Chapter 7 - Stocks

1. John purchases 150 shares of WWE stock for $50 per share. John pays $3,000 in cash and
borrows $4,500 from his broker at 15 percent interest to complete the purchase. One year l
John sells the stock for $65 per share. John's return if the stock paid no dividends during the
year is $2,250 – 675 = 1,575/3000 = 52.5%

2. Mel would like to purchase a stock on margin in her margin account. Currently, the stock sh
considering is trading at $17 per share and she would like to purchase 600 shares. What is
margin requirement if the margin rate is 30 percent and her brokerage firm is willing to lend
70 percent of her purchase price? $17*600*.3 = 3060

Chapter 8 - Bonds

1. What is the yield to maturity on the following bond: $10,000 par value, semi-annual coupon of
percent, maturing in six years and currently trading for $10,785?
To get the YTM, we need to solve for “ i “

Set-up – Clear all work in calculator. Ensure calculator payments are set to end mode.

n = 12 6 years with semi-annual coupons ( 6 x 2 = 12)

i = ? = 3.536
PV = - 10,785
PMT = 250 5% bond paying semi-annual coupons (5% x 10,000 = 500/year, $250 per pmt
FV = 10,000 (par)
C/Y = 2
P/Y = 2

2. What is the yield to maturity on the following bond: $5,000 par value, semi-annual coupon of 1
percent, maturing in five years and currently trading for $5,050?
To get the YTM, we need to solve for “ i “

Set-up – Clear all work in calculator. Ensure calculator payments are set to end mode.

n = 10 5 years with semi-annual coupons ( 5 x 2 = 10)

i = ? = 9.742
PV = - 5,050
PMT = 250 10% bond paying semi-annual coupons (10% x 5,000 = 500/year, $250 per pm
FV = 5,000 (par)
C/Y = 2
P/Y = 2

Note, current trading price is the present value. Par value of a bond, is the face value/maturity
proceeds. YTM, yield to maturity, is the current interest rate, and the coupon is the income (pmt).

3. Given the following bond information: $1,000 par value, maturity Dec 22, 2023, semi-annual co
7.75 percent, price 105.50 and yield 7.4 percent. How much interest does it pay annually? The
pays $77.5 annually (1,000 x 7.75%)

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 4. Given the following bond information: $1,000 par value, maturity Dec 22, 2023, semi-annual co
7.40 percent, price 105.50 and yield 7.2 percent. How much interest does it pay annually? The
pays $74 annually (1,000 x 7.4%)

5. What is the price of a $1000 bond with a 5.8% coupon rate, semi-annual coupons, and 30 year
maturity if yield to maturity is 7.5%?
To get the Price, we need to solve for “ PV “

Set-up – Clear all work in calculator. Ensure calculator payments are set to end mode.

n = 60 30 years with semi-annual coupons ( 30 x 2 = 60)

i = 7.5 YTM
PV = ? = 798.2277
PMT = 29 5.8% bond paying semi-annual coupons (5.8% x 1,000 = 58/year, $29 per pmt
FV = 1,000 (par)
C/Y = 2
P/Y = 2

6. A $2,500 bond with a coupon rate of 5% paid semi-annually has five years to maturity and a yi
maturity of 8%. What is the price of this bond?
To get the Price, we need to solve for “ PV “

Set-up – Clear all work in calculator. Ensure calculator payments are set to end mode.

n = 10 5 years with semi-annual coupons ( 5 x 2 = 10)

i=8 YTM
PV = ? = 2,195.84
PMT = 62.5 5% bond paying semi-annual coupons (5% x 2500 = 125/year, $62.5 per pmt)
FV = 2,500 (par)
C/Y = 2
P/Y = 2

7. Tammy purchased a $10,000 par value bond. The bond has coupon rate of 6% and matures in
years. If Tammy paid $10,584.55 to purchase the bond, what is the yield to maturity (quiz 3 re
question)? 4.99%

Chapter 9

8. Husky Energy Inc has 36 million shares outstanding, with a current share price of $21.45 per sh
If the firm's book value of equity is $80 million, what is its market-to-book ratio? Market-to-boo
equals Market Capitalization/ Book Value of equity. To start, calc market cap (36m X $21.45);

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 772.2M. Then divide the market cap by the book value of equity 772.2/80 = 9.65

9. A firm has 12 million shares outstanding with a current share price of $8.50. The firm has a ma
to-book ratio of 3.55 and a book debt-equity ratio of 0.8. If the firm currently has $4 million in
cash, what is its enterprise value? To compute the enterprise value, calculate the market
capitalization first…12M x $8.5 = 102M. Then divide the market cap by the market-to-book ra
102M / 3.55 = 28.7324. Then, multiple 28.7324 by the debt-equity ratio 0.8 = 22.9859. Finally
22.9859 (the total value) and the market cap 102m and subtract the cash $4
(22.9859m + 102m – 4m) = 120.9859 or 121M.

10. A firm has EBIT of $4.5 million, interest expense of $400,000, and pays taxes of $1.2 million. I
firm has 2 million shares outstanding, what is the firm's EPS?
EPS = Net Income/Shares Outstanding
EBIT is Earnings Before Interest and Taxes
NI = EBIT – Interest – Taxes (4.5 – 0.4 – 1.2) = 2.9
EPS = 2.9/2 = 1.45

11. A firm has retained earnings of $42 million, after paying dividends of $10 million. What was th
firm's payout ratio?
Payout ratio is Dividends/Net Income
Dividends = $10 million
Net Income = $52 million. Note, the question reads retained earnings are 42 million AFTER pa
dividends. Therefore, add the dividends back to retained earnings to get Net Income (42 + 10
Payout is 10/52 = .192308

12. A firm has total sales of $53 million. It has gross profit of $12 million, operating income of $8.5
million, and net income of $4 million. What is the firm's net profit margin?
Profit Margin is Net Income/Sales
Therefore, $4/$53 = 0.07547 or 7.5%

13. A firm has $8 million in cash, $4 million in accounts receivable, and inventory of $7 million. Th
firm's accounts payable is $7 million and the firm has no short-term debt. What is the firm's cu
ratio? Current ratio = Current Assets/Current Liabilities
Current Assets = $19 (8 + 4 + 7)
Current Liabilities = $7
CR = 19/7 = 2.71

14. A firm has $10 million in cash, $4 million in accounts receivable, and inventory of $7 million. T
firm's accounts payable is $6.2 million and the firm has no short-term debt. What is the firm's q
ratio? Quick ratio = (Current Assets- Inventory)/Current Liabilities
Current Assets – Inventory = $14 (10 + 4 +7) - 7
Current Liabilities = $6.2
QR = 14/6.2 = 2.25806

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 Equity Financing

15. SC Inc. is selling 2 million shares of stock in an auction IPO. At the end of the bidding period th
have received the bids shown below. Which of the following is closest to the price at which the sha
will be offered?

Price ($) Number of Shares Bid

5.00 600,000
5.25 700,000
5.50 850,000
5.75 800,000
6.00 650,000
6.25 400,000
6.50 150,000

To get the offer price, 2 million shares need to sell. The company wants to sell high, so we start w
highest price and work backwards. I.e. $6.50 is the highest price. Counting down until we reach
million (150,000 + 400,000 + 650,000 + 800,000 = 2 million).
The price, when we hit 2 million (800,000) is the offer price. I.e. $5.75

16. SC Inc. is selling 500,000 shares of stock in an auction IPO. At the end of the bidding period th
have received the bids shown below. Which of the following is closest to the price at which the sha
will be offered?

Price ($) Number of Shares Bid

3.00 100,000
3.25 100,000
3.50 150,000
3.75 100,000
4.00 40,000
4.25 80,000
4.50 150,000

To get the offer price, 500,000 shares need to sell. The company wants to sell high, so we start w
highest price and work backwards. I.e. $4.50 is the highest price. Counting down until we reach
500,000 (150,000 + 80,000 + 40,000 + 100,000 + 150,000).

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 The price when we hit 500,000(150,000) is the offer price. I.e. $3.50

17. An IPO is offered at $7 per share for 1 million shares. The IPO underwriters had a spread of 8%
What was the total fee paid to the underwriters?
To calculate the underwriters’ fee, take the total proceeds and multiple it by the spread.
$7 x 1 million = $7,000,000. Spread is 8%. Therefore 7,000,000 x 8% = $560,000

18. An IPO is offered at $6.75 per share for 2 million shares. The IPO underwriters had a spread of
What price did the underwriters pay per share?
To calculate the price the underwriters’ paid, subtract the spread from the price per share.
Spread is 9%. 9% x 6.75 = 0.6075
Therefore, underwriters paid $6.75 minus 0.6075 = $6.14

19. An IPO is offered at $6.75 per share for 2 million shares. The IPO underwriters had a spread of
What proceeds did the firm receive from the IPO?
Proceeds equal offer price x shares sold minus underwriters fee
$6.75 x 2 million share minus 9%
13.5M minus 1.215m (9% x 13.5) = 12.285
12.285 is what the firm receives

20. Big Box retailing has a market capitalization of $500 million and 20 million shares outstanding
order to finance its growth, the management of Big Box plans to raise further capital through a
rights issue. All shareholders will be issued one right per share. For every ten rights held by the
stockholder, they can buy one share at a price of $4.00. How much money will this raise, if all
shareholders exercise their rights?
To calculate the money raised, we need to know the number of new shares issued. Therefore,
new share equals 10 rights. 20 million share outstanding divided by 10 rights is 2 million.
2 million x $4 = $8 million

21. Big Box retailing has a market capitalization of $3500 million and 5 million shares outstanding
order to finance its growth, the management of Big Box plans to raise further capital through a
rights issue. All shareholders will be issued one right per share. For every five rights held by th
stockholder, they can buy one share at a price of $17.00. How much money will this raise, if al
shareholders exercise their rights?
To calculate the money raised, we need to know the number of new shares issued. Therefore,
new share equals 5 rights. 5 million share outstanding divided by 5 rights is 1 million.
1 million x $17 = $17 million

Debt Financing

22. Husky Energy issues $110 million in straight bonds at par with a coupon rate of 4%. The firm a
pays underwriting fees of 6% on the face value of the bonds. What are the net proceeds to Hus
Energy from the bond issue?
Proceeds equals bonds issued minus underwriters fee

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 Underwriter fee is $110m x 6% = 6.6M
Proceeds = 110 – 6.6 = 103.4M

23. Ontario Energy issues $65 million in straight bonds at par with a coupon rate of 3%. The firm a
pays underwriting fees of 5% on the face value of the bonds. What are the net proceeds to Ont
Energy from the bond issue?
Proceeds equals bonds issued minus underwriters fee
Underwriter fee is $65m x 5% = 3.25M
Proceeds = 65 – 3.25 = 61.75M

24. A bond has a face value of $10,000 and a conversion ratio of 150. The stock is currently tradin
$70. What is the conversion price?
Conversion price is face value divided by conversion ratio
$10,000/150 = $66.67

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