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Chapter 4: The Capital Budgeting Process

Foundations Of Financial Management
Pages: 255 - 450
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

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253 Questions for Chapter 4: The Capital Budgeting Process

  1. Using Table 10-1, assume interest rates in the market (yield to maturity) are 14 percent for 20 years on a bond paying 10 percent.

    Found on Page 322
  2. Terrier Company is in a 40 percent tax bracket and has a bond outstanding that yields 10 percent to maturity. a. What is Terrier’s aftertax cost of debt? b. Assume that the yield on the bond goes down by 1 percentage point, and due to tax reform, the corporate tax rate falls to 25 percent. What is Terrier’s new aftertax cost of debt? c. Has the aftertax cost of debt gone up or down from part a to part b? Explain why

    Found on Page 364
  3. What factors might influence a firm’s price-earnings ratio?

    Found on Page 319
  4. KeySpan Corp. is planning to issue debt that will mature in 2035. In many respects, the issue is similar to currently outstanding debt of the corporation. a. Using Table 11-3, identify the yield to maturity on similarly outstanding debt for the firm in terms of maturity. b. Assume that because the new debt will be issued at par, the required yield to maturity will be 0.15 percent higher than the value determined in part a. Add this factor to the answer in a. (New issues sold at par sometimes requirea slightly higher yield than older seasoned issues because there are fewer tax advantages and more financial leverage that increase company risk.) c. If the firm is in a 30 percent tax bracket, what is the aftertax cost of debt?

    Found on Page 364
  5. How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?

    Found on Page 320
  6. What approaches can be taken in valuing a firm’s stock when there is no cash dividend payment?

    Found on Page 320
  7. Rita Gonzales won the $41 million lottery. She is to receive $1.5 million a year for the next 19 years plus an additional lump sum payment of $12.5 million after 19 years. The discount rate is 14 percent. What is the current value of her winnings?

    Found on Page 283
  8. Al Rosen invests $25,000 in a mint condition 1952 Mickey Mantle Topps baseball card. He expects the card to increase in value 12 percent per year for the next 10 years. How much will his card be worth after 10 years?

    Found on Page 283
  9. Stilley Resources bonds have four years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 5 percent. If the price of the bond is $841.51, what is the yield to maturity?

    Found on Page 324
  10. Dr. Harold Wolf of Medical Research Corporation (MRC) was thrilled with the response he had received from drug companies for his latest discovery, a unique electronic stimulator that reduces the pain from arthritis. The process had yet to pass rigorousFederal Drug Administration (FDA) testing and was still in the early stages ofdevelopment, but the interest was intense. He received the three offers described in the following paragraph. (A 10 percent interest rate should be used throughout this analysisunless otherwise specified.)

    Found on Page 286

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