Chapter 11- Problem 1, 7, 9

Page 370

1) Calculating Costs and Break-Even

Night Shades, Inc. (NSI) manufactures biotech sunglasses. The variable materials cost is $10.48 per unit, and the variable labor cost is $6.89 per unit.

a) What is the variable cost per unit?

b) Suppose NSI incurs fixed costs of $870,000 during a year in which total production is 280,000 units. What re the total costs for the year?

c) If the selling price is $49.99 per unit, does NSI break even on a cash basis? If depreciation is $490,000 per year, what is the accounting break-even point?

7) Calculating Break-Even

In each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even

Unit Price Unit Variable Cost Fixed Cost Depreciation

$3,020 $2,275 $9,000,000 $3,100,000

46 41 73,000 150,000

11 4 1,700 930

9) Calculating Break-Even

A project has the following estimated data: price = $62 per unite; variable cots = $41 per unit; fixed costs = $15,500; required return = 12 percent: initial investment = $24,000; life= four years. Ignoring the effect of taxes, what is the accounting break-even quantity? The cash break-even quantity? The financial break-even quantity? What is the degree of operating leverage at the financial break-even level of output?

Chapter 12- Problem 1, 4

Page 407

1) Calculating Returns

Suppose a stock had an initial price of $72 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $79. Compute the percentage total return.

4) Calculating Returns

Suppose you bought a 6 percent coupon bond on e year ago to $920. The bond sells the $940 today.

a) Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

b) What was your total nominal rate of return on this investment over the past year?

c) If the inflation rate last year was 3 percent, what was your total real rate of return on this investment?

Chapter 13- Problem 11, 14

Page 445

11) Calculating Portfolio Betas

You own a stock portfolio invested 35 percent in Stock Q, 25 percent in Stock R, 30 percent in Stock S, and 10 percent in Stock T. The betas for these four stocks are .84, 1.17, 1.11, and 1.36, respectively. What is the portfolio beta?

14) Using CAPM

A stock has an expected return of 10.2 percent, the risk-free rate is 4.5 percent, and the market risk premium is 7.5 percent. What must the beta of this stock be?

Chapter 14- Problem 1, 9, 10

Page 477

1) Calculating Cost of Equity

The Muse Co. just issued a dividend of $2.75 per share on its common stock. The company is expected to maintain a constant 5.8 percent growth rate in its dividends indefinitely. If the stock sells for $59 a share, what is the company’s cost of equity?

9) Calculating WACC

Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 35 percent.

a) What is Mullineaux’s WACC?

b) The company president has approached you about Mullineaux’s capital structure. He wants to know why the company doesn’t use more preferred stock financing because its costs less than debt. What would you tell the president?

10) Taxes and WACC

Sixx AM Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 13 percent, and its cost of debt is 6 percent. If the tax rate is 35 percent, what is the company’s WACC.

Chapter 15- Problem 2, 12

2) Rights Offerings

The Clifford Corporation has announced a rights offer to raise $30 million for a new journal, the Journal of Financial Excess. The journal will review potential articles after the author pays a nonrefundable-reviewing fee of $5,000 per page. The stock currently sells for $48 per share, and there are 3.9 million shares outstanding.

a) What is the maximum possible subscription price? What is the minimum?

b) If the subscription price is set at $43 per share, how many shares must be s sold? How many rights will it take to buy one share?

c) What is the ex-rights price? What is the value of a right?

d) Show how a shareholder with 1,000 shares before the offering and no desire (or money) to buy additional shares is not harmed by the rights offer.

12) Rights

Keira Mfg. is considering rights offer. The company has determined hat the ex-rights price would be $83. The current price is $89 per share, and there are 24 million shares outstanding. The rights offer would raise a total of $50 million. What is the subscription price?

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