Chap 17, Prob B1
A. Bixton’s objective is to achieve a credit standing that falls, in the words of the chief financial officer, “comfortably within the ‘A’ range.” What target range would you recommend for each of the three credit measures? To remain within the 'A' range the following is recommended

Fixed Charge Coverage 3.00–4.30
Funds From Operations/Total Debt 45%–65%
Long-Term Debt/Capitalization 22%-32%
So to be comfortably within the range A the company should try to maintain higher fixed coverage ratio (near to 4.3), higher Fund from operation/total debt ratio (near to 65%) and maintain a lower long-term debt to capitalization ratio (near to 22%). B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider? Bixton CFO should take following into consideration

- Company ability to fully use non-interest tax credits (foreign tax credits) - Issuance cost related to Debt and future fixed expense in form of interest payment irrespective of the level of income - Company ability to raise debt from the market.

- Effect on Brand image or goodwill of the company on raising debt C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve? Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation the CFO of Bixton Corporation should consider the existing amount of R&D expenditure and foreign Tax credit. It is possible company may not be able to fully utilize the additional tax saving generated by taking additional debt when R&D expenditure and foreign tax credit is taken into consideration. Chap 18, Prob A10

...ProblemSets
Chapter 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
Calculating PV factor:
i= required return = 9% = 0.09
n= 10 years
Using Cash Flow of $1000 to calculate present value,
Cash flow= $1000
PV factor = 1/(1+i)^n = 0.42241
PV = $1000*0.42241= 422.41
Using Coupon Rate to calculate present value of Annuity
Cash flow= $1000 * 7.4/100 = $74
PV factor = (1/i)*(1- 1/(1+i)^n) = 6.4176
So, PV = $74*6.4176 = 474.90|
So the fair value of bond = 474.90+422.41 = $897.31
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?
Current market value = D1/(Required return – growth rate)
= 5.60/(10%-6%) = $140
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividends is now growing. What is the required return on James River preferred stock?
Required Return = Dividend/Market Price
Dividend = $3.38
Market Price = $45.25
Required Return = $3.38 / $45.25
Required Return = 7.47%
A14.(Stock Valuation) Suppose Toyota has...

...Question 1
Your finance text book sold 53,250 copies in its first year. The publishing company expects the sales to grow at a rate of 20 percent for the next three years, and by 10 percent in the fourth year. Calculate the total number of copies that the publisher expects to sell in year 3 and 4. (If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answers to the nearest whole number.)
Number of copies sold after 3 years
Number of copies sold in the fourth year
Link to Text
Question 2
Find the present value of $3,500 under each of the following rates and periods.
(If you solve this problem with algebra round intermediate calculations to 6 decimal places, in all cases round your final answer to the nearest penny.)
a. 8.9 percent compounded monthly for five years.
Present value
$
b. 6.6 percent compounded quarterly for eight years.
Present value
$
c. 4.3 percent compounded daily for four years.
Present value
$
d. 5.7 percent compounded continuously for three years.
Present value
$
2949.88
Question 3
Trigen Corp. management will invest cash flows of $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75 percent, what is the future value of these investment cash flows six years from today? (Round answer to 2 decimal places, e.g. 15.25.)
Future value
$...

...a rating that is “comfortably within the A range”, the company should try to maintain a fixed ratio of 4-4.3%, funds from operations/total debt between 60-65% and a lower long-term debt/capitalization ratio between 22-24%.
B. Before settling on these target ranges, what other factors should Bixton’s chief financial officer consider?
1. Does the company have the ability to fully utilize non-interest tax credits?
2. Does the company have the ability to raise debt from the markets?
3. Does the company have the appropriate level of income to absorb the cost associated with the issuance of the debt?
4. Does the company have the appropriate level of income to absorb the cost associated with the future fixed expense of interest payments?
5. What effect will raising debt have on consumer outlook?
C. Before deciding whether the target ranges are really appropriate for Bixton in its current financial situation, what key issues specific to Bixton must the chief financial officer resolve?
Even though the firm has larger-than-average research and development and foreign tax credits when compared to other firms in its industry, the chief financial officer should evaluate the current levels before deciding whether the suggested target ranges would be beneficial. For the target ranges to be effective, the company would need to be able to take full advantage of the additional tax savings generated by the additional debt and this may not be possible after evaluating...

...FIN571Week 2 Individual Study Guide: Text ProblemSets
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FIN571Week Two
Individual Assignment: Text ProblemSets
Top of Form
Bottom of Form
CHAPTER 5
A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond?
A10. (Dividend discount model) Assume RHM is expected to pay a total cash dividend of $5.60 next year and its dividends are expected to grow at a rate of 6% per year forever. Assuming annual dividend payments, what is the current market value of a share of RHM stock if the required return on RHM common stock is 10%?
A12. (Required return for a preferred stock) James River $3.38 preferred is selling for $45.25. The preferred dividend is non-growing. What is the required return on James River preferred stock?
B16. (Interest-rate risk) Philadelphia Electric has many bonds trading on the New York Stock Exchange. Suppose PhilEl’s bonds have identical coupon rates...

...FIN 370 Week 3 Problems 4–6 through 5–6
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4-6. A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that had excess cash on hand?
5-1A. (Compound interest) To what amount will the following investments accumulate?
$5,000 invested for 10 years at 10 percent compounded annually
$8,000 invested for 7 years at 8 percent compounded annually
$775 invested for 12 years at 12 percent compounded annually
$21,000 invested for 5 years at 5 percent compounded annually
5-4A. (Present value) What is the present value of the following future amounts?
$800 to be received 10 years from now discounted back to the present at 10 percent
$300 to be received 5 years from now discounted back to the present at 5 percent
$1,000 to be received 8 years from now discounted back to the present at 3 percent
$1,000 to be received 8 years from now discounted back to the present at 20 percent
5-5A. (Compound annuity) What is the accumulated sum of each of the...

...population mean? What is the best estimate of this value?
The value of population mean is unknown. The best estimate of this value is the sample mean of 60 pounds.
b. Explain why we need to use the t distribution. What assumption do you need to make?
According to Lind, et al. (2005), when population standard deviation is unknown, and the sample is smaller than 30, a t distribution should be used. We need to assume that the sample is from a normal population (pp. 291-293).
c. For a 90 percent confidence interval, what is the value of t?
For a 90 percent confidence interval, and df = 15, t= 1.753
d. Develop the 90 percent confidence interval for the population mean.
Xbar = 60; s = 20; n = 16
Xbar ±t(s/√n) = 60 ± 1.753 (20/√16) = 60± 1.753 (5) = 60± 8.765 = [51.24, 68.77]
e. Would it be reasonable to conclude that the population mean is 63 pounds?
Yes because 63 pounds is among the confidence intervals.
Lind Chapter 9; Exercise 28
A processor of carrots cuts the green top off each carrot, washes the carrots, and inserts six to a package. Twenty packages are inserted in a box for shipment. To test the weight of the boxes, a few were checked. The mean weight was 20.4 pounds, the standard deviation 0.5 pounds. How many boxes must the processor sample to be 95 percent confident that the sample mean does not differ from the population mean by more than 0.2 pounds?
Xbar = 20.4; s = 0.5; E= 0.2; 95% confidence level
At 95% confidence level, z = 1.96...

...Chapter 17, Problem B1
A. To remain comfortably within the ‘A’ range, the firm should avoid the lower of each scale.
Fixed Charge Coverage = 3.40 – 4.30 (Scale 3.00 – 4.30)
Total Debt = 55 – 65 (45 - 65)
Long-Term Debt = 25 – 32 (22 – 32)
B. Other factors to consider include net present value (NPV), foreign tax credits, and the price of stock.
C. Bixton must resolve the research and development, and foreign tax credits. The target ranges listed are suitable only for a debt shield. Lenders monitor long-term debt. If R&D spending increases and foreign tax credits remain balanced, then this may fall out of the 22-32 range which indicates the capital structure is losing leverage.
Chapter 18, A10
DPS1 – DPS0 = ADJ [POR(EPS1) – DPS0]
YEAR 1 = 0.75 [0.25 X $8.00 - $1.00] + $1.00 = $1.75
YEAR 2 = 0.75 [0.25 X $8.00 - $1.75] + $1.75 = $1.94
YEAR 3 = 0.75 [0.25 X $8.00 - $1.94] + $1.94 = $1.985
YEAR 4 = 0.75 [0.25 X $8.00 - $1.98] + $1.98 = $2.00
YEAR 5 = 0.75 [0.25 X $8.00 - $2.00] + $2.00 = $2.00
Chapter 18, B2
A.
(A) TOTAL DISCRETIONARY CASH FLOW (B) TOTAL EARNINGS
$ 50.00 $ 100.00
$ 70.00 $ 125.00
$ 60.00 $ 150.00
$ 20.00 $ 120.00
$ 15.00 $ 140.00
$ 215.00 $ 635.00
Maximum Payout Ratio = $215/$635 = 33.86%
B. Current...

...Chapter 13 Problems (2, 9, 11, & 14)
2) Determine the coefficient of correlation and the coefficient of determination. Interpret the association between X and Y.
X Y x^2 xy
5 13 25 65
3 15 9 45
6 7 36 42
3 12 9 36
4 13 16 52
4 11 16 44
6 9 36 54
8 5 64 40
39 85 211 378
r = (378) - (39)(85) / 8 = -36.375
√[211 - (39)^2 / 8] * √[983 - (85)^2 / 8]
r= -.8908
r^2= .7935
Since r is negative there would be a negative correlation.
9) Pennsylvania Refining Company is studying the relationship between the pump price of gasoline and the number of gallons sold. For a sample of 20 stations last Tuesday, the correlation was .78. At the .01 significance level, is the correlation in the population greater than zero?
Significance = .01
T= (.78√20- 2)/(√1-(〖.78)〗^2 )
T=5.288
DF = 18
Correlation= .78
CV= 2.552
Reject null
11) The Airline Passenger Association studied the relationship between the number of passengers on a particular flight and the cost of the flight. It seems logical that more passengers on the flight will result in more weight and more luggage, which in turn will result in higher fuel costs. For a sample of 15 flights, the correlation between the number of passengers and total fuel cost was .667. Is it reasonable to conclude that there is...

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