Question 1
1. (Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:
2.
Describe Google’s main source of financing in the financial markets over the period.
| 3. | 4. | Google’s main source of financing in the financial markets over the period was the issuance of common stock for the amount of $985 million. |
| 5. | 6. | Google’s main source of financing in the financial markets over the period was the issuance of debt for the amount of $10 million. |
| 7. | 8. | Google’s main source of financing in the financial markets over the period was the issuance of common stock for the amount of $8,034. |
| 9. | 10. | Google’s main source of financing in the financial markets over the period was the issuance of debt for the amount of $985 million. |
Question 2
(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:
How much did Goggle invest in new capital expenditures over the period? (Round to the nearest integer.)
| The amount that Google invested in new capital expenditures over the period is $15,930 million. | ||
| The amount that Google invested in new capital expenditures over the period is $14,710 million. | ||
| The amount that Google invested in new capital expenditures over the period is $16,290 million. | ||
| The amount that Google invested in new capital expenditures over the period is $11,030 million. |
Question 3
When managers have little or no ownership in the firm, they are less likely to work energetically for the company’s shareholders. We call this type of conflict a(n) __________.
| agency problem | ||
| ownership problem | ||
| management problem | ||
| moral problem |
Question 4
(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2007-2010. The cash flow statements for Goggle, Inc. spanning the period are below. Choose the best answer for the following question using the information found in these statements:
What years did Goggle generate positive cash flow from its operations?
| Goggle has generated positive cash flow from its operations during the years 2007 and 2008. | ||
| Goggle has generated positive cash flow from its operations during the years 2008 and 2009. | ||
| Goggle has generated positive cash flow from its operations during the years 2009 and 2010. | ||
| Goggle has generated positive cash flow from its operations during the years 2008, 2009, and 2010. |
Question 5
(Analyzing the cash flow Statement) Goggle, Inc. is an Internet firm that has experienced a period of very rapid growth in revenues over the period 2008-2010. The cash flow statements for Goggle, Inc. spanning the period are below.
Based solely on the cash flow statements for 2008 through 2010, select the statement that best describes the major activities of Goggle’s management team over the period.
| Google’s management team has been investing heavily in working capital and financing them with the issuance of stocks and internally generated funds. | ||
| Google’s management team has been investing heavily in capital expenditures and financing them with the issuance of stocks and internally generated funds. | ||
| Google’s management team has been spending heavily in paying cash dividends and financing them with the issuance of stocks and internally generated funds. | ||
| Google’s management team has been investing heavily in capital expenditures and financing them with the issuance of debt and internally generated funds. |
Question 6
1. (Annuity payments) Ford Motor Company’s current incentives include 5.7 percent APR financing for 72 months or $1,100 cash back on a Mustang. Let’s assume Suzie Student wants to buy the premium Mustang convertible, which costs $34,000, and she has no down payment other than the cash back from Ford. If she chooses the $1,100 cash back, Suzie can borrow from the VTech Credit Union at 7.7 percent APR for 72 months.
· If Suzie chooses 5.7 percent APR financing for 72 months to buy the premium Mustang convertible, which costs $34,000 = PMT(62.632529), what will her monthly payment be? (Round to the nearest cent.)
· If Suzie chooses $1,100 cash back to buy the premium Mustang convertible and borrows $32,900 from the VTech Credit Union at 7.7 percent APR for 72 months, how much will her monthly payment be?
· Which option should Suzie Student choose?
Question 7
1. (Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 12 percent interest. The market’s required yield to maturity on a comparable-risk bond is 7 percent. The current market price for the bond is $1,130.
· What is your yield to maturity on the Vail bonds given the current market price of the bonds? (Round to two decimal places.)
· What should be the value of the Vail bonds given the yield to maturity on a comparable risk bond? (Round to the nearest cent.)
· Should you purchase the bond at the current market price?
Question 8
1. (Present value) Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $380,000 due in 30 years. In other words, they will need $380,000 in 30 years. Toni Flanders, the company’s CEO, is scrambling to discount the liability to the present to assist in valuing the firm’s stock. If the appropriate discount rate is 9 percent, what is the present value of the liability?
Question 9
1. (Calculating rates of return) The common stock of Placo Enterprises had a market price of $8.34 on the day you purchased it just one year ago. During the past year, the stock had paid a dividend of $0.54 and closed at a price of $11.47. What rate of return did you earn on your investment in Placo’s stock? (Round to two decimal places.)
Question 10
1. (Common stock valuation) The common stock of NCP paid $1.21 in dividends last year. Dividends are expected to grow at an annual rate of 6.40 percent for an indefinite number of years.
· If your required rate of return is 9.30 percent, what is the value of the stock for you?
· Should you make the investment?
Question 11
1. (Cost of preferred stock) The preferred stock of Walter Industries Inc. currently sells for $36.02 a share and pays $3.48 in dividends annually. What is the firm’s cost of capital for the preferred stock?
Question 12
1. (Cost of debt) Sincere Stationery Corporation needs to raise $531,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 8.7 percent.
· Compute the market value of the bonds.
· How many bonds will the firm have to issue to receive the needed funds?
· What is the firm’s after-tax cost of debt if the firm’s tax rate is 32 percent?
Question 13
1. (Weighted average cost of capital) In the spring of last year, Tempe Steel learned that the firm would need to re-evaluate the company’s weighted average cost of capital following a significant issue of debt. The firm now has financed 33 percent of its assets using debt and 57 percent using equity. Calculate the firm’s weighted average cost of capital where the firm’s borrowing rate on debt is 7.9 percent, it faces a 34 percent tax rate, and the common stockholders require a 19.7 percent rate of return.
Question 14
(Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows:
To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8.4 percent per year (paid semiannually) at the market price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03. Common stock for GBH is currently selling for $49.09 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 4.5 percent per year into the indefinite figure. The firm’s marginal tax rate is 32 percent.
· Calculate component weights of capital:
· What is the weight of debt in the firm’s capital structure?
· What is the weight of preferred stock in the firm’s capital structure?
· What is the weight of common stock in the firm’s capital structure?
· Calculate component costs of capital:
· What is the after-tax cost of debt for the firm?
· What is the cost of preferred stock for the firm?
· What is the cost of common equity for the firm?
· Calculate the firm’s weighted average cost of capital.
· What is the discount rate you should use to evaluate the warehouse project? (Round to 3 decimal places.)
