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MANAGERIAL FINANCE: Practice Problems
(Please provide the formula for each problem and calculations)
1. Chris recently purchased a corporate bond which yields 12%. Chris is the 39% combined federal and state tax bracket. What is the bond's after-tax yield?
2. Corporate bonds issued by Porter Corporation currently yield 9%. Municipal bonds of equal risk currently yield 5%. At what tax rate would Porter be indifferent between these two bonds?
3. The Smith Corporation had a taxable income of $480,000 from operations after all operating costs but before 1. Interest charges of $75,000; 2. Dividends received of $30,000; 3. Dividends paid of $35,000; and 4. Income taxes. What are the firm's income tax liability and its after-tax income? What are the company's marginal and average tax rates on taxable income?
4. The Yvette Corporation had $23 million of taxable income.
a. What is the company's federal income tax bill of for the year?
b. Assume the firm receives an additional $3 million of interest income from some bonds it owns. What is the tax on this interest income?
c. Now assume that Yvette does not receive the interest income, but does receive an additional $3 million as dividends on some stock it owns. What is the tax on this dividend income?
5. Guillermo Villa has $60,000 invested in a stock which has a beta of 1.3 and $45,000 invested in a stock with a beta of .6. If these are his only two investments in his portfolio, what is his portfolio's beta?
6. Assume that the risk-free rate is 5% and the expected return on the market is 10%. What is the required rate of return on Porter Green Technology Inc. stock that has a beta of 0.5?
7. Assume that the risk-free is 4% and the market risk premium is 7%. What is the expected return for the overall stock market? What is the required rate of return on Smith Industries stock that has a beta of 1.5?
8. Villa Inc. stock's return has the following distribution:
Demand for the Company's |Probability of This Demand |Rate of Return if This
Products |Occurring | Demand Occurs
Below Average .2(15%)
Average .4 25
Above Average.2 30
Calculate the stock's expected return, standard deviation, and coefficient of variation.
9. Guillermo Industries just paid a dividend of $3.00 a share (i.e., Do= $3.00). The dividend is expected to grow 8% a year for the next 3 years, and then 12% a year thereafter. What is the expected dividend per share for each of the next 5 years?
10. Novosel Incorporated is expected to pay a $2.00 per share dividend at the end of the year (i.e., D1 = $2.00). The dividend is expected to grow at a constant rate of 9% a year. The required rate of return on the stock, rs, is 17%. What is the value per share of the company's stock?
11. O'bama's Gaming stock currently sells for $30.00 a share. The stock just paid a dividend of $2.50 a share (i.e., Do = $2.50). The dividend is expected to grow at a constant rate of 8% a year. What stock price is expected 1 year from now? What is the required rate of return on the company's stock?
12. Ma's Happy Solutions has preferred stock outstanding which pays a dividend of $7.50 at the end of the year. The preferred stock sells for $70 a share. What is the preferred stock's required rate of return?
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The solution explains some managerial finance problems relating to after tax yield, marginal rate, beta, expected return
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