United Uninsured Underwriters (U3) needs to raise $192 million. If

United Uninsured Underwriters (U3) needs to raise $192 million. If it issues new to raise the funds, the flotation costs will be 8 percent. The new issue will also require U3 to pay $280,000 in fees to its lawyers, printing costs, and other costs associated with the issue. U3 can issue stock at $25 per share. How many shares of must be issued so that it has $192 million after flotation costs? Show how much of the total dollar amount will be flotation costs and how much U3 will receive after the flotation costs are paid.

Mom’s Motel Corporation (MM) plans to issue bonds to raise

Mom’s Motel (MM) plans to issue bonds to raise $175 million that it needs to support future operations. MM’s investment banker will charge 2.5 percent of the total amount issued to help MM raise the funds. In addition, MM will incur other costs associated with the issue that equal $500,000. The market value of each bond at issue time will be $1,000. How many bonds must MM sell to net $175 million after flotation costs? Assume that fractions of bonds cannot be issued. Show how much of the issue will consist of flotation costs and how much MM will receive after flotation costs are paid.

North/South Airlines generated the following information from its financial statements: (1)

North/South Airlines generated the following information from its financial statements: 

(1) P/E ratio equals 15.0, 

(2) market price per share is $30, 

(3) Fixed assets turnover equals 8.0, 

(4) Current ratio equals 5.0, 

(5) Current liabilities equal $300,000, 

(6) Net profit margin equals 4 percent, 

(7) 60,000 shares of are outstanding. What are North/South’s 

(a) Return on assets (ROA) 

(b) Total assets turnover?

Suppose economists expect that the nominal riskfree rate of return,

Suppose economists expect that the nominal riskfree rate of return, rRF, which is also the rate on a one-year Treasury note, will be 3.2 percent long into the future. You are evaluating two corporate bonds that are identical except for their terms to The bonds have the same default risk, and neither bond has a liquidity premium. Bond T matures in five years and has a yield equal to 5.3 percent, whereas Bond Q matures in eight years and has a yield equal to 5.9 percent. Compute 

(a) The annual risk premium (MRP) 

(b) The bonds’ default risk premium (DRP).

Yesterday Sandi sold 1,000 shares of stock that she owned

Yesterday Sandi sold 1,000 shares of stock that she owned for $45 per share. When she purchased the stock two years ago, Sandi paid $50 per share. Every three months during the time that she held the stock, Sandi received a quarterly equal to $0.50 per share. A total of eight dividends were received. 

(a) What return (yield) did Sandi earn during the two years she held the stock? 

(b) If the price of the stock was $45 per share one year ago, what return did Sandi earn in each year she held the stock?

Take a look at Ford’s inventory turnover ratio. How does

Take a look at Ford’s . How does this ratio compare with its peers? Have there been any interesting changes over time in this measure? Do you consider Ford’s inventory management to be a strength or a weakness?

In Chapter 3, we took a look at Starbucks’ Now we use Thomson One to analyze Ford Motor Company. Enter Ford’s ticker symbol (F) and select “GO.” If we select the tab at the top labeled “Financials,” we can find Ford’s key for the past several years. At the “Financials” screen on the second line of tabs, select the “Fundamental Ratios” tab. If you then select the SEC Database Ratios from the pull-down menu, you can select either annual or quarterly ratios.

Under annual ratios, there is an in-depth summary of Ford’s various ratios over the past 3 years. This information enables you to evaluate Ford’s performance over time for each of the ratio categories that we mention in the text (liquidity, asset management, debt management, profitability, and market-based ratios).

The text mentions that financial statement analysis has two major components: a trend analysis, where we evaluate changes in the key ratios over time, and a peer analysis, where we compare with firms that are in the same industry and/or line of business. We have already used Thomson One to conduct a trend analysis—next we use this tool to conduct a peer analysis. If we click on the “Peers” tab (on the first line of tabs) near the top of the screen, some summary financial information for Ford and a few of its peers will be presented. If you click on the “Peer Sets” tab (second line of tabs), you can modify the list of peer firms. The default setup is “Peers set by SIC Code.” To obtain a comparison of many of the key ratios presented in the text, just click on “Financials” (second line of tabs) and select “Key from the drop-down menu.

Over the past few years, has there been a strong

Over the past few years, has there been a strong correlation between stock price performance and reported earnings?

Over the past decade, Starbucks coffee shops have become an increasingly familiar part of the urban landscape. Currently, the company operates more than 6,000 coffee shops in all 50 states, the District of Columbia, and internationally, and in 2005 it had roughly 80,000 employees.

Thomson ONE can access a wealth of financial information for companies such as Starbucks. To find some background information, begin by entering the company’s ticker symbol, SBUX, and then selecting “GO.” On the opening screen, you will see a lot of useful information, including a summary of what Starbucks does, a chart of its recent stock price, EPS estimates, some recent news stories, and a list of key financial data and ratios.

In researching a company’s operating performance, a good place to start is the recent stock price performance. At the top of the Stock Price Chart, click on the section labeled “Interactive Chart.” From this point, we are able to obtain a chart of the company’s stock price performance relative to the overall market, as measured by the S&P 500, between 1995 and 2005. To obtain a 10-year chart, go to “Time Frame,” click on the down arrow, and select 10 years. Then, click on “Draw” and a 10-year price chart should appear.

As you can see, Starbucks has had its ups and downs, but the company’s overall performance has been quite strong, and it has beat the overall market handily.

We can also find Starbucks’ recent financial statements. Near the top of your screen, click on the “Financials” tab to find the company’s balance sheet, income statement, and statement of cash flows for the past 5 years. Clicking on the Microsoft Excel icon downloads these statements directly to a spreadsheet.

Construct a simple Du Pont analysis for Ford and its

Construct a simple Du Pont analysis for Ford and its peers. What are Ford’s strengths and weaknesses relative to its competitors?

In Chapter 3, we took a look at Starbucks’ Now we use Thomson One to analyze Ford Motor Company. Enter Ford’s ticker symbol (F) and select “GO.” If we select the tab at the top labeled “Financials,” we can find Ford’s key for the past several years. At the “Financials” screen on the second line of tabs, select the “Fundamental Ratios” tab. If you then select the SEC Database Ratios from the pull-down menu, you can select either annual or quarterly ratios.

Under annual ratios, there is an in-depth summary of Ford’s various ratios over the past 3 years. This information enables you to evaluate Ford’s performance over time for each of the ratio categories that we mention in the text (liquidity, asset management, debt management, profitability, and market-based ratios).

The text mentions that financial statement analysis has two major components: a trend analysis, where we evaluate changes in the key ratios over time, and a peer analysis, where we compare with firms that are in the same industry and/or line of business. We have already used Thomson One to conduct a trend analysis—next we use this tool to conduct a peer analysis. If we click on the “Peers” tab (on the first line of tabs) near the top of the screen, some summary financial information for Ford and a few of its peers will be presented. If you click on the “Peer Sets” tab (second line of tabs), you can modify the list of peer firms. The default setup is “Peers set by SIC Code.” To obtain a comparison of many of the key ratios presented in the text, just click on “Financials” (second line of tabs) and select “Key from the drop-down menu.

What has happened to Ford’s liquidity position over the past

What has happened to Ford’s liquidity position over the past 3 years? How does Ford’s liquidity compare with its peers?

In Chapter 3, we took a look at Starbucks’ Now we use Thomson One to analyze Ford Motor Company. Enter Ford’s ticker symbol (F) and select “GO.” If we select the tab at the top labeled “Financials,” we can find Ford’s key for the past several years. At the “Financials” screen on the second line of tabs, select the “Fundamental Ratios” tab. If you then select the SEC Database Ratios from the pull-down menu, you can select either annual or quarterly ratios.

Under annual ratios, there is an in-depth summary of Ford’s various ratios over the past 3 years. This information enables you to evaluate Ford’s performance over time for each of the ratio categories that we mention in the text (liquidity, asset management, debt management, profitability, and market-based ratios).

The text mentions that financial statement analysis has two major components: a trend analysis, where we evaluate changes in the key ratios over time, and a peer analysis, where we compare with firms that are in the same industry and/or line of business. We have already used Thomson One to conduct a trend analysis—next we use this tool to conduct a peer analysis. If we click on the “Peers” tab (on the first line of tabs) near the top of the screen, some summary financial information for Ford and a few of its peers will be presented. If you click on the “Peer Sets” tab (second line of tabs), you can modify the list of peer firms. The default setup is “Peers set by SIC Code.” To obtain a comparison of many of the key ratios presented in the text, just click on “Financials” (second line of tabs) and select “Key from the drop-down menu.

Now let’s take a closer look at the stocks of

Now let’s take a closer look at the of four companies: Colgate Palmolive (Ticker CL), Gillette (G), Merrill Lynch (MER), and Microsoft (MSFT). Before looking at the data, which of these companies would you expect to have a relatively high beta (greater than 1.0), and which of these companies would you expect to have a relatively low beta (less than 1.0)?

Access the Thomson ONE problems though the ThomsonNOW Web site. Use the Thomson ONE—Business School Edition online database to work this chapter’s questions.

Using Past Information to Estimate Required Returns

Chapter 8 discussed the basic trade-off between risk and return. In the (CAPM) discussion, beta is identified as the correct measure of risk for diversified shareholders. Recall that beta measures the extent to which the returns of a given stock move with the stock market. When using the CAPM to estimate required returns, we would ideally like to know how the stock will move with the market in the future, but since we don’t have a crystal ball we generally use historical data to estimate this relationship with beta.

As mentioned in the Web Appendix for this chapter, beta can be estimated by regressing the individual returns against the returns of the overall market. As an alternative to running our own regressions, we can instead rely on reported betas from a variety of sources. These published sources make it easy for us to readily obtain beta estimates for most large publicly traded corporations. However, a word of caution is in order. Beta estimates can often be quite sensitive to the time period in which the data are estimated, the market index used, and the frequency of the data used. Therefore, it is not uncommon to find a wide range of beta estimates among the various published sources. Indeed, Thomson One reports multiple beta estimates. These multiple estimates reflect the fact that Thomson One puts together data from a variety of different sources.