FIN 419 Week 4 Activity Set Latest 2016 Version

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    FIN Week 4 Activity Set 2016 Version Questions
    1. Assume that the Financial Management Corporations $1000-par-value bond had a 6.500% coupon matured on May 15 2020 had a given current price quote of 110.418 and had a yield to maturity (YTM) of 5.255%. Given this information answer the following questions:
    a. What was the dollar price of the bond?
    b. What is the bonds current yield?
    c. Is the bond selling at par at a discount or at a premium? Why?
    d. Compare the bonds current yield calculated in part b to its YTM and explain why they differ
    2. Use the constant-growth model (Gordon Model) to find the value of each firm shown in the following table.
    Dividend Expected Dividend Growth Required Return
    3. Grey Products has fixed operating costs of $389000 variable operating costs of $16.51 per unit and a selling price of $62.02 per unit.
    a. Calculate the operating breakeven point in units.
    b. Calculate the firms EBIT at 11000 12000 and 13000 units respectively.
    c. With 12000 units as a base what are the percentage changes in units sold and EBIT as
    sales move from the base to the other sales levels used in part b?
    d. Use the percentages computed in part c to determine the degree of operating leverage (DOL).
    e. Use the formula for degree of operating leverage to determine the DOL at 12000 units.
    3. Northwestern Savings and Loan has a current capital structure consisting of $250000 of 16% (annual interest) debt and 1000 shares of common stock. The firm pays taxes at the rate of 30%.
    a. Using EBIT values of $77000 and $115000 determine the associated earnings per share (EPS).
    B) Using $77000 of EBIT as a base calculate the degree of financial leverage (DFL). C) Rework parts A and B assuming that the firm has $107000 of 16% (annual interest) debt and 2000 shares of common stock.
    5. Charter Enterprises currently has $1 million in total assets and is totally equity-financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10% 20% 30% 40% 50% 60% and 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratios value?

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