Finance 510

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Pearson Brothers recently reported an EBITDA of $6.5 million and net income of $1.95 million. It had $2.34 million of interest expense, and its corporate tax rate was 35%. What was its charge for depreciation and amortization?

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Problem 4-22

Expected Rate of return

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Washington-Pacific invests $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 15 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return? Round your answer to two decimal places.

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Problem 4-5

Number of Periods for an Annuity

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You have $35,666.34 in a brokerage account, and you plan to deposit an additional $4,000 at the end of every future year until your account totals $450,000. You expect to earn 8.8% annually on the account. How many years will it take to reach your goal? Round your answer to the nearest whole.

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roblem 4-25

Repaying a Loan

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While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual interest rate of 10.80%. If Mary repays $1,500 per year, how long (to the nearest year) will it take her to repay the loan?

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Problem 8-4

Put – Call Parity

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The current price of a stock is $36, and the annual risk-free rate is 3%. A call option with a strike price of $32 and 1 year until expiration has a current value of $6.80. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Round your answer to the nearest cent.

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roblem 5-5

Default Risk Premium

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A Treasury bond that matures in 10 years has a yield of 3%. A 10-year corporate bond has a yield of 8%. Assume that the liquidity premium on the corporate bond is 0.4%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

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Problem 7-1

DPS Calculation

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Thress Industries just paid a dividend of $2.00 a share (i.e., D0= 2.00). The dividend is expected to grow 7% a year for the next 3 years and then at 11% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to the nearest cent.

a. D1= $ [removed]

b. D2= $ [removed]

c. D3= $ [removed]

d. D4= $ [removed]

e. D5= $ [removed]

 

 

roblem 3-8

Profit Margin and Debt Ratio

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Assume you are given the following relationships for the Clayton Corporation:

Sales/total assets

1.4

Return on assets (ROA)

4%

Return on equity (ROE)

5%

1. Calculate Clayton’s profit margin. Round your answer to two decimal places.

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2. Calculate Clayton’s debt ratio. Round your answer to two decimal places.

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Problem 6-11

Required Rate of Return

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Stock R has a beta of 2.2, Stock S has a beta of 0.75, the expected rate of return on an average stock is 13%, and the risk-free rate is 7%. By how much does the required return on the riskier stock exceed the required return on the riskier stock exceed that on the less risky stock? Round your answer to two decimal places.

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Problem 4-2

Present Value of a Single Payment

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What is the present value of a security that will pay $5,000 in 30 years if securities of equal risk pay 6.1% annually? Round your answer to the nearest cent.

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Problem 3-5

Price/Earnings Ratio

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Needham Pharmaceuticals has a profit margin of 4% and an equity multiplier of 2.1. Its sales are $90 million and it has total assets of $44 million. What is its ROE? Round your answer to two decimal places.

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roblem 7-11

Nonconstant Growth Stock Valuation

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Assume that the average firm in your company’s industry is expected to grow at a constant rate of 7% and that its dividend yield is 5%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D1= D0(1 + g) = D0(1.50)] this year and 25% the following year, after which growth should return to the 7% industry average. If the last dividend paid (D0) was $1.5, what is the value per share of your firm’s stock? Round your answer to the nearest cent. Do not round your intermediate computations.

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Problem 7-8

Preferred Stock Rate of Return

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What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 12% of par, and a current market price of (a) $60, (b) $81, (c) $100, and (d) $139? Round the answers to two decimal places.

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Problem 2-10

Cash Flows

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The Moore Corporation had operating income (EBIT) of $550,000. The company’s depreciation expense is $165,000. Moore is 100% equity financed, and it faces a 40% tax rate.

1. What is the company’s net income?

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2. What is its net cash flow?

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Problem 8-3

Black-Scholes Model

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Assume you have been given the following information on Purcell Industries:

Current stock price = $18

Strike price of option = $12

Time to maturity of option = 4 months

Risk-free rate = 8%

Variance of stock return = 0.11

 

d1 = 0.24451

N(d1) = 0.40038

d2 = 0.0548

N(d2) = 0.49924

According to the Black-Scholes option pricing model, what is the option’s value? Round your answer to the nearest cent.

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Problem 5-2

Yield to Maturity for Annual Payments

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Wilson Wonders’s bonds have 7 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%. The bonds sell at a price of $1,095. What is their yield to maturity? Round your answer to two decimal places.

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Problem 6-2

Required Rate of Return

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Assume that the risk-free rate is 4% and that the expected return on the market is 14%. What is the required rate of return on a stock that has a beta of 1.3?

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Problem 5-13

Yield to Maturity and Current Yield

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You just purchased a bond that matures in 15 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.37%. What is the bond’s yield to maturity? Round your answer to two decimal places.

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