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Questions and Answers of Corporate Finance

Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of
Your firm is selling 3 million shares in an IPO. You are targeting an offer price of $17.25 per share. Your underwriters have proposed a spread of 7%, but you would like to lower it to 5%. However,
If all of the shares sold are primary shares, how much will the firm raise? What will your percentage ownership of the firm be after the IPO?The firm you founded currently has 12 million shares, of
If all of the shares sold are from your holdings, how much will the firm raise? What will your percentage ownership of the firm be after the IPO?The firm you founded currently has 12 million shares,
What is the maximum number of secondary shares you could sell and still retain more than 50% ownership of the firm? How much would the firm raise in that case?The firm you founded currently has 12
On January 20, Metropolitan, Inc., sold 8 million shares of stock in an SEO. The market price of Metropolitan at the time was $42.50 per share. Of the 8 million shares sold, 5 million shares were
Foster Enterprises’ stock is trading for $50 per share and there are currently 10 million shares outstanding. It would like to raise $100 million. If its underwriter charges 5% of gross proceeds,a.
MacKenzie Corporation currently has 10 million shares of stock outstanding at a price of $40 per share. The company would like to raise money and has announced a rights issue. Every existing
You are finalizing a bank loan for $200,000 for your small business and the closing fees payable to the bank are 2% of the loan. After paying the fees, what will be the net amount of funds from the
Your firm is issuing $100 million in straight bonds at par with a coupon rate of 6% and paying total fees of 3%. What is the net amount of funds that the debt issue will provide for your firm?
Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can only pay dividends out of earnings made after the debt issue and you must maintain a minimum
General Electric has just issued a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It
Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment
You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?
A $1000 face value bond has a conversion ratio of 40. You estimate the transaction costs of conversion to be 3% of the face value of the bond. What price must the stock reach in order for you to
You are the CFO of RealNetworks on July 1, 2008. The company’s stock price is $6.74 and its convertible debt (as shown in Table 15.7) is now callable.a. What is the value of the shares the
What four financial statements can be found in a firm’s 10-K filing? What checks are there on the accuracy of these statements?
What is GAAP and who oversees it?
Confirm that you can find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources:a. From the company’s Web page (www.starbucks.com). b. From the SEC Web
Consider the following potential events that might have occurred to Global on December 30, 2010. For each one, indicate which line items in Global’s balance sheet would be affected and by how
What was the change in Global’s book value of equity from 2009 to 2010 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2010? Explain.
Use Google Finance (www.google.com/finance) to find the balance sheet data for Qualcomm as of the end of 2009.a. How much did Qualcomm have in cash and short-term investments?b. What were
Find the annual 10-K report for Peet’s Coffee and Tea (PEET) online, filed for 2008 (filed in early 2009). Answer the following questions from its balance sheet:a. How much cash did Peet’s have
In June 2007, General Electric (GE) had a book value of equity of $117 billion, 10.3 billion shares outstanding, and a market price of $38.00 per share. GE also had cash of $16 billion, and total
In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, and current liabilities of $6.99 billion. It also had inventories of $0.25 billion.a. What was Apple’s current
In April 2010, the following information was true about Abercrombie and Fitch (ANF) and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars.×a. What is
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the income statement:a. What were Peet’s revenues for 2008? By what percentage
Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are $500,000 and its research and development is $1 million. It has annual
If Local Co., the company in Problem 12, had an increase in selling expenses of $300,000, how would that affect each of its margins?
If Local Co., the company in Problem 12, had interest expense of $800,000, how would that affect each of its margins?
Chutes & Co. has interest expense of $1 million and an operating margin of 10% on total sales of $30 million. What is Chutes’ interest coverage ratio?
Ladders, Inc. has a net profit margin of 5% on sales of $50 million. It has book value of equity of $40 million and total liabilities with a book value of $30 million. What is Ladders’ ROE? ROA?
JPJ Corp has sales of $1 million, accounts receivable of $50,000, total assets of $5 million (of which $3 million are fixed assets), inventory of $150,000, and cost of goods sold of $600,000. What
If JPJ Corp (the company from the previous question) is able to increase sales by 10% but keep its total and fixed asset growth to only 5%, what will its new asset turnover ratios be?
Suppose that in 2010, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4.50%. Suppose that they had no other income,
Suppose a firm’s tax rate is 35%.a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings?b. What effect would a $10
You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):a. What is the market debt-to-equity ratio of each firm?b. What is the book debt-to-equity
For 2010, Wal-Mart and Target had the following information (all values are in millions of dollars):a. What is each company€™s accounts receivable days?b. What is each company€™s
Quisco Systems has 6.5 billion shares outstanding and a share price of $18.00. Quisco is considering developing a new networking product in-house at a cost of $500 million. Alternatively, Quisco can
In January 2009, American Airlines (AMR) had a market capitalization of $1.7 billion, debt of $11.1 billion, and cash of $4.6 billion. American Airlines had revenues of $23.8 billion. British Airways
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008 (filed in early 2009).a. Compute Peet’s net profit margin, total asset turnover, and equity multiplier.b. Verify the
Repeat the analysis from parts a and b of the previous problem using Starbucks Corporation (SBUX) instead. Based on the DuPont Identity, what explains the difference between the two firms’ ROEs?
Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million.a. What is the firm’s current ROE?b.
Find online the 2008 annual 10-K report for Peet’s Coffee and Tea (PEET), filed in early 2009. Answer the following questions from its cash flow statement:a. How much cash did Peet’s generate
See the cash flow statement below for H. J. Heinz (HNZ) (all values in thousands of dollars) (see MyFinanceLab for the data in Excel format):a. What were Heinz€™s cumulative earnings over
Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1
Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%.a.
The balance sheet information for Clorox Co. (CLX) in 2004â€“2005 is shown here (all values in thousands of dollars) (see MyFinanceLab for the data in Excel format):a. What change in the book
Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008, filed in early 2009.a. Which auditing firm certified these financial statements?b. Which officers of Peet’s certified
RFC Corp. has announced a $1 dividend. If RFC’s last price while trading cum-dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?
ECB Co. has 1 million shares outstanding selling at $20 per share. It plans to repurchase 100,000 shares at the market price. What will its market capitalization be after the repurchase? What will
KMS corporation has assets of $500 million, $50 million of which are cash. It has debt of $200 million. If KMS repurchases $20 million of its stock:a. What changes will occur on its balance sheet?b.
Suppose that KMS in Problem 4 decides to initiate a dividend instead, but it wants the present value of the payout to be the same $20 million. If its cost of equity capital is 10%, to what amount
EJH Company has a market capitalization of $1 billion and 20 million shares outstanding. It plans to distribute $100 million through an open market repurchase.Assuming perfect capital markets:a. What
Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this
The HNH Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital
ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 5, 2010. It takes three business days after a purchase for the new owners of a share of stock
Suppose the board of Natsam Corporation decided to do the share repurchase in Problem 7(b), but you as an investor would have preferred to receive a dividend payment. How can you leave yourself in
You purchased CSH stock for $40 and it is now selling for $50. The company has announced that it plans a $10 special dividend.a. Assuming 2010 tax rates, if you sell the stock or wait and receive the
Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, and it pays out the interest payments on these securities as a
Redo Problem 11, but assume that Kay must pay a corporate tax rate of 35%, and that investors pay no taxes.
Redo Problem 11, but assume that investors pay a 15% tax on dividends but no capital gains taxes, and that Kay does not pay corporate taxes.
What is AMC’s share price prior to the share repurchase?
What would AMC’s share price be after the repurchase if its enterprise value goes up? What would AMC’s share price be after the repurchase if its enterprise value declines?
Suppose AMC waits until after the news comes out to do the share repurchase. What would AMC’s share price be after the repurchase if its enterprise value goes up? What would AMC’s share price be
Suppose AMC management expects good news to come out. Based on your answers to Problems 15 and 16, if management wants to maximize AMC’s ultimate share price, will they undertake the repurchase
Given your answer to Problem 17, what effect would you expect an announcement of a share repurchase to have on the stock price? Why?
FCF Co. has 20,000 shares outstanding and a total market value of $1 million, $300 thousand of which is debt and the other $700 thousand is equity. It is planning a 10% stock dividend.a. What is the
Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share.a. If Host issues a 20% stock dividend, what would its new share price be?b. If Host does a 3:2 stock split, what
If Berkshire Hathaway’s A shares are trading at $120,000, what split ratio would it need to bring its stock price down to $50?
After the market close on May 11, 2001, Adaptec, Inc., distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received 0.1646 share of Roxio
You have an opportunity to invest $50,000 now in return for $60,000 in one year. If your cost of capital is 8%, what is the NPV of this investment?
You have an opportunity to invest $100,000 now in return for $80,000 in one year and $30,000 in two years. If your cost of capital is 9%, what is the NPV of this investment?
Your storage firm has been offered $100,000 in one year to store some goods for one year. Assume your costs are $95,000, payable immediately, and the cost of capital is 8%. Should you take the
You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10 million today and $5 million in one year. The government
You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now.a. What is the
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an
Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years and your cash flows from the contract would be $5 million per year. Your upfront
You are considering opening a new plant. The plant will cost $100 million upfront and will take one year to build. After that, it is expected to produce profits of $30 million at the end of every
Bill Clinton reportedly was paid $10 million to write his book My Life. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his
FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make
OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship would cost $500 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70
You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate
Does the IRR rule agree with the NPV rule in Problem 7?
How many IRRs are there in part (a) of Problem 9? Does the IRR rule give the right answer in this case?
How many IRRs are there in part (b) of Problem 9? Does the IRR rule work in this case?
Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to eight
Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per
You own a coal mining company and are considering opening a new mine. The mine itself will cost $120 million to open. If this money is spent immediately, the mine will generate $20 million for the
Your firm is considering a project that will cost $4.55 million upfront, generate cash flows of $3.5 million per year for three years, and then have a cleanup and shutdown cost of $6 million in the
You have just been offered a contract worth $1 million per year for five years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is
You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs $5.4 million upfront and is expected to generate $1.1 million per
You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $250 million. Once this investment is
You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected to make $5 million in the year it is released and $2 million
You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table:a. What are the IRRs of the two projects?b. If your discount rate is
You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end
You are considering the following two projects and can only take one. Your cost of capital is 11%.a. What is the NPV of each project at your cost of capital?b. What is the IRR of each project?c.
You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease you the equipment for $10,000 per year if you sign a guaranteed five-year
Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain, but lasts much longer than the other. Its discount rate is 11%. It plans to continue with one of the
Hassle-Free Web is bidding to provide Web-page hosting services for Hotel Lisbon. Hotel Lisbon pays its current provider $10,000 per year for hosting its Web page and handling transactions on it,

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