Finance Review Byers

Practice Problem 1 What is the percentage return on a stock that was purchased for $70.00 paid a $5.00 dividend after one year and was then sold for $68.00?

Practice Problem 2 What is the average return, variance, and standard deviations of returns of a stock portfolio that produced returns of 10%, -10% and 15% over the past three years?

Practice Problem 3 A common stock is held for three years, during which time it receives an annual dividend of $10.00. The stock was sold for $75.00 and generated an average annual return of 15%. What price was paid for the stock?

Practice Problem 4 If a stock is purchased for $25 per share and held one year, during which time a $3.50 dividend is paid and the price climbs to $28.25, the rate of return is: 13.00% 14.00% 23.01% 27.00%  

Problem 5 You held 500 shares of 3M common stock. The company’s share price was $52.81 at the beginning of the year. During the year, the company paid a dividend of $2.56 per share, and ended the year at a price of $58.12. What is the dollar return, the percentage return, the capital gains yield, and the dividend yield for your investment in 3M?

Dollar return = 500 x ($58.12-$52.81+$2.56) = $3,935 Percent return = ($58.12-$52.81+$2.56)/$52.81 = 14.90% Capital gains yield = ($ 58.12-$52.81)/$ 52.81 = 10.05% Dividend yield = $2.56/$ 52.81 = 4.85%

Problem 6 Using the following returns, calculate the average return, the variance, and the standard deviation, for Cyberdyne stock. Year Cyberdyne 1 7% 2 14 3 - 3

Average Return = (7 + 14 - 3) / 3 = 6 Average Return = (7 + 14 - 3) / 3 = 6.00% σ2Cyberdyne = [(7 – 6)2 + (14 – 6)2 + (- 3 – 6)2] / (3 - 1) σ2Cyberdyne = 73 σCyberdyne = (73)1/2 = 8.54%

Problem 7 We expect the market portfolio to earn 12%, and T-bill yields are 4%. Lowes has a beta of 1.2. Calculate Lowes required return

Required Return = 4 + 1.2(12 - 4) = 13.6%

Problem 8 The market risk premium is 7.2. Clampett Oil’s required return is 11.2%. The risk-free rate is 5 percent. What is the firm’s beta?

Required Return = Rf + β(RM – Rf) 11.2 = 5 + β(7.2) β = (11.2 – 5) / 7.2 = 0.8611

Problem 9 ACME’s common stock paid a dividend of $1.32 last year and is expected to grow at 7 percent annually forever. What is the cost of the firm’s retained earnings if the current stock price is $35.31?

Problem 10 A firm’s long-term debt is currently selling at a price of $1,090. The issue matures in 12 years and pays an annual coupon of 7.5%. What is the before-tax cost of debt? A) 5.60% B) 6.40% C) 7.50% D) 8.90% E) 9.30%

Problem 11 Refer to the previous problem. If the firm’s marginal tax rate is 39 percent, what is the after-tax cost of debt?

Problem 12 The current market price of Fitch Company’s common stock is $47.50. The firm expects to pay a dividend of $2.90, and the growth rate is projected to be 9 percent annually. The company is in a 34 percent tax bracket. What is the cost of common equity?

Problem 13 Suppose your company has an equity beta of 1.8 and the current risk-free rate is 6.0%. If the expected market risk premium is 9.6%, what is your cost of equity capital?

Problem 14 Suppose we have a bond issue currently outstanding that has 20 years left to maturity. The coupon rate is 8% and coupons are paid semiannually. The bond is currently selling for $945.72 per $1000 bond. What is the cost of debt?

Problem 15 Your company has preferred stock that has an annual dividend of $4.50. If the current price is $22, what is the cost of preferred stock?

Problem 16 A firm has a target debt-equity ratio of 0.61. Its cost of equity is 18 percent and its cost of debt is 15 percent. If the tax rate is 36 percent, what is the firm’s WACC?

Problem 17 Given the following information, find the company’s WACC. Assume the company's tax rate is 30 percent. Debt: 4,000 7 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for $1,020; the bonds make semiannual payments. Common stock: 90,000 shares outstanding, selling for $55 per share; the beta is 1.1. Market: 7 percent market risk premium and 3 percent risk- free rate.

Weights: Market value of debt = 4000 bonds x $1020/bond = $4,080,000 Market value of equity = 90,000 shares x $55/share = $4,950,000 Total market value = $9,030,000 Wd = 4,080,000 9,030,000 = 45.18% We = 4,950,000 9,030,000 = 54.82%

Problem 18 Refer to the previous problem. What would the NPV be for the following project if it has the same risk as the overall firm? Period Cash Flow -280,000 1 55,000 2 85,000 3 95,000 4 120,000