Solutions to Chapter 10 Introduction to Risk‚ Return‚ and the Opportunity Cost of Capital capital gain + dividend ($44 − $40) + $2 = = 0.15 = 15.0% initial share price $40 1. Rate of return = Dividend yield = dividend/initial share price = $2/$40 = 0.05 = 5% Capital gains yield = capital gain/initial share price = $4/$40 = 0.10 = 10% 2. Dividend yield = $2/$40 = 0.05 = 5% The dividend yield is unaffected; it is based on the initial price‚ not the final price. Capital gain = $36 – $40
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Final Exam Practice Problems 1. Firm ABC’s only outstanding debt is $100‚000 worth of coupon bond (market value). Its yield to maturity is 8%. Given that its tax rate is 40%‚ what is its effective cost of debt? Effective cost of debt = cost of debt * (1-tax rate) =8%*(1-40%)=4.8% 2. Firm ABC has a stock currently traded at $20. The next year’s dividend will be $0.20. The dividend growth rate is forecasted to be 6% forever. Risk-free rate is 3%‚ and market risk premium is 4%. Assume that Constant
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24. We can use the debt-equity ratio to calculate the weights of equity and debt. The debt of the company has a weight for long-term debt and a weight for accounts payable. We can use the weight given for accounts payable to calculate the weight of accounts payable and the weight of long-term debt. The weight of each will be: Accounts payable weight = .15/1.15 = .13 Long-term debt weight = 1/1.15 = .87 Since the accounts payable has the same cost as the overall WACC‚ we can write the equation for
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List and briefly describe the three basic questions addressed by a financial manager. What should be the goal of the financial manager of a corporation? Why? What advantages does the corporate form of organization have over sole proprietorships or partnerships? If the corporate form of business organization has so many advantages over the sole proprietorship‚ why is it so common for small businesses to initially be formed as sole proprietorships? The three areas are: 1. Capital budgeting: The
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SCHOOL OF ECONOMICS‚ FINANCE & MARKETING CORPORATE FINANCE MID SEMESTER TEST FIRST SEMESTER 2008 – Part-time STUDENT DETAILS (Please Print Clearly) Family Name: ___________________________________________________________ First Name: _____________________________________________________________ Address: _______________________________________________________________ Tel. No: (BH) ___________________________________________________________ Student Number: _________________________________________________________
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Solutions to questions 1. Finance involves three main areas—corporate finance‚ financial institutions and markets‚ and investments—that are closely related and complementary. For example‚ in corporate finance the central issues are how to acquire and employ or invest funds. To acquire funds a financial manager must deal with financial institutions‚ so some knowledge of the operations of financial institutions and markets is essential. Similarly‚ corporate finance involves investments because decisions
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UNIVERSITY SCHOOL OF BUSINESS DEPARTMENT OF ACCOUNTING‚ ECONOMICS‚ AND FINANCE FIN 318 - PRINCIPLES OF INTERNATIONAL CORPORATE FINANCE COURSE SYLLABUS Term: Spring 2013 Tuesday & Thursday 12:15 – 1:30 Main Campus I. COURSE NUMBER AND TITLE FIN 318-01 – Principles of International Corporate Finance II. INSTRUCTOR Dr. Nicole Grandmont-Gariboldi ngariboldi@stu.edu Office Phone (305) 628-6568 III. TEXTBOOK Fundamentals of Multinational Finance 3rd Ed Moffett ‚ Stonehill &Eiteman‚ Addison-Westley ISBN: 0-321-54164-2
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Introduction to Corporate Finance 1. Two Questions: what investments should the corporation make and how should it pay for those investments? a. Investment decisions involve spending money and financing decisions involving raising money b. Concepts govern good financial decisions c. Financial managers value the shareholders’ investment opportunities outside their company because of the opportunity cost of capital contributed by shareholders d. All managers and employees need to pull together
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Bendigo Bank Case Study 2011 Question (1): Capital Structure and Financing in the Banking Industry Introduction Australian banks are an interesting case of capital structure and financing considerations as far as companies go‚ in that they are regulated in a number of ways by the Australian Prudential Regulatory Authority (APRA) and the Reserve Bank of Australia (RBA). Considerations of capital structure have the effect of reducing the cost of capital and so in turn increase the value
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Principles of Corporate Finance Comprehensive Case Questions Tire City‚ Inc. 1. Evaluate Tire City’s financial health. How well is the company performing? 2. Based on Mr. Martin’s prediction for 1996 sales of $28‚206‚000‚ and for 1997 sales of $33‚847‚000 and relying on the other assumptions provided in the Tire City case‚ prepare complete pro forma forecasts of TCI’s 1996 and 1997 income statements and year-end balance sheets. As a preliminary assumption‚ assume any new financing required will
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