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Chapter 4: Q15BP (page 282)
Question: Sherwin Williams will receive \(18,500 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights now for \)165,000?
Sherwin Williams should sell the future rights at $165,000.
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Hooper Chemical Company, a major chemical firm that uses such raw materials as carbon and petroleum as part of its production process, is examining a plastics firm to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:
Outcomes (\( millions) Probability
Recession .............................. \)20 0.30
Normal economy ................... 40 0.40
Strong economy .................... 60 0.30
After the acquisition, the expected outcomes for the firm would be:
Outcomes (\( millions) Probability
Recession .............................. \) 10 0.3
Normal economy ................... 40 0.4
Strong economy .................... 80 0.3
a. Compute the expected value, standard deviation, and coefficient of variation before the acquisition.
b. After the acquisition, these values are as follows:
Expected value .............................................. 43.0 (\( millions)
Standard deviation ........................................ 27.2 (\) millions)
Coefficient of variation ................................... 0.633
Comment on whether this acquisition appears desirable to you.
c. Do you think the firm鈥檚 stock price is likely to go up as a result of this acquisition?
d. If the firm were interested in reducing its risk exposure, which of the following three industries would you advise it to consider for an acquisition?
Briefly comment on your answer.
(1) Chemical company
(2) Oil company
(3) Computer company
What type of dividend pattern for common stock is similar to the dividend payment for the preferred stock?
Stilley 91影视 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?
Exodus Limousine Company has $1,000 par value bonds outstanding at 10 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity is
a. 5 percent.
b. 15 percent.
Murray Motor Company wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of \(2.50 per share, and the current price of its common stock is \)50 per share. The expected growth rate is 8 percent.
a. Compute the cost of retained earnings (Ke). Use Formula 11-5.
b. If a $3 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-6.
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