Question

1. Ten years ago, the Circus Corp.sold a 20-year bond issue with a 9 percent annual coupon rate and a3 percent call premium. Today, Circus called the bonds. The bondsoriginally were sold at their face value of $1,000. Compute therealized rate of return (yield to call) for investors who purchasedthe bonds when they were issued and who surrender them today inexchange for the call price.

2. (EXCELTEMPLATE) Grass Whacker’s is considering whether or not torefund a $90 million, 6 percent coupon, 30 year bond issue that wassold 8 years ago. It is amortizing $1.8 million of flotation costsover the issue’s 30-year life. A new 22-year issue would carry aninterest rate of 5.35 percent. A call premium of 5 percent would berequired to retire the old bonds and flotation costs on the newissue would be $1.35 million (also to be amortized). GrassWhacker’s marginal tax rate is 34 percent. The new bonds would beissued 1 month before the old bonds are called, with the proceedsbeing invested in short-term securities returning 1.5 percentannually. What is the NPV of the refund? Use the NPV function inExcel and the PV function in Excel. Answers should be the same.

Use the Excel Template andthe following information to answer the next threequestions:

Peterson Packaging Inc. does not currently pay dividends. Thecompany will start with a $0.50 dividend at the end of year threeand grow it by 10% for each of the next seven years until it nearlyreaches $1.00. After seven years of growth, it will fix itsdividend at $1.00 forever. The required return on the stock is15%.

3. (EXCEL TEMPLATE)What is the current stock price? Use the NPV function.

4. (EXCEL TEMPLATE)What is the expected stock price in years 1-10? Use the NPVfunction.

5. (EXCEL TEMPLATE)Calculate the dividend yield and capital gains yield that aninvestor should expect for each year.

Use the financial statements shown below to answer the nextthree questions. Free cash flow is expected to grow at 4 percentafter 2019. The weighted average cost of capital is 6.9 percent.The bonds are currently selling at 103% of par. The preferred stockhas a current market value of $51.51 million.

Balance Sheet (in millions)

	Actual 2018	Projected 2019		Actual 2018	Projected 2019
Cash	81.90	61.60	Accounts payable	26.10	22.20
Marketable securities	53.80	54.20	Notes payable	101.00	4.70
Accounts Receivable	26.40	27.00	Accruals	8.00	7.37
Inventory	198.20	186.90	Total current liabilities	135.10	34.27
Total Current Assets	360.30	329.70	Long term bonds	9.20	4.50
			Preferred Stock	50.20	52.40
			Common stock	230.00	230.00
			Retained earnings	307.00	367.23
Net fixed assets	371.20	358.70	Total common equity	537.00	597.23
Total assets	731.50	688.40	Total liabilities & equity	731.50	688.40

Income Statement (in millions)

	Actual 2018	Projected 2019
Sales	907.30	955.10
Operating expenses	764.40	802.80
Depreciation	21.30	21.30
Earnings before interest & taxes	121.90	131.00
Interest	0.60	0.60
Earnings before taxes	121.30	130.40
Taxes	45.90	50.10
Net income before preferred dividends	75.40	80.30
Preferred dividends	2.50	1.60
Net Income available for common	72.90	78.70
Common dividends	16.40	18.47
Addition to retained earnings	56.50	60.23
Number of shares (in millions)	12.70	12.70

6. What is the free cash flow for 2019?

7. What is the value of operations as of 2018?

8. What is the price per share for 2018?