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Managerial Finance
Managerial Finance
Must be completed in Excel
Chapter 6
2. Assume that a bond will make payments every six months as shown on the following timeline
(using six-month periods):
0 1 2 3 20
$20 $20 $20 20+$1000
a. What is the maturity of the bond (in years)?
b. What is the coupon rate (in percent)?
c. What is the face value?
4. Suppose the current zero-coupon yield curve for risk-free bonds is as follows:
Maturity (years) 1 2 3 4 5
YTM 5.00% 5.50% 5.75% 5.95% 6.05%
a. What is the price per $100 face value of a two-year, zero-coupon, risk-free bond?
b. What is the price per $100 face value of a four-year, zero-coupon, risk-free bond?
c. What is the risk-free interest rate for a five-year maturity?
6. Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for
a price of $1034.74.
a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?
b. If the bond’s yield to maturity changes to 9% APR, what will the bond’s price be?
7. Suppose a five-year, $1000 bond with annual coupons has a price of $900 and a yield to maturity
of 6%. What is the bond’s coupon rate?
11. Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity,
a face value of $1000, and a coupon rate of 7% (annual payments). The yield to maturity
on this bond when it was issued was 6%.
a. What was the price of this bond when it was issued?
b. Assuming the yield to maturity remains constant, what is the price of the bond immediately
before it makes its first coupon payment?
c. Assuming the yield to maturity remains constant, what is the price of the bond immediately
after it makes its first coupon payment?
13. Consider the following bonds:
Bond Coupon Rate (annual payments) Maturity (years)
A 0% 15
B 0% 10
C 4% 15
D 8% 10
a. What is the percentage change in the price of each bond if its yield to maturity falls from 6%
to 5%?
b. Which of the bonds A–D is most sensitive to a 1% drop in interest rates from 6% to 5% and
why? Which bond is least sensitive? Provide an intuitive explanation for your answer.
Chapter 9
3. Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and $3
per share next year. You expect Acap’s stock price to be $52 in two years. If Acap’s equity cost of
capital is 10%:
a. What price would you be willing to pay for a share of Acap stock today, if you planned to
hold the stock for two years?
b. Suppose instead you plan to hold the stock for one year. What price would you expect to be
able to sell a share of Acap stock for in one year?
c. Given your answer in part (b), what price would you be willing to pay for a share of Acap
stock today, if you planned to hold the stock for one year? How does this compare to your
answer in part (a)?
5. NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay
this dividend forever. What is the price per share if its equity cost of capital is 15% per year?
6. Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow
by 6% per year, what is its price per share if its equity cost of capital is 11%?
12. Procter & Gamble will pay an annual dividend of $0.65 one year from now. Analysts expect
this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level
off at 2% per year. According to the dividend-discount model, what is the value of a share of
Procter & Gamble stock if the firm’s equity cost of capital is 8%?
17. Maynard Steel plans to pay a dividend of $3 this year. The company has an expected earnings
growth rate of 4% per year and an equity cost of capital of 10%.
a. Assuming Maynard’s dividend payout rate and expected growth rate remains constant, and
Maynard does not issue or repurchase shares, estimate Maynard’s share price.
b. Suppose Maynard decides to pay a dividend of $1 this year and use the remaining $2
per share to repurchase shares. If Maynard’s total payout rate remains constant, estimate
Maynard’s share price.
c. If Maynard maintains the dividend and total payout rate given in part (b), at what rate are
Maynard’s dividends and earnings per share expected to grow?
21. Sora Industries has 60 million outstanding shares, $120 million in debt, $40 million in cash,
and the following projected free cash flow for the next four years::
Year 0 1 2 3 4
Earnings and FCF Forecast ($ millions)
1 Sales 433.0 468.0 516.0 547.0 574.3
2 Growth versus prior year 8.1% 10.3% 6.0% 5.0%
3 Cost of Goods Sold (313.6) (345.7) (366.5) (384.8)
4 Gross Profit 154.4 170.3 180.5 189.5
5 Selling, General and Administrative (93.6) (103.2) (109.4) (114.9)
6 Depreciation (7.0) (7.5) (9.0) (9.5)
7 EBIT 53.8 59.6 62.1 65.2
8 Less: Income Tax at 40% (21.5) (23.8) (24.8) (26.1)
9 Plus: Depreciation 7.0 7.5 9.0 9.5
10 Less: Capital Expenditures (7.7) (10.0) (9.9) (10.4)
11 Less: Increase in NWC (6.3) (8.6) (5.6) (4.9)
12 Free Cash Flow 25.3 24.6 30.8 33.3
24. You notice that PepsiCo (PEP) has a stock price of $72.62 and EPS of $3.80. Its competitor,
the Coca-Cola Company (KO), has EPS of $1.89. Estimate the value of a share of Coca-Cola
stock using only this data.
Agenda Comparison Grid
Agenda Comparison Grid to compare the impact of the previous three presidential agendas on the healthcare item you selected for study
Exercise 4-12 Target Profit And Break-Even Analysis; Margin Of Safety CM [LO1, LO3, LO5, LO6, LO7] Ratio_Answer Main
Exercise 4-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]
Exercise 4-12 Target Profit and Break-Even Analysis; Margin of Safety; CM Ratio [LO1, LO3, LO5, LO6, LO7]
Menlo Company distributes a single product. The company’s sales and expenses for last month follow:
Total Per Unit
Sales $1,092,000 $70
Variable expenses 764,400 49
Contribution margin 327,600 $21
Fixed expenses 264,600
Net operating income $63,000
________________________________________
Requirement 1:
What is the monthly break-even point in units sold and in sales dollars? (Omit the “$” sign in your response.)
Requirement 2:
Without resorting to computations, what is the total contribution margin at the break-even point? (Omit the “$” sign in your response.)
Requirement 3:
How many units would have to be sold each month to earn a target profit of $96,600? Use the formula method.
Units sold units
Requirement 4:
Refer to the original data. Compute the company’s margin of safety in both dollar and percentage terms. (Round your percentage value to 2 decimal places. Omit the “$” and “%” signs in your response.)
Dollars Percentage
Margin of safety $
%
________________________________________
Requirement 5:
What is the company’s CM ratio? If sales increase by $91,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?(Omit the “$” and “%” signs in your response.)
CM ratio %
Increased net operating income $
Problem 4-31 Changes in Fixed and Variable Costs; Target Profit and Break-Even Analysis [LO4, LO5, LO6]
Neptune Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come onto the market that the company is anxious to produce and sell. The new toy will sell for $2.9 per unit. Enough capacity exists in the company’s plant to produce 30,900 units of the toy each month. Variable costs to manufacture and sell one unit would be $1.84, and fixed costs associated with the toy would total $48,631 per month.
The company’s Marketing Department predicts that demand for the new toy will exceed the 30,900 units that the company is able to produce. Additional manufacturing space can be rented from another company at a fixed cost of $2,432 per month. Variable costs in the rented facility would total $2.03 per unit, due to somewhat less efficient operations than in the main plant.
Requirement 1:
(a) Calculate the contribution margin per unit on anything over 30,900 units. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Contribution margin $
(b) Compute the total fixed costs to be covered if more than 30,900 units are produced. (Omit the “$” sign in your response)
Total fixed costs to be covered by remaining sales $
(c) Compute the monthly break-even point for the new toy in units and in total sales dollars. (Round your answers to the nearest whole number. Omit the “$” sign in your response.)
Monthly break-even point in unit sales units
Monthly break-even point in dollar sales $
________________________________________
Requirement 2:
How many units must be sold each month to make a monthly profit of $10,962?
Units to be sold units
Requirement 3:
If the sales manager receives a bonus of 20 cents for each unit sold in excess of the break-even point, how many units must be sold each month to earn a return of 21% on the monthly investment in fixed costs? (Round your answer to the nearest whole number.)
Total units to be sold units
Problem 6-15 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3, LO4]
[The following information applies to the questions displayed below.]
Far North Telecom, Ltd., of Ontario, has organized a new division to manufacture and sell specialty cellular telephones. The division’s monthly costs are shown below:
Manufacturing costs:
Variable costs per unit:
Direct materials $88
Variable manufacturing overhead $3
Fixed manufacturing overhead costs (total) $220,400
Selling and administrative costs:
Variable 12% of sales
Fixed (total) $163,000
________________________________________
Far North Telecom regards all of its workers as full-time employees and the company has a long-standing no layoff policy. Furthermore, production is highly automated. Accordingly, the company includes its labor costs in its fixed manufacturing overhead. The cellular phones sell for $330 each. During September, the first month of operations, the following activity was recorded:
Units produced 3,800
Units sold 3,000
________________________________________
rev: 02-09-2011
references
Section Break Problem 6-15 Comprehensive Problem with Labor Fixed [LO1, LO2, LO3, LO4]
1.
value:
20.00 points
Problem 6-15 Requirement 1
Requirement 1:
(a) Compute the unit product cost under Absorption costing. (Omit the “$” sign in your response.)
Unit product cost $
(b) Compute the unit product cost under Variable costing. (Omit the “$” sign in your response.)
Unit product cost $
2.
value:
20.00 points
Problem 6-15 Requirement 2
Requirement 2:
Prepare an absorption costing income statement for September.(Input all amounts as positive values. Omit the “$” sign in your response.)
Requirement 3:
Prepare a contribution format income statement for September using variable costing. (Input all amounts as positive values except net operating loss which should be indicated by a minus sign. Omit the “$” sign in your response.)
Requirement 4:
Assume that the company must obtain additional financing in order to continue operations. As a member of top management, would you prefer to rely on the statement in (2) above or in (3) above when meeting with a group of prospective investors?
rev: 02-09-2011
Absorption costing statement
Variable costing statement
Requirement 5:
Reconcile the absorption costing and variable costing net operating incomes in requirement 2 and 3 above. (Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.)
$ : Fixed manufacturing overhead cost deferred