week 2

Homework Assignment

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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

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See the Syllabus section “Due Dates for Assignments
& Exams” for due date information.

DeVry University
FIN 351

May 15, 2016


What is the advantage of using a composite of indicators
(such as the 10 leading indicators) over simply using an individual indicator?


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?







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.)


Why might a firm begin paying stock dividends in the growth


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


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.


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).


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.


Find the present value of the dividends in part a.


Dividends (20% growth)

P.V. Factor 13%


Project the dividend for the fifth year (D5).


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

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 =


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

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


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

value of the stock.


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.


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

Industry P/E ratio


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.


What might a high dividend-payout ratio suggest to an
analyst about a company’s growth prospects?


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.


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)?


The Multi-Corporation has three different operating
divisions. Financial

information for each is as follows:


Which division provides the highest operating margin?


Which division provides the lowest after-tax profit margin?


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


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


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


The vice president of finance suggests the assets in the
Appliances division be sold off for $10 million and redeployed in Sporting


Explain why Sporting Goods, which has a lower return on
sales than

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

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