# Syntex, Inc. is considering an investment in one of two common stocks, accounting homework help

*label*Business Finance

*timer*Asked: Jan 11th, 2017

*account_balance_wallet*$15

**Question description**

1) (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks.

- Given the information in the table, what is the expected rate of return for stock B?
- What is the standard deviation of stock B?
- What is the expected rate of return for stock A?
- Based on the risk (as measured by the standard deviation) and return of each stock which investment is better? (Round to 2 decimal places)

2) (NPV, PI, and IRR calculations) Fijisawa, Inc. is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial outlay would be $1,960,000, and the project would generate cash flows of $380,000 per year for six years. The appropriate discount rate is 4.0 percent.

- Calculate the net present value.
- Calculate the profitability index.
- Calculate the internal rate of return.
- Should this project be accepted? Why or why not?

3) (Cost of debt) Sincere Stationery Corporation needs to raise $531,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 8.7 percent.

- Compute the market value of the bonds.
- How many bonds will the firm have to issue to receive the needed funds?
- What is the firm's after-tax cost of debt if the firm's tax rate is 32 percent?

4) (Cost of debt) Sincere Stationery Corporation needs to raise $451,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 11.1 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 9.6 percent.

- Compute the market value of the bonds.
- How many bonds will the firm have to issue to receive the needed funds?
- What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

5) (Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm's current capital structure (which the firm considers to be its target mix of financing sources) as follows:

To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8.4 percent per year (paid semiannually) at the market price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03. Common stock for GBH is currently selling for $49.09 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 4.5 percent per year into the indefinite figure. The firm's marginal tax rate is 32 percent.

- Calculate component weights of capital:
- What is the weight of debt in the firm’s capital structure?
- What is the weight of preferred stock in the firm’s capital structure?
- What is the weight of common stock in the firm’s capital structure?

- Calculate component costs of capital:
- What is the after-tax cost of debt for the firm?
- What is the cost of preferred stock for the firm?
- What is the cost of common equity for the firm?

- Calculate the firm's weighted average cost of capital.
- What is the discount rate you should use to evaluate the warehouse project? (Round to 3 decimal places.)

- Calculate component weights of capital:

6) (Capital structure weights) In August of 2010 the capital structure of the Emerson Electric Corporation (EMIR) (measured in book and market values) appeared as follows:

- What weights should Emerson use when computing the firm's weighted average cost of capital?
- What is the appropriate weight of debt? (Round to 1 decimal place.)
- What is the appropriate weight of common equity? (Round to 1 decimal place.)

## Tutor Answer

solution for question 1

a)

Stock A

Probability

Return (A)

Excepted Return

0,35

12%

4,20%

0,3

17%

5,10%

0,35

18%

6,30%

(B)

A-B

-3,600%

1,400%

2,400%

15,60%

(A-B)^2 P*(A-B)^2

12,96

4,536

1,96

0,588

5,76

2,016

7,14

a) Expected return = 15.60%

b) Standard deviation of Stock A = (7.14)^1/2 = 2.67%

c)

Probability

Return (A)

Excepted Return

0,25

-6%

-1,50%

0,25

8%

2,00%

0,25

13%

3,25%

0,25

20%

5,00%

(B)

A-B

(A-B)^2 P*(A-B)^2

-14,75%

217,56

54,39

-0,75%

0,5625

0,140625

4,25% 18,0625

4,515625

11,25% 126,5625 31,640625

8,75%

90,69

c) ...

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