finance calculation.
| Chapter 12, Question 5- A share of stock with a beta of .69 now sells for $50. Investors expect the stock to pay a year-end dividend of $4. The T-bill rate is 6%, and the market risk premium is 9%. |
| a. | Suppose investors believe the stock will sell for $52 at year-end. Is the stock a good or bad buy? What will investors do? |
| Â Â The stock is a buy and the investors . |
| b. | At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Â Â Stock price | $ |
| Chapter 12 Question 4- A share of stock with a beta of .85 now sells for $60. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 4%, and the market risk premium is 7%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year? (Do not round intermediate calculations. Round your answer to 3 decimal places.) |
| Â Â Stock price | $ |
| Chapter 13, Question 1- In 2013 Caterpillar Inc. had about 758 million shares outstanding. Their book value was $40 per share, and the market price was $94.00 per share. The company’s balance sheet shows that the company had $33.5 billion of long-term debt, which was currently selling near par value. |
| a. | What was Caterpillar’s book debt-to-value ratio? (Enter your answer as a decimal rounded to 2 decimal places. Do not round intermediate calculations.) |
| Â Â Book value |
| b. | What was its market debt-to-value ratio? (Enter your answer as a decimal rounded to 2 decimal places. Do not round intermediate calculations.) |
| Â Â Market value |
| c. | Which measure should you use to calculate the company’s cost of capital? | ||||
|
| Chapter 13 Question 2-Olympic Sports has two issues of debt outstanding. One is a 8% coupon bond with a face value of $24 million, a maturity of 15 years, and a yield to maturity of 9%. The coupons are paid annually. The other bond issue has a maturity of 20 years, with coupons also paid annually, and a coupon rate of 9%. The face value of the issue is $29 million, and the issue sells for 96% of par value. The firm’s tax rate is 30%. |
| a. | What is the before-tax cost of debt for Olympic? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
| Â Â Before-tax cost of debt | % |
| b. | What is Olympic’s after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
| Â Â After-tax cost of debt | % |
| Chapter 13, Question 4-Reliable Electric is a regulated public utility, and it is expected to provide steady dividend growth of 8% per year for the indefinite future. Its last dividend was $2 per share; the stock sold for $40 per share just after the dividend was paid. What is the company’s cost of equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
| Â Â Cost of equity | % |
| Question 6, Chapter 13- Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 32% of the company’s present value, and you believe that at this capital structure the company’s debtholders will demand a return of 6% and stockholders will require 13%. The company is forecasting that next year’s operating cash flow (depreciation plus profit after tax at 40%) will be $70 million and that investment expenditures will be $32 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. |
| a. | What is the total value of Icarus? (Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole dollar amount.) |
| Â Â Total value | $ million |
| b. | What is the value of the company’s equity? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.) |
|   Company’s equity | $ million |
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