week 2

Homework Assignment

Answer the following items from your textbook.

Chapter 5 Discussion Question 10

Chapter 5 Discussion Question 12

Chapter 6 Discussion Question 2

Chapter 6 Discussion Question 3

Chapter 7 Discussion Question 9

Chapter 7 Problem 5

Chapter 7 Problem 10

Chapter 7 Problem 14

Chapter 8 Discussion Question 12

Chapter 8 Discussion Question 13

Chapter 8 Problem 5

Chapter 8 Problem 15

Submit your answers in a Word document to the Week 2

Assignments Dropbox. Grading rubric may be found in Doc Sharing. Follow APA

format.

Submit your assignment to the Dropbox, located at the top of

this page. For instructions on how to use the Dropbox, read these step-by-step

instructions.

See the Syllabus section “Due Dates for Assignments

& Exams” for due date information.

DeVry University

FIN 351

May 15, 2016

1.

What is the advantage of using a composite of indicators

(such as the 10 leading indicators) over simply using an individual indicator?

2.

Comment on whether each of the following three industries is

sensitive to the business cycle. If it is sensitive, does it do better in a

boom period or a recession?

a.

Automobiles-

b.

Pharmaceuticals-

Housing-

3.

List the five stages of the industry life cycle. How does

the pattern of cash dividend payments change over the cycle? (A general

statement is all that is required.)

4.

Why might a firm begin paying stock dividends in the growth

stage?

5.

For cyclical companies, why might the current P/E ratio be

misleading?

6.

Assume D1 = $1.60, Ke = 13 percent, g = 8 percent. Using

Formula 7–5 on page 168, for the constant growth dividend valuation model,

compute P0.

7.

Leland Manufacturing Company anticipates a nonconstant

growth pattern

for dividends. Dividends at the end of year 1 are $4.00 per

share and are

expected to grow by 20 percent per year until the end of

year 4 (that’s three

years of growth). After year 4, dividends are expected to

grow at 5 percent as

far as the company can see into the future. All dividends

are to be discounted

back to present at a 13 percent rate (Ke = 13 percent).

a.

Project dividends for years 1 through 4 (the first year is

already given).

Round all values that you compute to two places to the right

of the

decimal point throughout this problem.

b.

Find the present value of the dividends in part a.

Year

Dividends (20% growth)

P.V. Factor 13%

c.

Project the dividend for the fifth year (D5).

d.

Use Formula 7–5 on page 168 to find the present value of all

future

dividends, beginning with the fifth year’s dividend. The

present value you

find will be at the end of the fourth year. Use Formula 7–5

as follows: P4 =

e.

Discount back the value found in part d for four years at 13

percent.

P.V. of $90.75 four years from now at 13%

f.

Add together the values from parts b and e to determine the

present

value of the stock.

8.

Mr. Phillips of Southwest Investment Bankers is evaluating

the P/E ratio of Madison Electronics Conveyors (MEC). The firm’s P/E is

currently 17. With

earning per share of $2, the stock price is $34.

The average P/E ratio in the electronic conveyor industry is

presently 16.

However, MEC has an anticipated growth rate of 18 percent

versus an industry average of 12 percent, so 2 will be added to the industry

P/E by Mr.

Phillips. Also, the operating risk associated with MEC is

less than that for the industry because of its long-term contract with American

Airlines. For this reason, Mr. Phillips will add a factor of 1.5 to the

industry P/E ratio.

The debt-to-total-assets ratio is not as encouraging. It is

50 percent, while the industry ratio is 40 percent. In doing his evaluation,

Mr. Phillips decides to subtract a factor of 0.5 from the industry P/E ratio.

Other ratios, including dividend payout, appear to be in line with the

industry, so Mr. Phillips will make no further adjustment along these lines.

However, he is somewhat distressed by the fact that the firm

only spent 3 percent of sales on research and development last year, when the

industry norm is 7 percent. For this reason he will subtract a factor of 1.5

from the industry P/E ratio.

Despite the relatively low research budget, Mr. Sanders

observes that the firm has just hired two of the top executives from a

competitor in the industry. He decides to add a factor of 1 to the industry P/E

ratio because of this.

a.

Determine the P/E ratio for MEC based on Mr. Phillips’s analysis.

Industry P/E ratio

b.

Multiply this times earnings per share, and comment on

whether you think the stock might possibly be under- or overvalued in the

marketplace at its current P/E and price.

The analysis would appear to be that the stock with a

current P/E of 17 and price of $34 is undervalued.

9.

What might a high dividend-payout ratio suggest to an

analyst about a company’s growth prospects?

10.

Explain the probable impact of replacement-cost accounting

on the ratios of return on assets, debt to total assets, and times interest

earned for a firm that has substantial old fixed assets.

11.

A firm has assets of $1,800,000 and turns over its assets 2.5

times per year.

Return on assets is 20 percent. What is its profit margin

(return on sales)?

12.

The Multi-Corporation has three different operating

divisions. Financial

information for each is as follows:

a.

Which division provides the highest operating margin?

b.

Which division provides the lowest after-tax profit margin?

c.

Which division has the lowest after-tax return on assets?

d.

Compute net income (after-tax) to sales for the entire

corporation.

e.

Compute net income (after-tax) to assets for the entire

corporation.

f.

The vice president of finance suggests the assets in the

Appliances division be sold off for $10 million and redeployed in Sporting

Goods.

g.

Explain why Sporting Goods, which has a lower return on

sales than

Appliances, has such a positive effect on return on assets.