# Flubber Products has current a

1. Flubber Products has current assets of \$60,000 and total assets of \$340,000. The firm’s sales are \$700,000. Flubber’s interest expense is \$25,000. All assets are classified as being either current assets or fixed assets. Flubber’s fixed asset turnover is

2. Milton Data Service just paid a dividend of \$4.00 per share on its common stock. The dividend is expected to grow at 4% per year forever. Milton has net working capital of \$500 million. Currently, the risk-free rate is 5%, the required market return is 10%, and Milton has a beta of 1.4.

a. What should be the current market price per share (i.e., the intrinsic value) of Milton stock?

b. If the actual market price per share is \$56, is Milton undervalued or overvalued? How much is the stock mispriced?

3. I’m Eating Restaurants is expected to pay a dividend of \$5.00 per share on its common stock in one year. The dividend is expected to grow at 4% per year forever. Investors require a 12% rate of return on stocks with I’m Eating’s risk characteristics.

a. What should be the current market price per share (i.e., the intrinsic value) of I’m Eating’s stock?

b. If the actual market price is \$60, is I’m Eating undervalued or overvalued? How much is the stock mispriced?

4. a. Compute the required rate of return on investment i given the following information: rf = 8%; rm = 14%; βi = 1.0.

b. Recalculate the required rate of return assuming βi is 1.8.

5. a. Compute the required rate of return on investment i given the following information: the market risk premium is 5%; rf = 6%; βi = 1.2.

b. Compute rm.

5. The Solar Utility Company has projected a capital budget of \$5 million for 2011. The capital structure (based upon market values) is 30 percent debt and 70 percent common equity. Management believes this structure to be optimal. Solar Utility has a combined federal/state/local tax rate of 40%. The following information has been collected about Solar Utility’s securities.

Debt: The new debt to be issued is forecast to have a yield to maturity (i.e., before-tax cost of debt) of 9.03%.

Common stock: Market price \$44, very recently paid dividend \$2, expected growth rate 10 percent. Flotation cost for a new stock issue would run about 8 percent. However, Solar Utility has adequate retained earnings. No external equity will be used in the near future.

Compute Solar Utility’s weighted average cost of capital (kWACC).

6.Cream of Tomato Company has the following data available.

Net income available to common stockholders = \$250,000

Sales = \$2.5 million

Total asset turnover = 3

Ratio of common equity to total assets = 0.4 Note that this ratio is sometimes called the equity ratio. Cream of Tomato does not have any preferred stock outstanding. Calculate the return on assets and return on common equity for Cream of Tomato.

7.A recently retired professor, Melinda Marketing, plans to establish the Hot-Air Fan Company and manufacture circulating fans. She estimates the fixed cost of operations to be \$357,500 annually. The variable cost of producing the fans is forecasted to be \$85 per unit. a. How many fans must be sold to break even if the fans are priced at \$150?

b. If Hot-Air sells 6,000 fans, what will be the EBIT?

c. If Hot-Air sells 6,000 fans and has interest expense of \$8,125, what is Hot-Air’s times-interest-earned? Hot-Air does not have any nonoperating expenses.

d. If the fans are priced at \$150, what is Hot-Air’s breakeven sales?

8.Vapor Lock Motors’ EBIT is \$7,000,000, the company’s interest expense is \$2,000,000, and its tax rate is 40 percent. Vapor Lock’s beta is 1.5.

a. What is Vapor Lock’s DFL?

b. If Vapor Lock were able to grow its EBIT by 50%, what would be the percentage increase in net income?

c. If Vapor Lock were able to grow its EBIT by 50%, what would be the resulting net income?

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