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corporate finance

Questions and Answers of Corporate Finance

Is an initial public offering an example of a primary or a secondary market transaction?
Differentiate between dealer markets and stock markets that have a physical location.
Identify and briefly compare the two leading stock exchanges in the United States today.
Why is corporate finance important to all managers?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the
Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form.Assume that you recently graduated and
How do corporations “go public” and conAssume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the
What should be the primary objective of managers?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the
Do firms have any responsibilities to society at large?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of
Is stock price maximization good or bad for society?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of
Should firms behave ethically?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is
What three aspects of cash flows affect the value of any investment?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and
What are free cash flows?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients is
What is the weighted average cost of capital?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the
How do free cash flows and the weighted average cost of capital interact to determine a firm’s value?Assume that you recently graduated and have just reported to work as an investment advisor at
Who are the providers (savers) and users (borrowers) of capital? How is capital transferred between savers and borrowers?Assume that you recently graduated and have just reported to work as an
What do we call the price that a borrower must pay for debt capital? What is the price of equity capital? What are the four most fundamental factors that affect the cost of money, or the general
What are some economic conditions that affect the cost of money?Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer
What are financial securities? Describe some financial instruments.Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer
List some financial institutions.Assume that you recently graduated and have just reported to work as an investment advisor at the brokerage firm of Balik and Kiefer Inc. One of the firm’s clients
What are some different types of markets?
How are secondary markets organized?
List some physical location markets and some computer/telephone networks.
Explain the differences between open outcry auctions, dealer markets, and electronic communications networks (ECNS).
Briefly explain mortgage securitization and how it contributed to the global economic crisis.Assume that you recently graduated and have just reported to work as an investment advisor at the
Define each of the following terms:a. Annual report; balance sheet; income statementb. Common stockholders’ equity, or net worth; retained earningsc. Statement of stockholders’ equity; statement
If a “typical” firm reports $20 million of retained earnings on its balance sheet, can the firm definitely pay a $20 million cash dividend?
What is operating capital, and why is it important?
Explain the difference between NOPAT and net income. Which is a better measure of the performance of a company’s operations?
What is free cash flow? Why is it the most important measure of cash flow?
If you were starting a business, what tax considerations might cause you to prefer to set it up as a proprietorship or a partnership rather than as a corporation?
An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond’s after-tax yield?
Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?
Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement
Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was 40%. Calculate its charge for
Kendall Corners Inc. recently reported net income of $3.1 million and depreciation of $500,000. What was its net cash flow? Assume it had no amortization expense.
In its most recent financial statements, Newhouse Inc. reported $50 million of net income and $810 million of retained earnings. The previous retained earnings were $780 million. How much in
The Talley Corporation had a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of
The Wendt Corporation had $10.5 million of taxable income.a. What is the company’s federal income tax bill for the year?b. Assume the firm receives an additional $1 million of interest income from
The Shrieves Corporation has $10,000 that it plans to invest in marketable securities. It is choosing among AT&T bonds, which yield 7.5%, state of Florida muni bonds, which yield 5% (but are not
The Moore Corporation has operating income (EBIT) of $750,000. The company’s depreciation expense is $200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the company’s
The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenues will be
Using Rhodes Corporation's financial statements (shown below), answer the following questions. a. What is the net operating profit after taxes (NOPAT) for 2010? b. What are the amounts of net
The Bookbinder Company has made $150,000 before taxes during each of the last 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2010 the firm incurred a loss of
What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet? What effect did it have on liabilities and equity?
What do you conclude from the statement of cash flows?
What is free cash flow? Why is it important? What are the five uses of FCF?
What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net
What is Computron’s free cash flow (FCF)? What are Computron’s “net uses” of its FCF?
Calculate Computron’s return on invested capital. Computron has a 10% cost of capital (WACC). Do you think Computron’s growth added value?
Jamison also has asked you to estimate Computron's EVA. She estimates that the after-tax cost of capital was 10 percent in both years.
What happened to Computron's market value added (MVA)?
Assume that a corporation has $100,000 of taxable income from operations plus $5,000 of interest income and $10,000 of dividend income. What is the company’s tax liability?
Assume that you are in the 25 percent marginal tax bracket and that you have $5,000 to invest. You have narrowed your investment choices down to California bonds with a yield of 7 percent or equally
Define each of the following terms:a. Liquidity ratios: current ratio; quick, or acid test, ratiob. Asset management ratios: inventory turnover ratio; days sales outstanding (DSO); fixed assets
Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in evaluating ratios?
Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a drop in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed assets
Profit margins and turnover ratios vary from one industry to another. What differences would you expect to find between a grocery chain such as Safeway and a steel company? Think particularly about
How might(a) Seasonal factors and(b) Different growth rates distort a comparative ratio analysis? Give some examples. How might these problems be alleviated?
Why is it sometimes misleading to compare a company’s financial ratios with those of other firms that operate in the same industry?
Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.
Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long-term debt and common equity. What is the company’s debt ratio?
Winston Washers’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in
A company has an EPS of $1.50, a cash flow per share of $3.00, and a price/cash flow ratio of 8.0. What is its P/E ratio?
Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are $100 million and it has total assets of $50 million. What is its ROE?
Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover?What is the firm’s equity multiplier?
Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level
Assume you are given the following relationships for the Clayton Corporation:Sales/total assets 1.5Return on assets (ROA) 3%Return on equity (ROE) 5%Calculate Clayton’s profit margin and debt ratio.
The Nelson Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to
The Manor Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10% annually: Manor’s annual sales are $2 million, its average tax rate is 30%, and its net profit margin on
Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data: Debt ratio: 50% Quick ratio: 0.80 Total assets turnover:
The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover of 6 times, total current assets of $810,000, and cash and marketable securities of $120,000. What were
Data for Morton Chip Company and its industry averages follow. a. Calculate the indicated ratios for Morton. b. Construct the extended Du Pont equation for both Morton and the industry. c. Outline
The Jimenez Corporation's forecasted 2011 financial statements follow, along with some industry average ratios. a. Calculate Jimenez's 2011 forecasted ratios, compare them with the industry average
Why are ratios useful? What three groups use ratio analysis and for what reasons?
Calculate the 2011 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2009, 2010, and as projected
Calculate the 2011 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computron’s utilization of assets stack up against other firms in its
Calculate the 2011 debt, times-interest-earned, and EBITDA coverage ratios. How does Computron compare with the industry with respect to financial leverage? What can you conclude from these ratios?
Calculate the 2011 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
Calculate the 2011 price/earnings ratio, price/cash flow ratios, and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron?
Use the extended Du Pont equation to provide a summary and overview of Computron’s financial condition as projected for 2011. What are the firm’s major strengths and weaknesses?
What are some potential problems and limitations of financial ratio analysis?
What are some qualitative factors analysts should consider when evaluating a company’s likely future financial performance?
Define each of the following terms:(a) Option; call option; put option(b) Exercise value; strike price(c) Black-Scholes option pricing model
Why do options sell at prices higher than their exercise values?
Describe the effect on a call option’s price that results from an increase in each of the following factors:(1) Stock price, (2) Strike price, (3) Time to expiration, (4) Risk-free rate, and (5)
A call option on the stock of Bedrock Boulders has a market price of $7. The stock sells for $30 a share, and the option has a strike price of $25 a share. What is the exercise value of the call
The exercise price on one of Flanagan Company’s options is $15, its exercise value is $22, and its time value is $5. What are the option’s market value and the price of the stock?
Assume that you have been given the following information on Purcell Industries:Current stock price = $15 ………………… Strike price of option = $15Time to maturity of option = 6
The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of
Use the Black-Scholes Model to find the price for a call option with the following inputs:(1) Current stock price is $30,(2) Strike price is $35,(3) Time to expiration is 4 months,(4) Annualized
The current price of a stock is $20. In 1 year, the price will be either $26 or $16. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $21 and
The current price of a stock is $15. In 6 months, the price will be either $18 or $13. The annual risk-free rate is 6%. Find the price of a call option on the stock that has a strike price of $14
What is a financial option? What is the single most important characteristic of an option?Assume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California
Options have a unique set of terminology. Define the following terms:(1) Call option;(2) Put option;(3) Strike price;(4) Expiration date;(5) Exercise value(6) Option price;(7) Time value;(8) Covered
Consider Triple Play's call option with a $25 strike price. The following table contains historical values for this option at different stock prices: 1. Create a table which shows(a) Stock
What happens to the option’s time value as the stock price rises? Why?MINI CASEAssume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California company that
Consider a stock with a current price of P = $27. Suppose that over the next 6 months the stock price will either go up by a factor of 1.41 or down by a factor of 0.71. Consider a call option on the
Suppose you write 1 call option and buy Ns shares of stock. How many shares must you buy to create a portfolio with a riskless payoff (which is called a hedge portfolio)? What is the payoff of the
What is the present value of the hedge portfolio’s riskless payoff? What is the value of the call option?MINI CASEAssume that you have just been hired as a financial analyst by Triple Play Inc., a

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