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Questions and Answers of Corporate Finance

Use the AFN equation to estimate Hatfield’s required new external capital for 2011 if the 15% expected growth takes place. Assume its 2010 ratios will remain the same in 2011.
Define the term “capital intensity.” Explain how a decline in capital intensity would affect the AFN, other things held constant. Would economies of scale combined with rapid growth affect
Define the term “self-supporting growth rate.” Based on the Figure MC-1 data, what is Hatfield’s self-supporting growth rate? Would the self-supporting growth rate be changed by a change in the
How much new capital will the firm need (i.e., what is the forecasted AFN), how does it compare with the amount you calculated using the AFN equation, and why does any difference exist?
Calculate the firm’s free cash flow, return on invested capital, EPS, DPS, ROE, and any other ratios you think would be useful in considering the situation.
Assuming all of the inputs turn out to be exactly correct, would these answers also be exactly correct? If not, why not?
What is financing feedback?
Now repeat the analysis done for question f but assume that Hatfield is able to achieve industry averages for the following input variables: Operating costs/Sales, Receivables/Sales,
Might a strategic plan that included an incentive compensation program affect the firm’s ability to move to or at least toward industry average operating performance?
Define each of the following terms:a. Assets-in-place; growth options; nonoperating assetsb. Net operating working capital; operating capital; NOPAT; free cash flowc. Value of operations; horizon
Explain how to use the corporate valuation model to find the price per share of common equity.
Explain how it is possible for sales growth to decrease the value of a profitable company.
What are some actions an entrenched management might take that would harm shareholders?
How is it possible for an employee stock option
Use the following income statements and balance sheets to calculate Garnet Inc.'s free cash flow for 2011. GarnetInc.
EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012, and the weighted average cost of capital is 11%. What is the
A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%, and a WACC of 10%. What is its value of operations? What is its intrinsic MVA?
You are given the following forecasted information for the year 2014: sales = $300,000,000, operating profitability (OP) = 6%, capital requirements (CR) = 43%, growth (g) = 5%, and the weighted
Brooks Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000 for the next 2 years, respectively; after the second year, FCF is expected to grow at a constant
Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 7%
The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2010 value of operations is $756 million, what is the 12/31/2010 intrinsic market value of equity? Balance Sheet, December 31,
The balance sheet of Roop Industries is shown below. The 12/31/2010 value of operations is $651 million, and there are 10 million shares of common equity. What is the intrinsic price per share?
The financial statements of Lioi Steel Fabricators are shown below, both the actual results for 2010 and the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The
What are assets-in-place? How can their value be estimated?
What are nonoperating assets? How can their value be estimated?
What is the total value of a corporation? Who has claims on this value?
The first acquisition target is a privately held company in a mature industry owned by two brothers, each with 50 shares of stock. The company currently has free cash flow of $24 million. Its WACC
What is its total corporate value?
What is its intrinsic stock price per share?
What is its MVA (MVA = total corporate value – total book value)?
The second acquisition target is a privately held company in a growing industry. The target has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It
What is its value of equity on a price per share basis?
What are the four value drivers? How does each of them affect value?
What is expected return on invested capital (EROIC)? Why is the spread between EROIC and WACC so important?
KFS has two divisions. Both have current sales of $1,000, current expected growth of 5%, and a WACC of 10%. Division A has high profitability (OP=6%) but high capital requirements (CR=78%). Division
What is the ROIC of each division for 5% growth and for 6% growth? How is this related to MVA?
List six potential managerial behaviors that can harm a firm’s value.
The managers at KFS have heard that corporate governance can affect shareholder value. What is corporate governance? List five corporate governance provisions that are internal to a firm and are
Briefly describe the use of stock options in a compensation plan. What are some potential problems with stock options as a form of compensation?
What is block ownership? How does it affect corporate governance?
What characteristics of the board of directors usually lead to effective corporate governance?
Define each of the following terms:a. Working capital; net working capital; net operating working capitalb. Relaxed policy; restricted policy; moderate policyc. Permanent current operating assets;
What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?
What are the four elements of a firm’s credit policy? To what extent can firms set their own credit policies as opposed to accepting policies that are dictated by its competitors?
What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?
From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?
Discuss this statement: Firms can control their accruals within fairly wide limits.
Is it true that most firms are able to obtain some free trade credit and that additional trade credit is often available, but at a cost? Explain.
What kinds of firms use commercial paper?
Williams & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s
Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day. What is the company’s average accounts receivable?
What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?
The Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of
A chain of appliance stores, APP Corporation, purchases inventory with a net price of $500,000 each day. The company purchases the inventory under the credit terms of 2/15, net 40. APP always takes
How can one distinguish between a relaxed but rational working capital policy and a situation in which a firm simply has excessive current assets because it is inefficient? Does SKI’s working
Calculate the firm’s cash conversion cycle given annual sales are $660,000 and cost of goods represent 80% of sales. Assume a 365-day year.
What might SKI do to reduce its cash without harming operations?
In an attempt to better understand SKI’s cash position, Barnes developed a cash budget. Data for the first 2 months of the year are shown below. (Note that Barnes’ preliminary cash budget does
Should depreciation expense be explicitly included in the cash budget? Why or why not?
In his preliminary cash budget, Barnes has assumed that all sales are collected and, thus, that SKI has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting
Barnes’ cash budget for the entire year, although not given here, is based heavily on his forecast for monthly sales. Sales are expected to be extremely low between May and September but then
What reasons might SKI have for maintaining a relatively high amount of cash?
Is there any reason to think that SKI may be holding too much inventory? If so, how would that affect EVA and ROE?
If the company reduces its inventory without adversely affecting sales, what effect should this have on the company’s cash position (1) in the short run and (2) in the long run? Explain in terms of
Barnes knows that SKI sells on the same credit terms as other firms in its industry. Use the ratios presented earlier to explain whether SKI’s customers pay more or less promptly than those of its
If the company reduces its DSO without seriously affecting sales, what effect would this have on its cash position (1) in the short run and (2) in the long run? Answer in terms of the cash budget
In addition to improving the management of its current assets, SKI is also reviewing the ways in which it finances its current assets. With this concern in mind, Barnes is also trying to answer the
Assume that SKI purchases $200,000 (net of discounts) of materials on terms of 1/10, net 30, but that it can get away with paying on the 40th day if it chooses not to take discounts. How much free
SKI tries to match the maturity of its assets and liabilities. Describe how SKI could adopt either a more aggressive or more conservative financing policy.
What are the advantages and disadvantages of using short-term debt as a source of financing?
Would it be feasible for SKI to finance with commercial paper?
Define each of the following terms:a. Multinational corporationb. Exchange rate; fixed exchange rate system; floating exchange ratesc. Trade deficit; devaluation; revaluationd. Exchange rate risk;
If the United States imports more goods from abroad than it exports, then foreigners will tend to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect to foreign
Why do U.S. corporations build manufacturing plants abroad when they could build them at home?
Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.
What is a Eurodollar? If a French citizen deposits $10,000 in Chase Bank in New York, have Eurodollars been created? What if the deposit is made in Barclays Bank in London? Chase’s Paris branch?
Does interest rate parity imply that interest rates are the same in all countries?
Why might purchasing power parity fail to hold?
A currency trader observes that, in the spot exchange market, 1 U.S. dollar can be exchanged for 9 Mexican pesos or for 111.23 Japanese yen. What is the cross rate between the yen and the peso; that
Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, 1 yen equals $0.009. If interest rate
A television set costs $500 in the United States. The same set costs 550 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
Inventory management
Credit management.
What is the impact of multinational operations on each of the following financial management topics? Cash management.
Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen equals 0.0086 dollar. In Japan, 90-day risk-free securities yield 4.6%. What is the yield
In the spot market, 7.8 pesos can be exchanged for 1 U.S. dollar. A compact disc costs $15 in the United States. If purchasing power parity holds, what should be the price of the same disc in Mexico?
You are the vice president of International InfoXchange, headquartered in Chicago. All shareholders of the firm live in the United States. Earlier this month, you obtained a loan of 5 million
Early in September 1983, it took 245 Japanese yen to equal $1. More than 20 years later, that exchange rate had fallen to 108 yen to $1. Assume that the price of a Japanese-manufactured automobile
Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today's spot rate. The firm's financial manager, James Desreumaux, has noted the following current spot and
Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Germany. In the spot market, 1 euro equals $0.80 dollar.a. Is the 90-day forward
After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to
Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering whether to undertake a 1-year project in the United States. The
What is a multinational corporation? Why do firms expand into other countries?
What are the six major factors which distinguish multinational financial management from financial management as practiced by a purely domestic firm?
Calculate the indirect quotations for Euros and Kronor.
What is a cross rate? Calculate the two cross rates between euros and kronor.
Now assume Citrus Products begins producing the same liter of orange juice in Spain. The product costs 2.0 euros to produce and ship to Sweden, where it can be sold for 20 kronor. What is the dollar
Briefly describe the current International Monetary System. How does the current system differ from the system that was in place prior to August 1971?
What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?

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