FIN 3403
1). Whitewall Tire Co. just paid a $1.60 dividend on its common shares. If Whitewall is expected to increase its annual dividend by 2 percent per year into the foreseeable future and the current price of Whitewall’s common shares is $11.66, what is the cost of common stock for Whitewall?
2). WACC for a firm: Capital Co. has a capital structure, based on current market values, that consists of 50 percent debt, 10 percent preferred shares, and 40 percent common shares. If the returns required by investors are 8 percent, 10 percent, and 15 percent for debt, preferred equity, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.
3)Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5 percent. The stock’s current value is
a. $25.00
b. $26.92
c. $37.31
d. $40.18
(SHOW YOUR WORK)
4) What does the WACC for a firm tell us?
5) Your boss just completed computing your firm’s weighted average cost of capital. He is relieved because he says that he can now use that cost of capital to evaluate all projects that the firm is considering for the next four years. Evaluate that statement.
6). Maltese Falcone, Inc., has not checked its weighted average cost of capital for four years. Firm management claims that since Maltese has not had to raise capital for new projects since that time, they should not have to worry about their current weighted average cost of capital since they have essentially locked in their cost of capital. Critique that statement.
7). Mike’s T-Shirts, Inc., has debt claims of $400 (market value) and equity claims of $600 (market value). If the after-tax cost of debt financing is 11 percent and the cost of equity is 17 percent, what is Mike’s weighted average cost of capital?
8). The market value of a firm’s assets is $3 billion. If the market value of the firm’s liabilities is $2 billion, what is the market value of the stockholders’ investment and why?
9). Below is a partial aging of accounts receivable for Bitar Roofing Services. Fill in the rest of the information and determine Bitar’s days’ sales outstanding. How does it compare to the industry average of 40 days?
Age of Account (days) Value of Account % of Total Value
0–10 $211,000
11–30 120,360
31–45 103,220
46–60 72,800
Over 60 23,740
Total $531,120
10) What does 4/15, net 3 mean?
11). Suppose you are a financial manager at a big firm and you expect the interest rates to decline in the near future. What current asset investment strategy would you recommend the company pursue?
12). Wolfgang’s Masonry management estimates that it takes the company 27 days on average to pay off its suppliers. It also knows that it has days’ sales in inventory of 64 days and days sales’ outstanding of 32 days. How does Wolfgang’s cash conversion cycle compare to that of an industry average of 75 days?
13). You would like to own a common stock that has a record date of Friday, September 9, 2011. What is the last date that you can purchase the stock and still receive the dividend?
14). List and define four types of dividends
15). What are the key events and dates in the dividend payment process?
16). Discuss why the dividend payment process is so much simpler for private companies than for public companies.
17). Describe what the Capital Asset Pricing Model (CAPM) tells us and how to use it to evaluate whether the expected return of an asset is sufficient to compensate an investor for the risks associated with that asset.
18) Discuss which type of risk matters to investors and why.
19) Explain the concept of diversification.
20) You must choose between investing in stock A or stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given their systematic risk and decided that the expected return for both exceeds that predicted by CAPM by the same amount. In other words, both are equally attractive investments for a diversified investor. However, since you are still in school and do not have a lot of money, your investment portfolio is not diversified. You have decided to invest in the stock that has the highest expected return per unit of total risk. If the expected return and standard deviation of returns for stock A are 10 percent and 25 percent, respectively, and the expected return and standard deviation of returns for stock B are 15 percent and 40 percent, respectively, which should you choose? Assume that the risk-free rate is 5 percent.
21). CSB, Inc., has a beta of 1.35. If the expected market return is 14.5 percent and the risk-free rate is 5.5 percent, what is the appropriate required return of CSB (using the CAPM)?
