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##### An investor is considering starting a new business.

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**Question**

1.;An investor is considering starting a new business. The company would require;$725,000 of assets, and it would be financed entirely with common stock. The investor will go;forward only if she thinks the firm can provide a 21.5% return on the invested capital, which;means that the firm must have an ROE of 22.5%. How much net income must be expected to;warrant starting the business?;2.;Helmuth Inc.'s latest net income was $1,450,000, and it had 235,000 shares outstanding.;The company wants to pay out 35% of its income as dividends. What dividend per share;should it declare?;3.;Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its;sales last year were $675,000, and its year-end receivables were $115,000. If its DSO is;less than the 45-day credit period, then customers are paying on time. Otherwise, they;are paying late. By how much are customers paying early or late? Base your answer on;this equation: DSO - Credit period = days early or late, and use a 365-day year when;calculating the DSO. A positive answer indicates late payments, while a negative answer;indicates early payments.;4.;Last year Mason Inc. had a total assets turnover of 2.55 and an equity multiplier of 1.95.;Its sales were $235,000 and its net income was $9,549. The CFO believes that the;company could have operated more efficiently, lowered its costs, and increased its net;income by $5,800 without changing its sales, assets, or capital structure. Had it cut costs;and increased its net income in this amount, by how much would the ROE have changed?;5. Muscarella Inc. has the following balance sheet and income statement data;Cash;$ 14,000;Receivable;s;60,000;Inventories;Total CA;220,000;$294,000;Net fixed;assets;Total;assets;Sales;Net income;126,000;$420,000;Accounts;payable;Other;current;liabilities;Total CL;Long-term;debt;Common;equity;Total liab.;and equity;$ 47,000;28,000;$ 75,000;70,000;275,000;$420,000;$250,000;$ 14,000;The new CFO thinks that inventories are excessive and could be lowered sufficiently to;cause the current ratio to equal the industry average, 2.75, without affecting either sales or;net income. Assuming that inventories are sold off and not replaced to get the current ratio;to the target level, and that the funds generated are used to buy back common stock at;book value, by how much would the ROE change?;6.;Rick Kish has a $120,000 stock portfolio. $45,000 is invested in a stock with a beta of;0.95 and the remainder is invested in a stock with a beta of 2.15. These are the only two;investments in his portfolio. What is his portfolios beta?;7.;ABC Company's stock has a beta of 1.75, the risk-free rate is 2.25%, and the market risk;premium is 7.50%. What is ABC's required rate of return using CAPM?;8. Ripken Iron Works believes the following probability distribution exists for its stock. What is;the standard deviation of return on the company's stock?;State of the Economy;Probability of State;Occurring;0.30;0.50;0.20;Boom;Normal;Recession;9.;Stock;A;B;C;D;10.;Stock's Expected Return;32%;12%;-8%;Joel Foster is the portfolio manager of the Go Anywhere Fund, a $3 million hedge fund that;contains the following stocks. The required rate of return on the market is 9.00% and the riskfree rate is 3.00%. What rate of return should investors expect (and require) on this fund?;Amount;$1,075,000;675,000;750,000;500,000;$3,000,000;Beta;1.20;1.50;2.40;0.75;Hazel Morrison, a mutual fund manager, has a $60 million portfolio with a beta of 1.00. The;risk-free rate is 3.25%, and the market risk premium is 6.00%. Hazel expects to receive an;additional $40 million, which she plans to invest in additional stocks. After investing the;additional funds, she wants the fund's required and expected return to be 12.00%. What must;the average beta of the new stocks be to achieve the target required rate of return?;11. Campbell's father holds just one stock, East Coast Bank (ECB), which he thinks is a very;low-risk security. Campbell agrees that the stock is relatively safe, but he wants to demonstrate;that his father's risk would be even lower if he were more diversified. Campbell obtained the;following returns data shown for West Coast Bank (WCB). Both have had less variability than;most other stocks over the past 5 years. Measured by the standard deviation of returns, by how;much would his father's historical risk have been reduced if he had held a portfolio consisting of;55% ECB and the remainder in WCB?;Year;2010;2011;2012;2013;2014;ECB;20.00%;-10.00%;35.00%;-5.00%;15.00%;WCB;25.00%;15.00%;-5.00%;-10.00%;35.00%;12.;Garvin Enterprises bonds currently sell for $875. They have a 6-year maturity, an annual;coupon of $70, and a par value of $1,000. What is their current yield?;13.;Sadik Inc.'s bonds currently sell for $1,250 and have a par value of $1,000. They pay a;$115 annual coupon and have a 15-year maturity, but they can be called in 5 years at;$1,115. What is their yield to call (YTC)?;14.;Moerdyk Corporation's bonds have a 10-year maturity, a 5.50% coupon rate with interest;paid semiannually, and a par value of $1,000. The nominal required rate of return on;these bonds is 6.75%. What is the bonds intrinsic value?;15.;Niendorf Corporation's 5-year bonds yield 8.25%, and 5-year T-bonds yield 4.50%. The;real risk-free rate is r* = 2.45%, the inflation premium for 5-year bonds is IP = 1.65%, the;default risk premium for Niendorf's bonds is DRP = 2.35% versus zero for T-bonds, and;the maturity risk premium for all bonds is found with the formula MRP = (t 1) x 0.1%;where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's;bonds?;16.;A 25-year, $1,000 par value bond has a 7.75% coupon rate with interest paid;semiannually. The bond currently sells for $800. What is the capital gains yield on these;bonds?;17.;O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 20 years.;Their nominal yield to maturity is 8.50%, they pay interest semiannually, and they sell at;a price of $875. What is the bond's nominal (annual) coupon interest rate?;View Full Attachment;Additional Requirements;Level of Detail: Show all work;Other Requirements: Formulas must be provided in excel

Paper#23312 | Written in 18-Jul-2015

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