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1.

(Floating-rate loans) The Bensington Glass Company entered into a loan agreement with the firm’s bank to finance the firm’s working capital. The loan called for a floating rate that was 26 basis points (0.26 percent) over an index based on LIBOR. In addition, the loan adjusted weekly based on the closing value of the index for the previous week and had a maximum annual rate of 2.21 percent and a minimum of 1.76 percent. Calculate the rate of interest for weeks 2 through 10.

Week 1 is 1.96% LIBOR

Week 2 is 1.67% LIBOR

The rate of interest for week 2 is ___ % (Round to 2 decimal places.)

2.

(Bond valuation) Calculate the value of a bond that matures in 13 years and has a $1,000 par value. The annual coupon interest rate is 15 percent and the market’s required yield to maturity on a comparable-risk bond is 11%.

The value of the bond is $___. (Round to nearest cent)

3.

(Bond valuation) A bond that matures in 13 years has a $1,000 par value. The annual coupon interest rate is 12% and the market’s required yield to maturity on a comparable-risk bond is 14%. What would be the value of this if it paid interest annually? What would be the value of this if it paid interest semiannually?

4.

(Bond valuation) Pybus Inc. is considering issuing bonds that will mature in 23 years with an annual coupon rate of 9%. Their par value will be $1,000, and the interest will be paid semiannually. Pybus is hoping to get an AA rating on its bonds and, if it does, the yield to maturity on similar AA bonds is 9.5%. However, Pybus is not sure whether the new bonds will receive an AA rating. If they receive an A rating, the yield to maturity on similar A bonds is 10.5%. What will be the price of these bonds if they receive either an A or AA rating? (Round to the nearest cent.)

5.

(Yield to maturity) The market price is $1,175 for a 16-year bond ($1,000 par value) that pays 9% annual interest, but makes interest payments on a semiannual basis (4.5 % semiannually). What is the bond’s yield to maturity? (Round to 2 decimal places)

6.

(Bond valuation) Doisneau 22 year bonds have an annual coupon interest of 12%, make interest payments on a semiannual basis, and have a $1,000 par value. If the bonds are trading with a market’s required yield to maturity of 14%, are these premiums or discount bonds? What is the price of the bonds? (Round to nearest cent.)

7.

(Bond valuation) Fingen’s 15-year, $1,000 par value bonds pay 9% interest annually. The market price of the bonds is $1,130 and the market’s required yield to maturity on a comparable-risk bond is 6%. (Round to 2 decimal places.)

a. Compute the bond’s yield to maturity?

b. Determine the value of the bond to you, given your required rate of return.

c. Should you purchase the bond?

8.

(Yield to maturity) Abner Corporation’s bonds mature in 22 years and pay 13% interest annually. If you purchase the bonds for $1,150, what is your yield to maturity? (Round to 2 decimal places.)

9.

(Bond valuation) The 8-year $1,000 par bonds of Vail Inc. pay 12% interest. The market’s required yield to maturity on a comparable-risk bond is 16%. The current market price for the bond is $880. (Round to 2 decimal places.)

a. Determine the yield to maturity.

b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond?

c. Should you purchase the bond at current market price?

10.

(Yield to maturity) The Saleemi Corporation’s $1,000 bonds pay 11% interest annually and have 11 years until maturity. You can purchase the bond for $1,105. (Round to 2 decimal places.)

a. What is the yield to maturity on this bond?

b. Should you purchase the bond if the yield to maturity on a comparable risk bond is 11%?

11.

(Bond valuation relationships) The 18-year , $1,000 par value bonds of Waco Industries pay 12% interest annually. The market price of the bond is $935, and the market’s required yield to maturity on a comparable-risk bond is 14%. (Round to 2 decimal places)

a. Compute the bond’s yield to maturity.

b. What is the value of the bonds to you given the yield to maturity on a comparable-risk bond?

c. Should you purchase the bond at current market price?

12.

(Inflation and Interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.1% and the expected inflation rate is 7.5%? (Round to 2 decimal places)

BUSN 319 Final Exam

1. (TCO 4) Three commonly used methods of evaluating marketing programs are (Points : 5)

2. (TCO 1) Ideally in effective marketing planning, goals should be _____ in terms of what is to be accomplished and when. (Points : 5)

3. (TCO 3) Which marketing strategy focuses on a single market segment but adds additional product lines? (Points : 5)

4. (TCO 1) Based on relative competitive scope (broad target to narrow target) and source of competitive advantage (lower cost to differentiation), Porter’s four generic business strategies are differentiation, cost focus, cost leadership, and (Points : 5)

5. (TCO 2) Which of the following pieces of information is used in the implementation phase of the strategic marketing process? (Points : 5)

6. (TCO 6) Which of the following pieces of information is used in a SWOT analysis, the first step of the planning phase of the strategic marketing process? (Points : 5)

7. (TCO 3) The first decision in developing an advertising program is to (Points : 5)

8. (TCO 2) The proper blend of elements in the promotional mix depends on the type of product. The three specific characteristics to be considered are _____, risk, and ancillary services. (Points : 5)

9. (TCO 4) Reminding buyers of the product’s existence is the promotional objective during which stage of the product life cycle? (Points : 5)

10. (TCO 2) The _____ can be used to inform prospective buyers about the benefits of the product. (Points : 5)

11. (TCO 8) Which of the following statements about the terms used for marketing intermediaries is true? (Points : 5)

12. (TCO 7) Which of the following statements about the legal and regulatory aspect of pricing is true? (Points : 5)

13. (TCO 2) Pricing objectives may change depending on (Points : 5)

14. (TCO 3) The ratio of perceived benefits to _____ is called value. (Points : 5)

15. (TCO 6) Market segmentation involves aggregating prospective buyers into groups that will respond similarly to a marketing action and (Points : 5)

16. (TCO 5) The process of continually acquiring information on events occurring outside the organization to identify and interpret potential trends is called (Points : 5)

17. (TCO 1) The marketing department helps keep the organization focused on creating value both for it and for customers. This is accomplished by (Points : 5)

18. (TCO 1) Which of the following acts as a barrier to the development of relationship marketing? (Points : 5)

19. (TCO 1) Your neighbor is tired of conventional soft drinks and wants something different. Coincidentally, Cadbury Beverages Inc. has begun distributing Country Time lemonade through the supermarket at a price comparable to that of soft drinks. Which of the conditions needed for marketing to occur is described in this situation? (Points : 5)

20. (TCO 6) Kraft produces Lunchables, a prepackaged meal usually consisting of several crackers, small slices of meat, and small slices of cheese. Some versions contain Capri Sun drinks. Others are called Cracker Stackers and Fun Fuel. The box is bright yellow and the quantity of food contained within is small. The target market for Kraft Lunchables is most likely (Points : 5)

21. (TCO 3) Which element of the marketing mix is demonstrated when the Mars Company has a sale on M&M’s® brand candies? (Points : 5)

22. (TCO 5) The Lemon Tree is a high-fashion boutique selling top-of-the-line women’s clothing and accessories. The keys to its success include knowing the customers’ changing tastes and providing something different from other retailers. In addition, because of the high value of the merchandise, The Lemon Tree’s management is exploring the use of computerized inventory controls and sales order processing. From this description, one can infer that the environmental category of least importance to The Lemon Tree is (Points : 5)

23. (TCO 7) In 1998, F. Hoffman-LaRoche Ltd. and BASF AG, two international pharmaceutical companies, were ordered to pay $725 million in fines for plotting to raise and fix prices of vitamins used in virtually every home in the United States. This is an example of how _____ forces affect the marketing environment. (Points : 5)

24. (TCO 6) Mile High Frozen Foods is a distributor for McDonald’s. It also bakes the buns used by McDonald’s in several states. Mile High purchases flour, yeast, and sesame seeds, manufactures the buns, and then distributes them to the retail stores. Mile High Frozen Foods is operating in a(n) _____ market. (Points : 5)

25. (TCO 1) Several years ago, SwissAir made some unwise investments to pay for a planned expansion. As a result, the company had to make some cost-cutting moves that alienated its customers. Eventually the company declared bankruptcy, regrouped, and found itself able to resume business. Its board of directors recently announced that the company would like to resume flying. Before resuming flying, SwissAir needed to determine what percentage of its former customers it could expect to return to the airline. If not enough former customers were willing to use SwissAir again, the resumption of flights would not be profitable. The determination of the percentage of returning patrons that would be needed to resume operation is an example of a (Points : 5)

26. (TCO 3) When Marine Midland Bank sent market researchers with surveys door-to-door in the neighborhoods of its branch banks to ask people with savings accounts why they did not also have checking accounts and credit cards with Marine Midland, the researchers were gathering _____ data. (Points : 5)

27. (TCO 4) Sara Burns is the owner of a company called Spice and was looking for a new product to go with her company’s line of food condiments when a friend suggested combining spices with tea. In the _____ stage of the new-product process, the spices and tea mixtures were exposed to prospective consumers under realistic purchase conditions. (Points : 5)

28. (TCO 4) A few years ago, Who Wants to Be a Millionaire premiered as the first nighttime game show in several decades. The marketing for the show was intent on making television viewers aware of its existence and excited enough about the show that they would watch the first episode. Based on this description, in which stage of the product life cycle would this show be? (Points : 5)

29. (TCO 8) In an episode of the Andy Griffith television series, two local farmers were selling the produce they grew on their farms from the backs of their pickup trucks to local people who drove by on the road. The farmers selling their products without wholesalers or retailers were an example of a (Points : 5)

30. (TCO 2) Disney is using an integrated marketing communications program (IMC) to promote group travel to its theme parks, because (Points : 5)

31. (TCO 2) When a news story covers a terrible disaster and viewers are asked to send donations to the American Red Cross, the American Red Cross is receiving (Points : 5)

32. (TCO 8) For several years, advertisements for Arm & Hammer Baking Soda have prompted consumers to place an opened box of the product in the refrigerator to lessen food odor and to replace that box monthly. The same ads advise customers to pour the used box down their kitchen sinks to freshen drains. Arm & Hammer employed a _____ strategy in its attempt to sell more baking soda. (Points : 5)

33. (TCO 3) Imagine that you are creating a marketing plan for a company that will sell motor scooters . As you consider the marketing program, what types of strategy should you consider including in the plan? Propose one specific example of each type of strategy that you are considering, and present your rationale (reasoning) for your strategy selections. (Points : 30)

34. Discriminate between primary data and secondary data and their usefulness to business decision making, being sure to discuss the advantages and disadvantages of each. Your response should also identify the typical sources for primary and secondary data and what you would rely on most heavily in making your marketing decisions. (Points : 30)

35. (TCO 4) You are the product manager responsible for a horrible product failure, but in your wisdom, you are evaluating why the product failed. What factors would you consider in your evaluation? What actions could you have taken to prevent the failure? Does product innovation need a willingness to accept failure? (Points : 30)

P14-5 P14-6 and P14-7

1.       Explain whether each of the following projects is likely to have risk similar to the average risk of the firm.

a.   The Clorox Company considers launching a new version of Armor All designed to clean and protect notebook computers.

b.   Google, Inc., plans to purchase real estate to expand its headquarters.

c.   Target Corporation decides to expand the number of stores it has in the southeastern United States.

2.       Suppose Caterpillar, Inc., has 665 million shares outstanding with a share price of $74.77, and $25 billion in debt. If in three years, Caterpillar has 700 million shares outstanding trading for $83 per share, how much debt will Caterpillar have if it maintains a constant debt-equity ratio?

  3.       In 2006, Intel Corporation had a market capitalization of $112 billion, debt of $2.2 billion, cash of $9.1 billion, and EBIT of more than $11 billion. If Intel were to increase its debt by $1 billion and use the cash for a share repurchase, which market imperfections would be most relevant for understanding the consequence for Intel’s value? Why?

4.       Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. If the plant has average risk and Goodyear plans to maintain a constant debt-equity ratio, what after-tax amount must it receive for the plant for the divestiture to be profitable?

5.       Suppose Lucent Technologies has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%.

a.   What is Lucent’s WACC?

b.   If Lucent maintains a constant debt-equity ratio, what is the value of a project with average risk and the following expected free cash flows?

c.   If Lucent maintains its debt-equity ratio, what is the debt capacity of the project in part (b)?

6.       Acort Industries has 10 million shares outstanding and a current share price of $40 per share. It also has long-term debt outstanding. This debt is risk free, is four years away from maturity, has annual coupons with a coupon rate of 10%, and has a $100 million face value. The first of the remaining coupon payments will be due in exactly one year. The riskless interest rates for all maturities are constant at 6%. Acort has EBIT of $106 million, which is expected to remain constant each year. New capital expenditures are expected to equal depreciation and equal $13 million per year, while no changes to net working capital are expected in the future. The corporate tax rate is 40%, and Acort is expected to keep its debt-equity ratio constant in the future (by either issuing additional new debt or buying back some debt as time goes on).

a.   Based on this information, estimate Acort’s WACC. b.   What is Acort’s equity cost of capital?

7.       Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. Suppose Goodyear maintains a constant debt-equity ratio.

a.   What is Goodyear’s WACC?

b.   What is Goodyear’s unlevered cost of capital?

c.   Explain, intuitively, why Goodyear’s unlevered cost of capital is less than its equity cost of capital and higher than its WACC.

8.       You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $10 million. The product will generate free cash flow of $750,000 the first year, and this free cash flow is expected to grow at a rate of 4% per year. Markum has an equity cost of capital of 11.3%, a debt cost of capital of 5%, and a tax rate of 35%. Markum maintains a debt-equity ratio of 0.40.

a.   What is the NPV of the new product line (including any tax shields from leverage)?

b.   How much debt will Markum initially take on as a result of launching this product line?

c.   How much of the product line’s value is attributable to the present value of interest tax shields?

d.   GE decides to open a new Universal Studios theme park in China.

9.       Consider Lucent’s project in Problem 5.

a.   What is Lucent’s unlevered cost of capital?

b.   What is the unlevered value of the project?

c.   What are the interest tax shields from the project? What is their present value?

d.   Show that the  APV of Lucent’s project  matches the value  computed using the WACC method.

10.    Consider Lucent’s project in Problem 5.

a.   What is the free cash flow to equity for this project?

b.   What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method?

11.    In year 1, AMC will earn $2000 before interest and taxes. The market expects these earnings to grow at a rate of 3% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 40%. Right now, the firm has $5000 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 3% per year. Suppose the risk-free rate equals 5%, and the expected return on the market equals 11%. The asset beta for this industry is 1.11.

a.   If AMC were an all-equity (unlevered) firm, what would its market value be?

b.   Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC’s debt is expected to grow by 3% per year, at what rate are its interest payments expected to grow?

c.   Even though AMC’s debt is riskless (the firm will not default), the future growth of AMC’s debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC’s assets, what is the present value of AMC’s interest tax shield?

d.   Using the APV method, what is AMC’s total market value, V L? What is the market value of AMC’s equity?

e.   What is AMC’s WACC? (Hint: Work backward from the FCF and V L.)

f.   Using the WACC method, what is the expected return for AMC equity?

g.   Show that the following holds for AMC: .[SHERYL: there’s an equation that should be set here, but I can’t get it out of the PDF in correct for. It’s on page 631].

h.   Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part (f ) to derive the market value of equity using the FTE method. How does that compare to your answer in part (d)?

12.    Prokter and Gramble (PG) has historically maintained a debt-equity ratio of approximately 0.20. Its current stock price is $50 per share, with 2.5 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.50 and can borrow at 4.20%, just 20 basis points over the risk-free rate of 4%. The expected return of the market is 10%, and PG’s tax rate is 35%.

a.   This year, PG is expected to have free cash flows of $6.0 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?

b.   PG believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.50, it believes its borrowing costs will rise only slightly to 4.50%. If PG announces that it will raise its debt-equity ratio to 0.5 through a leveraged recap, determine the increase in the stock price that would result from the anticipated tax savings.

13.    Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $15 million, and you expect the firm’s free cash flows to grow by 4% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR’s equity beta. However, you do have beta data for UAL, another firm in the same industry:

AMR has a much lower debt-equity ratio of 0.30, which is expected to remain stable, and its debt is risk free. AMR’s corporate tax rate is 40%, the risk-free rate is 5%, and the expected return on the market portfolio is 11%.

a.   Estimate AMR’s equity cost of capital.

b.   Estimate AMR’s share price.