#1

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

#2

Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

Using Rhodes Corporation’s financial statements (shown above), answer the following questions.

a.     What is the net operating profit after taxes (NOPAT) for 2013? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$______ million

b.    What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2013 $______   PRIVATE “<INPUT NAME=”answer2_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million
2012 $______   PRIVATE “<INPUT NAME=”answer3_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

c.     What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
2013 $______    PRIVATE “<INPUT NAME=”answer4_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million
2012 $ ______   PRIVATE “<INPUT NAME=”answer5_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

d.    What is the free cash flow for 2013? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
$______   PRIVATE “<INPUT NAME=”answer6_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

e.    What is the ROIC for 2013? Round your answer to two decimal places. 
  PRIVATE “<INPUT NAME=”answer7_1134241561″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______%

f.      How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

#3

Comprehensive Ratio Analysis

The Jimenez Corporation’s forecasted 2014 financial statements follow, along with some industry average ratios.

Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014

Jimenez Corporation: Forecasted Income Statement for 2014

Calculate Jimenez’s 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez’s projected strengths and weaknesses. Round DSO to the nearest whole number. Round the other ratios to one decimal place.

So, the firm appears to be   PRIVATE “<SELECT NAME=”answer28_978563920″><OPTION SELECTED>-Select-</OPTION><OPTION>badly</OPTION><OPTION>well</OPTION></SELECT>” MACROBUTTON HTMLDirect  well or badly  PRIVATE “<SELECT DISABLED><OPTION>Item 28</OPTION></SELECT>” MACROBUTTON HTMLDirect   managed.

#4

Growing Annuity Payments

You want to accumulate $3 millions by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 7.76% interest, compounded annually. You expect to get an annual raise of 5%, which will offset inflation, and you will let the amount you deposit each year also grow by 5% (i.e., your second deposit will be 5% greater than your first, the third will be 5% greater than the second, etc.). How much must your first deposit be to meet your goal? Round your answer to the nearest cent.

$__________

Required Rate of Return

Stock R has a beta of 1.5, Stock S has a beta of 0.45, the expected rate of return on an average stock is 12%, 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.

  PRIVATE “<INPUT NAME=”answer1_940659145″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ___ %

#5

CMS Corporation’s balance sheet as of today is as follows:

The bonds have an 7.9% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm’s debt?

Select the correct answer.

#6

Required Rate of Return

Stock R has a beta of 1.5, Stock S has a beta of 0.45, the expected rate of return on an average stock is 12%, 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.

  PRIVATE “<INPUT NAME=”answer1_940659145″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  _____%

#7
Nonconstant Growth Stock Valuation

Conroy Consulting Corporation (CCC) has been growing at a rate of 19% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g_0,1 = g_1,2 = 19%).

a.     If D₀= $2.00, r_s= 9% and g_L = 7%, then what is CCC’s stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations.

$______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

What is its expected dividend yield at this time? Round the answer to two decimal places. Do not round your intermediate computations.

  ______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect %

What is its capital gains yields at this time? Round the answer to two decimal places. Do not round your intermediate computations.

      PRIVATE “<INPUT NAME=”answer3_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   ______    PRIVATE “<INPUT NAME=”answer1_1964765327″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect %

b.    Now assume that CCC’s period of supernormal growth is to last another 5 years rather than 2 years (g_0,1 = g_1,2 = g_2,3 = g_3,4 = g_4,5 = 19%). How would this affect its price, dividend yield, and capital gains yield?
  PRIVATE “<SELECT NAME=”answer4_1964765327″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION><OPTION>IV</OPTION><OPTION>V</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 4</OPTION></SELECT>” MACROBUTTON HTMLDirect   Select from the following: _______
I.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
II.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
III.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
IV.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period.
V.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period.

c.     What will CCC’s dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) Round the answers to two decimal places. Do not round your intermediate computations.

d.     

e.    Of what interest to investors is the relationship over time between dividend yield and capital gains yield?
  PRIVATE “<SELECT NAME=”answer7_1964765327″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION><OPTION>IV</OPTION><OPTION>V</OPTION></SELECT>” MACROBUTTON HTMLDirect Select from the following:______
I.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold.
II.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized.
III.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold.
IV.It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate.
V.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year.

#8

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binomial model, what is the option’s value? (Hint: Use daily compounding.)

#9

Refer to Exhibit 9.1. What is the best estimate of the firm’s WACC?

#10

NPV and IRR Analysis

Cummings Products Company is considering two mutually exclusive investments whose expected net cash flows are as follows:

a.     Construct NPV profiles for Projects A and B.

Select the correct graph.

The correct graph (A, B, C or D) _____

b.    What is each project’s IRR? Round your answers to two decimal places. 

Project A   PRIVATE “<INPUT NAME=”answer2_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____% 

Project B   PRIVATE “<INPUT NAME=”answer3_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____%

c.     Calculate the two projects’ NPVs, if you were told that each project’s cost of capital was 10%. Round your answers to the nearest cent.

Project A    $_____    PRIVATE “<INPUT NAME=”answer4_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Project B    $_____    PRIVATE “<INPUT NAME=”answer5_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Which project, if either, should be selected? (A or B)  _____
  PRIVATE “<SELECT NAME=”answer6_296577758″><OPTION SELECTED>-Select-</OPTION><OPTION>Project A</OPTION><OPTION>Project B</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 6</OPTION></SELECT>” MACROBUTTON HTMLDirect   

Calculate the two projects’ NPVs, if the cost of capital was 17%. Round your answers to the nearest cent.

Project A    $_____    PRIVATE “<INPUT NAME=”answer7_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Project B    $_____    PRIVATE “<INPUT NAME=”answer8_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

What would be the proper choice? (A or B?)  _____
  PRIVATE “<SELECT NAME=”answer9_296577758″><OPTION SELECTED>-Select-</OPTION><OPTION>Project A</OPTION><OPTION>Project B</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 9</OPTION></SELECT>” MACROBUTTON HTMLDirect   

d.    What is each project’s MIRR at a cost of capital of 10%? (Hint: Note that B is a 6-year project.) Round your answers to two decimal places. 

Project A   PRIVATE “<INPUT NAME=”answer10_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____% 

Project B   PRIVATE “<INPUT NAME=”answer11_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____% 

What is each project’s MIRR at a cost of capital of 17%? (Hint: Note that B is a 6-year project.) Round your answer to two decimal places. 

Project A   PRIVATE “<INPUT NAME=”answer12_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____% 

Project B   PRIVATE “<INPUT NAME=”answer13_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____%

e.    What is the crossover rate? Round your answer to two decimal places.
  PRIVATE “<INPUT NAME=”answer14_296577758″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   _____% 

What is its significance?
  PRIVATE “<SELECT NAME=”answer15_296577758″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 15</OPTION></SELECT>” MACROBUTTON HTMLDirect   Select from the following: _______
I.The crossover rate has no significance in capital budgeting analysis. 
II.If the cost of capital is greater than the crossover rate, both the NPV and IRR methods will lead to the same project selection. 
III.If the cost of capital is less than the crossover rate, both the NPV and IRR methods lead to the same project selections. 

#11

Replacement Analysis

The Everly Equipment Company’s flange-lipping machine was purchased 5 years ago for $100,000. It had an expected life of 10 years when it was bought and is being depreciated by the straight-line method by $10,000 per year. As the older flange-lippers are robust and useful machines, it can be sold for $20,000 at the end of its useful life.

A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%.

The old machine can be sold today for $55,000. The firm’s tax rate is 35%, and the appropriate WACC is 12%.

a.     If the new flange-lipper is purchased, what is the amount of the initial cash flow at Year 0? Round your answer to the nearest whole dollar.
$_______    PRIVATE “<INPUT NAME=”answer1_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

b.    What are the incremental net cash flows that will occur at the end of Years 1 through 5? Round your answers to the nearest whole dollar.

c.     What is the NPV of this project? Round your answer to the nearest whole dollar.
$_______      PRIVATE “<INPUT NAME=”answer7_1652863961″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   

Should Everly replace the flange-lipper? _______  

#12

Puckett Inc. risk-adjusts its WACC to account for project risk. It uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?

#13

The capital intensity ratio is generally defined as follows:

#14

AFN Equation

Broussard Skateboard’s sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $3 million at the end of 2013. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2013, current liabilities were $1.4 million, consisting of $450,000 of accounts payable, $500,000 of notes payable, and $450,000 of accruals. The after-tax profit margin is forecasted to be 3%. Assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Do not round intermediate calculations. Round your answer to the nearest dollar.
$ _______      PRIVATE “<INPUT NAME=”answer1_982073892″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

Why is this AFN different from the one when the company pays dividends? 
  PRIVATE “<SELECT NAME=”answer2_982073892″><OPTION SELECTED>-Select-</OPTION><OPTION>I</OPTION><OPTION>II</OPTION><OPTION>III</OPTION><OPTION>IV</OPTION><OPTION>V</OPTION></SELECT>” MACROBUTTON HTMLDirect    PRIVATE “<SELECT DISABLED><OPTION>Item 2</OPTION></SELECT>” MACROBUTTON HTMLDirect  Select from the following: ______ 
I. Under this scenario the company would have a lower level of retained earnings which would reduce the amount of additional funds needed. 
II. Under this scenario the company would have a lower level of retained earnings but this would have no effect on the amount of additional funds needed. 
III. Under this scenario the company would have a higher level of retained earnings which would reduce the amount of additional funds needed. 
IV. Under this scenario the company would have a higher level of retained earnings which would increase the amount of additional funds needed. 
V. Under this scenario the company would have a higher level of retained earnings but this would have no effect on the amount of additional funds needed.

      PRIVATE “<SELECT NAME=”answer8_1652863961″><OPTION>-Select-</OPTION><OPTION>Yes</OPTION><OPTION>No</OPTION></SELECT>” MACROBUTTON HTMLDirect  

#17

Sanchez Company has planned capital expenditures that total $2,000,000. The company wants to maintain a target capital structure that is 35% debt and 65% equity. The company forecasts that its net income this year will be $1,800,000. If the company follows a residual dividend policy, what will be its total dividend payment?

#18

Stock Split

Fauver Enterprises declared a 4-for-1 stock split last year, and this year its dividend is $1.10 per share. This total dividend payout represents a 10% increase over last year’s pre-split total dividend payout. What was last year’s dividend per share? Round your answer to the nearest cent.

$_____    PRIVATE “<INPUT NAME=”answer1_1588059250″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  

#19

Based on the information below for Benson Corporation, what is the optimal capital structure?

#20

Capital Structure Analysis

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company’s EBIT is $11.04 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 75% (based on market values) or decreasing it to 25%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 14% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.

The firm pays out all earnings as dividends; hence, its stock is a zero growth stock. Its current cost of equity, r_s, is 14%. If it increases leverage, r_s will be 16%. If it decreases leverage, r_s will be 13%.

Present situation (50% debt):
What is the firm’s WACC? Round your answer to three decimal places.
      PRIVATE “<INPUT NAME=”answer1_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect  ______%
What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
$______    PRIVATE “<INPUT NAME=”answer2_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

75% debt:
What is the firm’s WACC? Round your answer to two decimal places.
 ______ %
What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
$______    PRIVATE “<INPUT NAME=”answer4_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million

25% debt:
What is the firm’s WACC? Round your answer to two decimal places.
 ______%
What is the total corporate value? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to three decimal places.
$______    PRIVATE “<INPUT NAME=”answer6_163063973″ MAXLENGTH=”80.0″ SIZE=”8″ TYPE=”text” VALUE=””>” MACROBUTTON HTMLDirect   million