Finance for Managers Assignment Help

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Please show all the work any intermediate calculations that you would make

Finance for Managers Part I Please show all the work to get full credit and do not round up any intermediate calculations that you would make ( 10 points each) 1. Hopeful Industries just paid a dividend of D0 = $3.75. Analysts expect the company’s dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock’s current market value? 2. Renata Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 22% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? 3. The Best Company’s last dividend was $1.75. Its dividend growth rate is expected to be constant at 24% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?. 4. Derek Inc. forecasts that it will have the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the firm’s total corporate value, in millions? Year Free cash flow 1 2 3 -$20.00 $48.00 $50.50 5) A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: The firm’s common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm’s marginal tax rate is 40 percent. Calculate the firm’s weighted average cost of capital assuming the firm has exhausted all retained earnings. 6) What is the NPV for the following project if its cost of capital is 15 percent and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3 and $1,300,000 in year 4? Part II TRUE/ FALSE : Indicate whether the statement below is true or false ( 1 Point each) 1) The constant growth model is an approach to dividend valuation that assumes a constant future dividend. 2) The free cash flow valuation model is based on the same principle as the P/E valuation approach; that is, the value of a share of stock is the present value of future cash flows. 3) In common stock valuation, any action taken by the financial manager that increases risk will cause an increase in value. 4) Assuming that economic conditions remain stable, any management action that would cause current and prospective stockholders to raise their dividend expectations should decrease the firm’s value. 5) Corporate venture capital funds are subsidiaries of financial institutions, particularly banks, set up to help young firms grow and, it is hoped, become major customers of the institutions. Part III Multiple Choice: Choose the one that best explains the statement ( points 2 each) 1.Equity capital can be raised through A) the money market. B) the NYSE bond market. C) retained earnings and the stock market. D) a private placement with an insurance company as the creditor. 2.As a form of financing, equity capital A) has a maturity date. B) is only liquidated in bankruptcy. C) is temporary. D) has priority over bonds. 3.The cost of preferred stock is A) lower than the cost of long-term debt. B) higher than the cost of common stock. C) higher than the cost of long-term debt and lower than the cost of common stock. D) lower than the cost of convertible long-term debt and higher than the cost of common stock 4.Regarding the tax treatment of payments to securities holders, it is true that ________, while ________. A) interest and preferred stock dividends are not tax-deductible; common stock dividends are tax deductible B) interest and preferred stock dividends are tax-deductible; common stock dividends are not tax-deductible C) common stock dividends and preferred stock dividends are tax-deductible; interest is not taxdeductible D) common stock dividends and preferred stock dividends are not tax-deductible; interest is taxdeductible 5.The disadvantages of issuing common stock versus long-term debt include all of the following EXCEPT A) the potential dilution of earnings. B) high cost. C) no maturity date on which the par value of the issue must be repaid. D) the market perception that management thinks the firm is over-valued, causing a decline in stock price. 6.A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The accounting entry for the paid-in capital in excess of par account is A) $200,000. B) $380,000. C) $400,000. D) $800,000. 7. CCC Corp has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0% (not percentage points). Neither betas nor the risk-free rate change. What would CCC’s new required return be? Do not round your intermediate calculations. a. 16.34% b. 18.15% c. 14.19% d. 16.50% e. 14.69% 8. A mutual fund manager has a $40.00 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. The manager expects to receive an additional $29.50 million which she plans to invest in additional stocks. After investing the additional funds, she wants the fund’s required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return? Do not round your intermediate calculations. a. 2.08 b. 2.18 c. 2.60 d. 1.66 e. 1.87 9. Carson Inc.’s manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm’s returns will have the probability distribution shown below. What’s the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.) Do not round your intermediate calculations. Economic Conditions Prob. Return Strong 30% 40.0% Normal 40% 10.0% Weak 30% -16.0% a. 21.71% b. 25.18% c. 22.58% d. 17.59% e. 24.75% 10. Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio’s beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.55. What would the portfolio’s new beta be? Do not round your intermediate calculations. a. 1.60 b. 1.32 c. 1.58 d. 1.61 e. 1.38 11. Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The Tbill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.75%. Using the SML, what is the firm’s required rate of return? Do not round your intermediate calculations. a. 13.61% b. 11.57% c. 12.25% d. 14.70% e. 12.11% 12. Jim Angel holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A $50,000 1.20 B $50,000 0.80 C $50,000 1.00 D $50,000 1.20 Total $200,000 What is the portfolio’s beta? Do not round your intermediate calculations. a. 1.239 b. 1.040 c. 0.861 d. 0.809 e. 1.050 13. Porter Inc’s stock has an expected return of 12.50%, a beta of 1.25, and is in equilibrium. If the riskfree rate is 2.00%, what is the market risk premium? Do not round your intermediate calculations. a. 10.50% b. 8.48% c. 7.98% d. 8.40% e. 6.80% 14. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio? a. Your portfolio has a standard deviation of 30%, and its expected return is 15%. b. Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6. c. Your portfolio has a beta equal to 1.6, and its expected return is 15%. d. Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%. e. Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6. 15. Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? a. Adding more such stocks will reduce the portfolio’s unsystematic, or diversifiable, risk. b. Adding more such stocks will increase the portfolio’s expected rate of return. c. Adding more such stocks will reduce the portfolio’s beta coefficient and thus its systematic risk. d. Adding more such stocks will have no effect on the portfolio’s risk. e. Adding more such stocks will reduce the portfolio’s market risk but not its unsystematic risk. Part IV Essay : Explain in detail why corporation engage in capital budgeting, present the pros and cons of the various methods and point out the selection criteria. (15 points) …

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