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ECON 2035 : Econ Exam 2 Notes

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azuremammoth471
15 Mar 2019
School
LSU
Department
Economics
Course
ECON 2035
Professor
All

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Using the one-period valuation model, assuming a year-end dividend of . 00, an expected sales price of , and a required rate of return of 10% the current price of the stock would be 183. 63: 202/1. 1 = 183. 63. One year dividend of . 50 and expected sales price of , and a required rate of return of 8%, the current price of the stock would be 28. 24: 30. 5/1. 08 = 28. 24. In a one-period valuation model, an increase in the required return on investments in equity reduces the current price of a stock. Using the one-period valuation model, assuming a year-end dividend of . 50, an expected sales price of , and required rate of return of 8%, the current price of the stock would be 28. 24. If the interest rate goes up people are going to buy more bonds and demand for stocks will fall stock prices fall.

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Related Questions

Richland Merchants is analyzing a proposed expansion project that is riskier than the firm's current operations. Due to the nature of the project, the firm has stated that the project will be assigned a discount rate equal to the firm's cost of capital plus 3.5 percent. The company wants to build a new distribution center on leased land at a cost of $16.5 million dollars that will be depreciated on a straight-line basis over 20 years. An additional $145,000 is required for developmental design plans and consulting fees. The center will require an increase in current assets of $1.3 million during the project's life. These assets will be recouped at the end of the project. Management estimates that the facility will generate sales of $3.1 million a year over its 20-year life. At the end of 20 years, the company plans to sell the facility for an estimated $20 million. The company has 70,000 shares of common stock outstanding at a market price of $43 a share. This stock just paid an annual dividend of $2.10 a share. The dividend is expected to increase by 3 percent annually. The firm also has 8,000 shares of 5 percent preferred stock with a market value of $62 a share. The preferred stock has a par value of $100. The company has a 7 percent, semiannual coupon bond issue outstanding with a total face value of $1.3 million. The bonds are currently priced at 99.5 percent of face value and mature in 13 years. The tax rate is 34 percent. Should Richland Merchants pursue the expansion at this point in time? Why or why not? Use NPV and IRR.

1.Consider the following four debt securities, which areidentical in every characteristic except as noted:
?W: A corporate bond rated AAA
?X: A corporate bond rate BBB
?Y: A corporate bond rated AAA with a shorter time to maturity thanbonds W and X
?Z: A corporate bond rated AAA with the same time to maturity asbond Y that trades in a more liquid market than bonds W, X, orY
List the bonds in the most likely order of the interest rates(yields to maturity) of the bonds from highest to lowest. Explainyour work.

2.Explain how an economist could use the slope of the yield curveto analyze the probability that a recession will occur and why thespread may matter.
3.One year ago, you bought a bond for $10,000. You receivedinterest of $400 at the end of the year, as well as your $10,000principal. If the inflation rate over the last year was fivepercent, calculate the real return. Show your work.
4.Suppose that the price of a stock is $50 at the beginning of ayear and $53 at the end of the year, and it pays a dividend of $2during the year. Calculate the stock’s current yield, capital-gainsyield, and the return. Show your work for three separatecalculations.
5.Use the capital-asset pricing model to predict the returns nextyear of the following stocks, if you expect the return to holdingstocks to be 12 percent on average, and the interest rate onthree-month T-bills will be two percent. Calculate a stock with abeta of -0.3, 0.7, and 1.6. Show your work for three separatecalculations.

Problem 3-14
Comprehensive Ratio Analysis

The Jimenez Corporation's forecasted 2014 financial statements follow, along with some industry average ratios.

Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014

Assets  
Cash $ 72,000
Accounts receivable 439,000
Inventories 894,000
Total current assets $1,405,000
Fixed assets 431,000
Total assets $1,836,000
Liabilities and Equity  
Accounts payable $ 332,000
Notes payable 100,000
Accruals 170,000
Total current liabilities $ 602,000
Long-term debt 404,290
Common stock 575,000
Retained earnings 254,710
Total liabilities and equity $1,836,000

Jimenez Corporation: Forecasted Income Statement for 2014

Sales $4,290,000
Cost of goods sold 3,580,000
Selling, general, and administrative expenses 370,320
Depreciation and amortization 159,000
Earnings before taxes (EBT) $ 180,680
Taxes (40%) 72,272
Net income $ 108,408
Per Share Data  
EPS $ 4.71
Cash dividends per share $ 0.95
P/E ratio of 5.0
Market price (average) $ 23.57
Number of shares outstanding 23,000
Industry Financial Ratios (2013)*  
The quick ratio of 1.0
The current ratio of 2.7
Inventory turnover** 7.0
Days sales outstanding*** 32.0 days
Fixed assets turn over** 13.0
Total assets turnover** 2.6
Return on assets 9.1%
Return on equity 18.2%
The profit margin on aales of 3.5%
Debt-to-assets ratio 21.0%
Liabilities-to-assets ratio 50.0%
   
P/E ratio of 6.0
Price/Cash flow ratio of 3.5
Market/Book ratio of 3.5
*Industry average ratios have been constant for the past 4 years.
**Based on year-end balance sheet figures.
***Calculation is based on a 365-day year.

Calculate Jimenez's 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez's projected strengths and weaknesses. Assume that there are no changes from the prior period to any of the operating balance sheet accounts. Round DSO to the nearest whole number. Round the other ratios to one decimal place.

Ratios Firm Industry Comment
Quick ratio   1.0 -Select-Strong Weak Item 2
Current ratio   2.7 -Select-Strong Weak Item 4
Inventory turnover   7.0 -Select-Poor Rich Item 6
Days sales outstanding days 32 days -Select-Poor Rich Item 8
Fixed assets turnover   13.0 -Select-Poor Rich Item 10
Total assets turnover   2.6 -Select-Poor Rich Item 12
Return on assets % 9.1% -Select-Bad Good Item 14
Return on equity % 18.2% -Select-Bad Good Item 16
The profit margin on sales % 3.5% -Select-Bad Good Item 18
Debt ratio % 21.0% -Select-Low High item 20
Liabilities-to-assets % 50.0% -Select-Low High Item 22
EPS $4.71 n.a. --
Stock Price $23.57 n.a. --
P/E ratio   6.0 -Select-PoorRich Item 24
P/CF ratio   3.5 -Select-PoorRich Item 26
M/B ratio   n.a. --

So, the firm appears to be -Select-badly good item 28 managed