1. Wtd Cost of Capital Global Technology’s capital structure is as follows:
Debt35%
Preferred Stock15
Common Equity50
The aftertax cost of debt is 6.5%; the cost of preferred stock is 10%; and the cost of common equity (in the form of retained earnings) is 13.5. Calculate Global Technology’s weighted average cost of capital.

2. As an alternative to the proportions above, an outside consultant for Global has suggested the following modifications:
Debt60%
Preferred Stock 5
Common Equity35
Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.8%; the cost of preferred stock is 11%; and the cost of common equity is 15.6%. Recalculate the firm’s weighted average cost of capital. Which plan is optimal in terms of minimizing the weighted average cost of capital?

Alternative plan raises cost of capital. The company should stick with the original financing plan to minimize costs.

3.
Cost of Common Murray Motor Co wants you to calculate its cost of common stock. During the next 12 months, the co expects to pay dividends D1 of $2.50 and the current price of its common stock is $50 per share. The expected growth rate is 8%. a. Compute the cost of existing equity (use dividend approach) b. If a $3 floatation cost is involved, compute the cost of new common stock (Kn) (hint, use proceeds of new stock, net of floatation – issuance costs – in place of market price.
Ke = DPS...

...10 Principles of FinancialManagement
The 10 simple principles that do not require knowledge of finance to understand. However, while it is not necessary to understand finance in order to understand these principles, it is necessary to understand these principles in order to understand finance. Keep in mind that although these principles may at first appear simple or even trivial, they will provide the driving force behind all that follows. These principles will weave together concepts and techniques presented in this text, thereby allowing us to focus on the logic underlying the practice of financialmanagement. In order to make the learning process easier for you as a student, we will keep returning to these principles throughout the book in the form of "Back to the Principles" boxes-tying the material together and letting you son the "forest from the trees."
PRINCIPLE 1 The Risk-Return Trade-Off-We won’t take on additional risk unless we expect to be compensated with additional return. At some point, we have all saved some money.
Why have we done this? The answer is simple: to expand our future consumption opportunities-for example, save for a house, a car, or retirement. We are able to invest those savings and earn a return on our dollars because some people would rather forgo future consumption opportunities to consumer now-maybe they’re borrowing money to open a new business or a...

...CHAPTER10
ANSWERS TO REVIEW QUESTIONS
9-1 Once the relevant cash flows have been developed, they must be analyzed to determine whether the projects are acceptable or to rank the projects in terms of acceptability in meeting the firm's goal.
9-2 The payback period is the exact amount of time required to recover the firm's initial investment in a project. In the case of a mixed stream, the cash inflows are added until their sum equals the initial investment in the project. In the case of an annuity, the payback is calculated by dividing the initial investment by the annual cash inflow.
9-3 The weaknesses of using the payback period are 1) no explicit consideration of shareholders' wealth; 2) failure to take fully into account the time factor of money; and 3) failure to consider returns beyond the payback period and, hence, overall profitability of projects.
9-4 Net present value computes the present value of all relevant cash flows associated with a project. For conventional cash flow, NPV takes the present value of all cash inflows over years 1 through n and subtracts from that the initial investment at time zero. The formula for the net present value of a project with conventional cash flows is:
NPV = present value of cash inflows - initial investment
9-5 Acceptance criterion for the net present value method is if NPV > 0, accept; if NPV < 0, reject. If the firm undertakes projects with a positive NPV, the market...

...Fall 2013 Corporate FinancialManagement
Due: Thursday, October 31st
Chapter 7 & Options
1. Assume that you sold a 100 call for $10. Calculate your profit/loss per share if the future stock prices are $80, $90, $100, $110.
What type of investor (bullish or bearish) sell a call? Why?
2. Assume that you bought a 110 put for $11. Calculate your profit/loss per share if the future stock prices are $ $90, $100, $110, $120.
What type of investor (bullish or bearish) buy a put? Why?
3. If a stock splits 5 for 3 how would the exchange adjust a put option contract with $80 as the exercise price?
4. If a stock splits 1 for 2 how would the exchange adjust a put option contract with $70 as the exercise price?
5. If a stock pays a common dividend of $2 per share, how would the exchange adjust a 100 call option contract on that stock?
6. A stock is expected to pay no dividends in the next two years. It will pay a dividend of $2.50 in year three. For years four and five the earnings are expected to increase at the rates of 30% and 25% respectively before settling on a constant growth of 7%.
a. What is current value of this stock if the required rate of return is 12%?
b. What will be the price of this stock at the end of year one from today?
c. What will be the dividend yield and capital gain yield for years 1 & 6?
d. Why are investors interested in knowing the distribution of return into dividend...

... Price and trading patterns.
(3) Strong Efficiency: It means that theprices of securities reflect all information regardless of whetheror not it is publicly available, including historical price andtrading patterns.
Question 2)
1) Discuss the implications of the seperation of ownership and management
Professional Managerial Skills
* The growth of a company comes with the demand for different skills to manage the operations of the company, meaning that the owners of a company may not entirely have the necessary skills and experience needed for certain managerial roles. Creating a management team separate from the ownership enables the company to be run by professionals who have diverse skills such as in marketing, corporate financing, public relations, among others.
Ease Performance Appraisals
* Performance appraisals are an essential part of good corporate governance as they enable managers to evaluate the company and to point out areas of improvement. It can be complex to evaluate performance where there is a lack of separation of ownership and management. But separation makes it easier for the board and those in management to be evaluated objectively. Owners are able to freely deal with the chief executive officer and other senior managers, even after the appraisals.
Capital Utilization
* Capital utilization involves the arrangements that determine...

...CHAPTER10
Cash Flows and Other Topics
in Capital Budgeting
ANSWERS TO
END-OF-CHAPTER QUESTIONS
10-1. We focus on cash flows rather than accounting profits because these are the flows that the firm receives and can reinvest. Only by examining cash flows are we able to correctly analyze the timing of the benefit or cost. Also, we are only interested in these cash flows on an after tax basis as only those flows are available to the shareholder. In addition, it is only the incremental cash flows that interest us, because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.
10-2. Although depreciation is not a cash flow item, it does affect the level of the differential cash flows over the project's life because of its effect on taxes. Depreciation is an expense item and, the more depreciation incurred, the larger are expenses. Thus, accounting profits become lower and, in turn, so do taxes, which are a cash flow item.
10-3. If a project requires an increased investment in working capital, the amount of this investment should be considered as part of the initial outlay associated with the project's acceptance. Since this investment in working capital is never "consumed," an offsetting inflow of the same...

...CHAPTER10: COST OF CAPITAL
HOMEWORK
1. The Dempere Imports Company’s EPS in 2009 was $2.82, and in 2004 it was $1.65. The company’s payout ratio is 30%, and the stock is currently valued at $41.50. Flotation costs for new equity will be 15%. Net income in 2010 is expected to be $15 million. The market-value weights of the firm’s debt and equity are 40% and 60%, respectively.
a. Based on the five-year track record, what is Dempere’s EPS growth rate? What will the dividend be in 2010?
b. Calculate the firm’s cost of retained earnings and the cost of new common equity.
c. Calculate the break-point associated with retained earnings.
d. If Dempere’s after-tax cost of debt is 8%, what is the WACC only with debt and retained earnings? With debt and new common equity?
2. TRM Consulting Services currently has the following capital structure:
Source
Book Value
Quantity
Common Stock
$6,500,000
350,000
Preferred Stock
$375,000
7,500
Debt
$4,000,000
4,000
Debt is represented by 15-year original maturity bonds, issued five years ago, with a coupon rate of 8% and are currently selling for $965. The bonds pay interest semiannually. The preferred stock pays a $5 dividend annually and is currently valued at $60 per share. Flotation costs on debt and preferred equity are negligible and can be ignored, but they will be 8% of the selling price for common stock. The common stock, which can be bought for...

...ey
Chapter 8
Stocks and Their Valuation
LEARNING OBJECTIVES
After reading this chapter, students should be able to:
• Identify some of the more important rights that come with stock ownership and define the following terms: proxy, proxy fight, takeover, and preemptive right.
• Briefly explain why classified stock might be used by a corporation and what founders’ shares are.
• Differentiate between closely held and publicly owned corporations and list the three distinct types of stock market transactions.
• Determine the value of a share of common stock when: (1) dividends are expected to grow at some constant rate, (2) dividends are expected to remain constant, and (3) dividends are expected to grow at some super-normal, or nonconstant, growth rate.
• Calculate the expected rate of return on a constant growth stock.
• Apply the total company (corporate value) model to value a firm in situations when the firm does not pay dividends or is privately held.
• Explain why a stock’s intrinsic value might differ between the total company model and the dividend growth model.
• Explain the following terms: equilibrium, marginal investor, and Efficient Markets Hypothesis (EMH); distinguish among the three levels of market efficiency; briefly explain the implications of the EMH on financial decisions; and discuss the results of empirical studies on market efficiency and...

...BFN1014 FinancialManagement I (Semester 53) GROUP ASSIGNMENT II Question 1: Assume that you are an assistant to Fernandez, senior vice presidents of a mutual fund company. Your company had been recently requested by a major client to present an investment seminar, and Fernandez, who will make the actual presentation, have asked you to help him. To illustrate the common stock valuation process, Fernandez has asked you to analyze the ABC Berhad (ABC), a semiconductor manufacturer. You are to answer the following questions. a) Describe briefly the legal rights and privileges of common stockholders. b) i. Write out a formula that can be used to value any stock, regardless of its dividend pattern. ii. What is a constant growth stock? How are constant growth stocks valued? c) Assume that ABC has a beta coefficient of 1.2, that the risk-free rate is 7%, and that the required rate of return on the market is 12%. What is ABC’s required rate of return? d) Assume that ABC is a constant growth company whose last paid dividend (D ) was
0
RM2.00 and whose dividend is expected to grow indefinitely at a 6% rate. i. What is the firm’s expected dividend stream over the next 3 years? ii. What is its current stock price? iii. What is the stock’s expected value 1 year from now? e) Now assume that the stock is currently selling at RM30.29. What is its expected rate of return? f) What would the stock price be if its dividends were expected to have zero growth? g)...