CAPM.d.If a company’s beta increases, this will increase the cost of equity used to calculate theWACC, but only if the company does not have enough retained earnings to take care of itsequity financing and hence must issue new stock.e.Higher flotation costs reduce investors' expectedreturns, and that leads to a reduction in acompany’s WACC.Statement “a” is true, because interest payments on debt are tax deductible. The other statementsare false.15.What is the % of total financing by equity if the total $12m funding include $7.5m from debt?a.35%b.37.5%c.46.5%d.50%e.62.5%Component of capital: (LT)debt, PFD stocks, and Common Equity. Therefore (12-7.5)/12 = 37.5%

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16.The amount of retained earnings limit the size of internal equity financing. If the amount ofretained earnings is $25m, where do you have a switch from the internal to external equityfinancing in terms of the size of the total funding when the equity financing accounts for 25% ofthe total funding and the remaining is from debt?a.$150mb.$100mc.$180md.$130me.$150m25m/0.25=$100m17.Long-term debt of Topstone Industries is currently selling for $1,045. Its face value is $1,000.The issue matures in 10 years and pays an annual coupon of 8% of face. What is the before-taxcost of debt for Topstone if the company is in 30% tax bracket?a.6.75%b.7.35%c.6.85%d.7.45%e.8.35%Find YTM. N=10, PV=-1045, PMT=80, FV=1000 => I/Y= 7.35%18.Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sellsfor $925, and thecompany’stax rate is 40%. What is the component cost of debt for use in theWACC calculation?a.4.28%b.4.46%c.4.65%d.4.83%e.5.03%Coupon rate7.00%Periods/year2Maturity (yr)20Bond price$925.00Par value$1,000Tax rate40%Calculator inputs:N = 2 × 2040PV = Bond's price-$925.00PMT = Coupon rate × Par/2$35FV = Par = Maturity value$1,000I/YR3.87%Times periods/yr = before-tax cost of debt7.74%= After-tax cost of debt (A-T rd) for use in WACC4.65%19.Weaver Chocolate Co. expects to earn $3.50 per share during the current year, its expecteddividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common

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