1) Describe (in detail) the three forms of underwriting. 2) You want to set up an education trust for a relative starting in 2014. The trust will pay $25,000 a year starting in year 2022 and ending in year 2025. The stated annual percentage rate is 8% compounded annually. a. How much will you have to invest in 2010 to achieve your objective? b. How much will you have to invest each year from 2012 2017 to achieve your objective? 3) Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock? 4) Tidewater Fishing has a current beta of 1.21. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.50? 5) Penn Corporation does not currently pay dividends. It is expected to begin paying dividends in year three (3) with a $2.50 dividend. This dividend is expected to grow at a rate of 14% for three years and then 6% every year after that forever. The required return on Penns stock is 16%. Calculate the price of Penns stock today. 6) Suppose Primerica has just paid a dividend of $1.75 per share. Sales and profits for Primerica are expected to grow at a rate of 5% per year. Its dividend is expected to grow by the same amount. If the required return is 12%, what is the value of a share of Primerica in 6 years? 7) IPOs typically experience underpricing. Describe (1) what is underpricing, (2) the evidence that underpricing occurs (be sure to include real world numbers/examples), and (3) why does underpricing occur. 8) Adelson’s Electric had beginning long-term debt of $42,511 and ending long-term debt of $48,919. The beginning and ending total debt balances were $84,652 and $78,613, respectively. The interest paid was $4,767. What is the amount of the cash flow to creditors? 9) You arrived at work today to see the CFO, COO and most of the companys top management team taken away in handcuffs. The only executive who was not arrested was the newly appointed CEO. Before you can even reach your cube, the CEO calls you into his office to explain some incomplete project analysis left on the CFOs desk. Below are the two mutually exclusive projects under consideration. Year Project A Project B 0 (171,000.00) (198,000.00) 1 46,000.00 55,000.00 2 79,000.00 34,000.00 3 51,000.00 120,000.00 4 65,000.00 25,000.00 5 23,000.00 75,000.00 IRR 17.82% 16.22% While a marketing genius, the CEO has very little experience in finance, and would like to simply choose Project A because it earns a higher return for the company. a. Explain (in words and graphically) why the CEOs reasoning could be flawed. b. If your firm has a cost of capital of 8%, how much value will the firm lose out on by choosing the project with the highest IRR? 10) Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company’s pre-tax cost of debt? If the company has a 38% marginal tax rate, what is its after tax cost of debt? 11) National Home Rentals has a beta of 1.24, a stock price of $22, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm’s cost of equity? 12) The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders? 13) Phillips Equipment has 80,000 bonds outstanding with a par value of $1,000 each and a quoted price of 103. The bonds carry a 7.75% coupon that is payable semiannually and mature in 25 years. The company also has 750,000 shares…
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