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Questions and Answers of Corporate Finance

Riter-Cal Corporation has preferred shares outstanding carrying a $35 par value and promise a 6% annual dividend rate. Daniel Smith holds 200 shares of RC's preferred stock. What annual dividend can
During the current year, the total assets of Mifflinburg Corporation decreased by $ 60,000 and total liabilities decreased by $ 300,000. The company issued $ 100,000 of new stock, and its net income
Storico Co. just paid a dividend of $3.5 per share. The company will increase its dividend by 12 percent next year and will then reduce its dividend growth rate by 3 percentage points per year until
Velcro Saddles is contemplating the acquisition of Pogo Ski Sticks, Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates
Debbie Davis and Elizabeth Engels Exchanged like kind property. Debbie had an adjusted basis of $12,000 in her property (Fair Market value is $15,000). Elizabeth’s property had an adjusted basis of
From past experience, an airline has found the luggage weight for individual air travelers on its trans-Atlantic route to have a mean of 80 pounds and a standard deviation of 20 pounds. The plane is
A stock has a beta of 1.35 and an expected return of 16%. A risk-free asset currentlyearns 4.8%.1. What is the expected return on a portfolio that is equally invested in the two assets?2. If a
Alex Inc, buys 40 percent of Steinbart Company on January 1, 2010, for $530,000. The equity method accounting is to be used. Steinbart’s net assets on that date were $1.2 million. Any excess
Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each companys value in that state are shown here:a) What is the value of each company before the
On February 1, 2011, Lagune & Sons issued 9% bonds dated February 1, 2011, with a face amount of $200,000. The bonds sold for $182,841 and mature in 20 years. The effective interest rate for
You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money:• Capital Cities ABC, Inc. bonds with a par value of
You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money:• Capital Cities ABC, Inc. bonds with a par value of
The expected return from two stocks, Microsoft and Boeing, under different states of the economy are as follows:State of the economy – Poor, Average, Good, Probability – Poor 20%, Average
Assume that you have been hired as a consultant by CGT, a major producer of chemicals and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the firms weighted
The Marietta Corporation, a large manufacturer of mufflers, tailpipes, and shock absorbers, is currently carrying out its financial planning for next year. In about two weeks, at the next meeting of
You have the following data on Joe's Corporation:EBIT:$1,000,000Tax rate:40%Cost of equity:10%Joe's is a zero growth firm, and is currently financed entirely with equity (in other words, it currently
DeAngelo Corp.s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it
Great Subs, Inc., a regional sandwich chain, is considering purchasing a smaller chain, Eastern Pizza, which is currently, financed using 20% debt at a cost of 8%. Great Subs' analysts project
1. If you are promised a nominal return of 12% on a one year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?2. A positive aspect of defined-benefit
You are provided the following information on a company. The total market value is $40 million. The capital structure, shown here, is considered to be optimal.a. What is the after-tax cost of debt?
Why is it that for a given firm, the required rate of return on equity is always greater then the required rate of return on its debt?
A bond maturing in 7 years pays 8% on a $1,000 face value. However interest is paid semi-annually.If your required rate of return is 10%, what is the value of the bond? What is the value if the
Tulley Appliances Inc. projects next year’s sales to be $20 million. Current sales are $15 million, based on current assets of $5 million and fixed assets of $5 million. The firm’s net profit
A local government agency has asked you to consult regarding acquisition of land for recreation needs for the urban area. The following data are provided:Urban population 10 years ago 49,050Urban
What are the weaknesses of a dividend growth evaluation model?
This morning, you arrived at your job as Head of Client Advisory Services for a major investment firm and received a distressing phone call. Mrs. Smith, one of your best clients, who just happened to
The following information was obtained from the accounts of Lukes, Inc., as of December 31, 2008. It is presented in scrambled order.Common stock, no par value, 10,000 sharesauthorized, 5,724 shares
Excel format - please show formulas.The accounts of Consolidated Can contain the following amounts atDecember 31, 2008:Cost of products sold $410,000Dividends 3,000Extraordinary gain (net of tax)
A product sells for $750 in the United States. The exchange rate is $1 to 1.65 Swiss francs. If purchasing power parity (PPP) holds, what is the price of the product in Switzerland? a. 123.75
You are a sugar dealer anticipating the purchase of 250,000 pounds of sugar in three months. You are concerned that the price of sugar will rise, so you take a long position in sugar futures. Each
Heathrow issues $200,000 of 6%, 15-year bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31st. The bonds are issued at a price of $1,728,224.HEATHROWBonds issued,
1. Which of the following statements is CORRECT?a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its
The following information is taken from accounting records of ABC Company as of the tiscal year ended December 31, 2007:Net sales$900,000Interest revenue 2,000Dividend income 12,000Cost of goods sold
Why do we need different tools for analyzing the financial statements? Don't the numbers in the financial statements speak for themselves?
The City of Charleston issued $3,000,000 of 8% coupon, 30 year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if
Your portfolio has a beta of 1.19. The portfolio consists of 13 percent U.S. Treasury bills, 32 percent in stock A, and 55 percent in stock B. Stock A has a risk-level equivalent to that of the
The R&D division of Healy Chemical Corp. has just developed a chemical for sterilizing the vicious Brazilian “killer bees” which are invading Mexico and the southern states of the United States.
Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project’s
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund
Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.a. Suppose
Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would its cost of equity be if it took on the average amount of debt for its
Pelamed Pharmaceuticals had EBIT of $325 million in 2010. In addition, Pelamed had interest expenses of $125 million and a corporate tax rate of 40%.a. What was Pelamed’s 2010 net income?b. What
Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 35%.a. If Grommit increases leverage so
Assume that Microsoft has a total market value of $300 billion and a marginal tax rate of 35%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13% of its
Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year,
Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal
Arnell Industries has $10 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future.a. Suppose
Rogot Instruments makes fine violins, violas, and cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at a rate of 35%. Its cost of equity is
Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost
Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 40%, and it pays 7% interest on its debt. By what amount does the interest tax shield from its debt lower Summit’s
Milton Industries expects free cash flows of $5 million each year. Milton’s corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05
NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. NatNah decides to increase its leverage to maintain a market debt-to-value ratio of 0.5. Suppose its
Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently
Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s
Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount
Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $20 million
Marpor Industries has no debt and expects to generate free cash flows of $16 million each year. Marpor believes that if it permanently increases its level of debt to $40 million, the risk of
Dynron Corporation’s primary business is natural gas transportation using its vast gas pipeline network. Dynron’s assets currently have a market value of $150 million. The firm is exploring the
Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year.
Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after taxes) and their likelihood for each strategy are shown
You own a firm, and you want to raise $30 million to fund an expansion. Currently, you own 100% of the firm’s equity, and the firm has no debt. To raise the $30 million solely through equity, you
Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):EBIT ........ $1,000Interest expense ..... 0Income before tax .... 1,000Taxes ........ -350Net income
Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is
What is the most important difference between a corporation and all other organizational forms?
What does the phrase limited liability mean in a corporate context?
Which organizational forms give their owners limited liability?
What are the main advantages and disadvantages of organizing a firm as a corporation?
Explain the difference between an S and a C corporation.
You are a shareholder in a C corporation. The corporation earns $2.00 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. Assume the
Repeat Problem 6 assuming the corporation is an S corporation.
What is the most important type of decision that the financial manager makes?
Why do all shareholders agree on the same goal for the financial manager?
Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than in their own interests. What strategies are
Think back to the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order
Suppose you are considering renting an apartment. You, the renter, can be viewed as an agent while the company that owns the apartment can be viewed as the principal. What agency conflicts do you
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the
What is the difference between a public and a private corporation?
What is the difference between a primary and a secondary market?
What are some of the differences between the NYSE and NASDAQ?
Explain why the bid-ask spread is a transaction cost.
The following quote on Yahoo! stock appeared on April 13, 2010, on Yahoo! Finance:If you wanted to buy Yahoo!, what price would you pay per share? How much would you receive per share if you wanted
What is the financial cycle?
How do financial institutions help with risk-bearing?
What role do investment banks play in the economy?
What are some of the similarities and differences among mutual funds, pension funds, and hedge funds?
You have started a company and are in luck—a venture capitalist has offered to invest. You own 100% of the company with 5 million shares. The VC offers $1 million for 800,000 new shares.a. What is
Starware Software was founded last year to develop software for gaming applications. The founder initially invested $800,000 and received 8 million shares of stock. Starware now needs to raise a
Your start-up company needs capital. Right now, you own 100% of the firm with 10 million shares. You have received two offers from venture capitalists. The first offers to invest $3 million for 1
Three years ago, you founded your own company. You invested $100,000 of your own money and received 5 million shares of Series A preferred stock. Your company has since been through three additional
Based on the information in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what fractions of the firm do the Series B, C, and D
Assuming that you own only the Series A preferred stock in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm
Roundtree Software is going public using an auction IPO. The firm has received the following bids:Price ($) Number of Shares14.00 100,00013.80 200,00013.60
If Roundtree from Problem 7 decides to issue an extra 500,000 shares (for a total of 2.3 million shares), how much total money will it raise?
Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your
Your investment bankers price your IPO at $15 per share for 10 million shares. If the price at the end of the first day of trading is $17 per share,a. What was the percentage underpricing?b. How much
Margoles Publishing recently completed its IPO. The stock was offered at a price of $14 per share. On the first day of trading, the stock closed at $19 per share.a. What was the initial return on
If Margoles Publishing from Problem 11 paid an underwriting spread of 7% for its IPO and sold 10 million shares, what was the total cost (exclusive of underpricing) to it of going public?

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