FIN 419 Week 4 Activity Set Latest 2016 Version

FIN  Week 4  Activity Set   2016 Version  Questions

1.            Assume that the Financial Management Corporation’s $1,000-par-value bond had a 6.500% coupon, matured on May 15, 2020, had a given current price quote of 110.418, and had a yield to maturity (YTM) of 5.255%. Given this information, answer the following questions:

a. What was the dollar price of the bond?

b. What is the bond’s current yield?

c. Is the bond selling at par, at a discount, or at a premium? Why?

d. Compare the bond’s current yield calculated in part b to its YTM and explain why they differ

2.            Use the constant-growth model (Gordon Model) to find the value of each firm shown in the following table.

Dividend  Expected                         Dividend Growth                             Required  Return

3.            Grey Products has fixed operating costs of $389,000, variable operating costs of $16.51 per unit, and a selling price of $62.02 per unit.

a. Calculate the operating breakeven point in units.

b. Calculate the firm’s EBIT at 11,000, 12,000, and 13,000 units, respectively.

c. With 12,000 units as a base, what are the percentage changes in units sold and EBIT as

sales move from the base to the other sales levels used in part b?

d. Use the percentages computed in part c to determine the degree of operating leverage  (DOL).

e. Use the formula for degree of operating leverage to determine the DOL at 12,000 units.

3.            Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 1,000 shares of common stock. The firm pays taxes at the rate of 30%.

a. Using EBIT values of $77,000 and $115,000, determine the associated earnings per share (EPS).

B) Using $77,000 of EBIT as a base, calculate the degree of financial leverage (DFL).                                                                                                                C) Rework parts A and B assuming that the firm has $107,000 of 16% (annual interest) debt and 2,000 shares of common stock.

5.            Charter Enterprises currently has $1 million in total assets and is totally equity-financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio’s value?