Cost of Capital = D1/Price + growth = 2.5/25 +.04 =.

14 or 14%
After Annoucement Value of Share = 1.5/(.14-.08)= 25
FV -1000
PMT -40
N 30
Rate 4.40%
PV $934.07
So Price of the Bond should be $934.07
a. Compute the free cash flows for each year of Epiphany's project.
Year 0 Year 1 Year 2 Year 3
Sales 100000 100000 100000
Less: COGS 50000 50000 50000
Less: Dep 30000 30000 30000
EBIT 20000 20000 20000
Less: Taxes 7000 7000 7000
Net Income 13000 13000 13000
Net Income $13,000 $13,000 $13,000
Add: Depriciation $30,000 $30,000 $30,000
Add: Changes in Working Capital ($5,000) ($5,000) $10,000
Investment ($90,000)
Net Cash Flow ($90,000) $38,000 $38,000 $53,000
1. JRN enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.
Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the
new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the
value of a share of JRN after the announcement is closest to _________. (Note: Compute the cost of capital, r, first then compute the current
price).
2. The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates
that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually. Assuming the appropriate YTM on
the Sisyphean bond is 8.8%, then at what price should this bond trade for?
3. Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of
12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year 0 1 2 3 Sales
(Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT
20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 +
changes to working capital -5,000 -5,000 10,000 - capital expenditures -90,000
b. Compute the NPV
Year Cash Flow PV Factor @12% PV
0 -90000 1 -90000
1 38000 0.892857143 33928.57
2 38000 0.797193878 30293.37
3 53000 0.711780248 37724.35
NPV 11946.29
c. Compute the IRR price
Year Cash Flow
0 -90000
1 38000
2 38000
3 53000
IRR 19.14%
a. For the year ending December 31, 2006 Luther's earnings per share are closest to ______________.
Basic EPS = 10.6/10.2 =$1.04
Diluted EPS= 10.6/(10.2+.3) =$1.01
(If only one needs to be mentioned we will mention Diluted EPS)
b. Luther's Operating Margin for the year ending December 31, 2005 is closest to __________.
Operating Margin = 31.3/578.3=.0541 or 5.41%
c. Luther's return on equity (ROE) for the year ending December 31, 2006 is closest to __________.
ROE=Net Income/(Average Stockholder Equity) = 10.6/((126.6+63.6)/2)=.1115 or 11.15%
d. Luther's price - earnings ration (P/E) for the year ending December 31, 2006 is closest to _________
P/E Ration = Price/Earning Per Share = 16/1.04=15.38
(Note: PE ration is calculated fron Basic EPS)
4.Consider the following income statement and other information: Luther Corporation Consolidated Income Statement Year ended December 31
(in $ millions) 2006 2005 Total sales 610.1 578.3 Cost of sales (500.2) (481.9) Gross profit 109.9 96.4 Selling, general, and administrative
expenses (40.5) (39.0) Research and development (24.6) (22.8) Depreciation and amortization (3.6) (3.3) Operating income 41.2 31.3 Other
income --- --- Earnings before interest and taxes (EBIT) 41.2 31.3 Interest income (expense) (25.1) (15.8) Pretax income 16.1 15.5 Taxes (5.5)
(5.3) Net income 10.6 10.2 Price per share $16 $15 Shares outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2
Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7
Money Required for first year of Education(at age of 18) = 12500*(1.04^18) =$25,322.71
Money Required for Second year of Education(at age of 19) = 12500*(1.04^19) =$26,335.61
Money Required for third year of Education(at age of 20) = 12500*(1.04^20) =$27,389.04
Money Required for Fourth year of Education(at age of 21) = 12500*(1.04^21) =$28,484.60
5. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's
college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have
historically increased at a rate of 4% per year. Assume that college costs continue to increase an average of 4% per year. How much money will
she need to have in the future for each of her four years of her undergraduate education when she starts college at age of 18.
1. JRN enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations.
Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the
new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the
value of a share of JRN after the announcement is closest to _________. (Note: Compute the cost of capital, r, first then compute the current
price).
2. The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates
that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semi-annually. Assuming the appropriate YTM on
the Sisyphean bond is 8.8%, then at what price should this bond trade for?
3. Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of
12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: Year 0 1 2 3 Sales
(Revenues) 100,000 100,000 100,000 - Cost of Goods Sold (50% of Sales) 50,000 50,000 50,000 - Depreciation 30,000 30,000 30,000 = EBIT
20,000 20,000 20,000 - Taxes (35%) 7000 7000 7000 = unlevered net income 13,000 13,000 13,000 + Depreciation 30,000 30,000 30,000 +
changes to working capital -5,000 -5,000 10,000 - capital expenditures -90,000
4.Consider the following income statement and other information: Luther Corporation Consolidated Income Statement Year ended December 31
(in $ millions) 2006 2005 Total sales 610.1 578.3 Cost of sales (500.2) (481.9) Gross profit 109.9 96.4 Selling, general, and administrative
expenses (40.5) (39.0) Research and development (24.6) (22.8) Depreciation and amortization (3.6) (3.3) Operating income 41.2 31.3 Other
income --- --- Earnings before interest and taxes (EBIT) 41.2 31.3 Interest income (expense) (25.1) (15.8) Pretax income 16.1 15.5 Taxes (5.5)
(5.3) Net income 10.6 10.2 Price per share $16 $15 Shares outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2
Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7
5. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's
college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have
historically increased at a rate of 4% per year. Assume that college costs continue to increase an average of 4% per year. How much money will
she need to have in the future for each of her four years of her undergraduate education when she starts college at age of 18.