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Questions and Answers of Corporate Finance

MV Corporation has debt with market value of $100 million, common equity with a book value of $100 million, and preferred stock worth $20 million outstanding. Its common equity trades at $50 per
Andyco, Inc., has the following balance sheet and an equity market-to-book ratio of 1.5. Assuming the market value of debt equals its book value, what weights should it use for its WACCcalculation?
Book Co. has 1 million shares of common equity with a par (book) value of $1, retained earnings of $30 million, and its shares have a market value of $50 per share. It also has debt with a par value
Consider a simple firm that has the following market-value balance sheet:Next year, there are two possible values for its assets, each equally likely: $1200 and $960. Its debt will be due with 5%
Avicorp has a $10 million debt issue outstanding, with a 6% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently
Laurel, Inc., has debt outstanding with a coupon rate of 6% and a yield to maturity of 7%. Its tax rate is 35%. What is Laurel’s effective (after-tax) cost of debt?
Dewyco has preferred stock trading at $50 per share. The next preferred dividend of $4 is due in one year. What is Dewyco’s cost of capital for preferred stock?
Steady Company’s stock has a beta of 0.20. If the risk-free rate is 6% and the market risk premium is 7%, what is an estimate of Steady Company’s cost of equity?
Wild Swings Inc.’s stock has a beta of 2.5. Given the information in Problem 8, what is an estimate of Wild Swings’ cost of equity?
HighGrowth Company has a stock price of $20. The firm will pay a dividend next year of $1, and its dividend is expected to grow at a rate of 4% per year thereafter. What is your estimate of
Slow ’n Steady, Inc., has a stock price of $30, will pay a dividend next year of $3, and has expected dividend growth of 1% per year. What is your estimate of Slow ’n Steady’s cost of equity
Your company has sales of $100,000 this year and cost of goods sold of $72,000. You forecast sales to increase to $110,000 next year. Using the percent of sales method, forecast next year’s cost of
Mackenzie Company has a price of $36 and will issue a dividend of $2 next year. It has a beta of 1.2, the risk-free rate is 5.5%, and it estimates the market risk premium to be 5%.a. Estimate the
CoffeeCarts has a cost of equity of 15%, has an effective cost of debt of 4%, and is financed 70% with equity and 30% with debt. What is this firm’s WACC?
Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and acost of preferred stock of 9%. The market values of its debt, preferred stock, and equity are $10 million, $3
Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year.a. What is
A retail coffee company is planning to open 100 new coffee outlets that are expected to generate, in total, $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the
RiverRocks, Inc., is considering a project with the following projected free cash flows:The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing
RiverRocks (whose WACC is 12%) is considering an acquisition of Raft Adventures (whose WACC is 15%). What is the appropriate discount rate for RiverRocks to use to evaluate the acquisition? Why?
RiverRocks’ purchase of Raft Adventures (from Problem 18) will cost $100 million, but will generate cash flows that start at $15 million in one year and then grow at 4% per year forever. What is
CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor. Suppose the firm faces a tax rate of 35% and collects the following information. If it plans to finance 11%
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the Internet. You have decided that
RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures (described in Problem 19) by issuing new debt and equity. The firm estimates that the direct
You are planning to issue debt to finance a new project. The project will require $20 million in financing and you estimate its NPV to be $15 million. The issue costs for the debt will be 3% of face
For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000. Your firm’s payout ratio is 10%. Your beginning stockholders’ equity is $300,000 and your beginning
Assume your beginning debt in Problem 2 is $100,000. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity
Jim’s expects sales to grow by 10% next year. Using the percent of sales method, forecast (see MyFinanceLab for the data in Excel format):a. Costsb. Depreciationc. Net incomed. Cashe. Accounts
Assume that Jim’s pays out 90% of its net income. Use the percent of sales method to forecast (see MyFinanceLab for the data in Excel format):a. Stockholders’ equityb. Accounts payable
What is the amount of net new financing needed for Jim’s (see MyFinanceLab for the data in Excel format)?
If Jim€™s adjusts its payout policy to 70% of net income, how will the net new financingchange?
Global expects sales to grow by 8% next year. Using the percent of sales method, forecast (see MyFinanceLab for the data in Excel format):a. Costs except depreciationb. Depreciationc. Net incomed.
Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholders’ equity (see MyFinanceLab for the data in Excel format).Use the following income
What is the amount of net new financing needed for Global (see MyFinanceLab for the data in Excel format)?
If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy (see MyFinanceLab for the data in Excel format)?
Assume that KMS’s market share will increase by 0.25% per year rather than the 1% used in the chapter (see Table 18.5) and that its prices remain as in the chapter. What production capacity will
Under the assumption that KMS’s market share will increase by 0.25% per year, you determine that the plant will require an expansion in 2012. The expansion will cost $20 million. Assuming that the
Under the assumption that KMS's market share will increase by 0.25% per year (and the investment and financing will be adjusted as described in Problem 13), you project the following
Assuming that KMS’s market share will increase by 0.25% per year (implying that the investment, financing, and depreciation will be adjusted as described in Problems 13 and 14), and that the
Using the information in the table below, calculate this company’s:Net Income ...........50,000Beginning Total Assets ......400,000Beginning Stockholders’ Equity ....250,000Payout Ratio
Did KMS’s expansion plan call for it to grow slower or faster than its sustainable growth rate?
Your firm has an ROE of 12%, a payout ratio of 25%, $600,000 of stockholders’ equity, and $400,000 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you
IZAX, Co. had the following items on its balance sheet at the beginning of the year:Its net income this year is $20,000 and it pays dividends of $5,000. If its assets grew at its internal growth
Forecast KMS's free cash flows (reproduce Table 18.13), assuming KMS's market share will increase by 0.25% per year; investment, financing, and depreciation will be adjusted accordingly; and working
Calculate the continuation value of KMS using your reproduction of Table 18.8 from Problem 14, and assuming an EBITDA multiple of8.5.
Assuming a cost of capital of 10%, compute the value of KMS under the 0.25% growth scenario.
Homer Boats has accounts payable days of 20, inventory days of 50, and accounts receivable days of 30. What is its operating cycle?
FastChips Semiconductors has inventory days of 75, accounts receivable days of 30, and accounts payable days of 90. What is its cash conversion cycle?
Westerly Industries has the following financial information. What is its cash conversion cycle?Sales ………………………......…..100,000Cost of Goods Sold ……………80,000Accounts
Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will
Your firm currently has net working capital of $100,000 that it expects to grow at a rate of 4% per year forever. You are considering some suggestions that could slow that growth to 3% per year. If
The Greek Connection had sales of $32 million in 2010, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:a. Calculate The Greek Connection's net working
Assume the credit terms offered to your firm by your suppliers are 3/5, net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.
Your supplier offers terms of 1/10, net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45?
The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide. The owner of the firm is investigating the desirability of employing a billing firm to do her billing and
The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system
The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?
The Mighty Power Tool Company has the following accounts on its books:The firm extends credit on terms of 1/15, net 30. Develop an aging schedule using 15-day increments through 60 days, and then
Simple Simon’s Bakery purchases supplies on terms of 1/10, net 25. If Simple Simon’s chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A
Your firm purchases goods from its supplier on terms of 3/15, net 40.a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40?b. What
Use the financial statements supplied below and on the next page for International Motor Corporation (IMC) to answer the following questions (see MyFinanceLab for the data in Excel format):a.
Your company had $10 million in sales last year. Its cost of goods sold was $7 million and its average inventory balance was $1,200,000. What was its average days of inventory?
Happy Valley Homecare Suppliers, Inc. (HVHS), had $20 million in sales in 2010. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000.a. Calculate the average number
Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels
Emerald City Umbrellas sells umbrellas and rain gear in Seattle, so its sales are fairly level across the year. However, it is branching out to other markets where it expects demand to be much more
What are the permanent working capital needs of your company? What are the temporary needs (see MyFinanceLab for the data in Excel format)?
If you chose to use only long-term financing, what total amount of borrowing would you need to have on a permanent basis? Forecast your excess cash levels under this scenario (see MyFinanceLab for
If you hold only $100 in cash at any time, what is your maximum short-term borrowing and when (see MyFinanceLab for the data in Excel format)?
If you choose to enter the year with $400 total in cash, what is your maximum short-term borrowing (see MyFinanceLab for the data in Excel format)?
If you want to limit your maximum short-term borrowing to $500, how much excess cash must you carry (see MyFinanceLab for the data in Excel format)?
The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide which of three alternatives to use:Alternative A: Forgo the discount on its trade credit agreement that
Consider two loans with one-year maturities and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement. Which loan
Which of the following one-year, $1000 bank loans offers the lowest effective annual rate?a. A loan with an APR of 6%, compounded monthlyb. A loan with an APR of 6%, compounded annually, with a
The Needy Corporation borrowed $10,000 from Bank Ease. According to the terms of the loan, Needy must pay the bank $400 in interest every three months for the three-year life of the loan, with the
The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for Treadwater?
Magna Corporation has an issue of commercial paper with a face value of $1,000,000 and a maturity of six months. Magna received net proceeds of $973,710 when it sold the paper. What is the effective
Assume that the prime rate is 8% APR, compounded quarterly. How much dollar savings in interest did Treadwater (Problem 12) and Magna (Problem 13) achieve by accessing the commercial paper market?
The Signet Corporation has issued four-month commercial paper with a $6 million face value. The firm netted $5,870,850 on the sale. What effective annual rate is Signet paying for these funds?
The Ohio Valley Steel Corporation has borrowed $5 million for one month at a stated annual rate of 9%, using inventory stored in a field warehouse as collateral. The warehouser charges a $5000 fee,
The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $500,000. Interest on the loan will be 10% (APR, annual
Construct a short-term financial plan for Springfield Snowboards based on its expansion opportunity described in the "Positive Cash Flow Shocks" part of Section 20.1. Base the plan on the following
Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales
You are an international shrimp trader. A food producer in the Czech Republic offers to pay you 2 million Czech koruna today in exchange for a year’s supply of frozen shrimp. Your Thai supplier
Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company’s stock. Whichever one you choose will be awarded today. The stock is currently trading for $63 per
Suppose Big Bank offers an interest rate of 5.5% on both savings and loans, and Bank Enn offers an interest rate of 6% on both savings and loans.a. What profit opportunity is available?b. Which bank
If the cost of buying a CD and ripping the tracks to your iPod (including your time) is $25, what is the most Apple could charge on iTunes for a whole 15-track CD?
Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, Research In Motion, the maker of BlackBerry mobile devices, trades on both the
Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,000 per ton.a.
Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him. Assume he produces
You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
You expect to have $1000 in one year. A bank is offering loans at 6% interest per year. How much can you borrow today?
A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans:a. How much would you have in one year if you
You plan to borrow $1000 from a bank. In exchange for $1000 today, you promise to pay $1080 in one year. What does the cash flow timeline look like from your perspective? What does it look like from
Suppose the interest rate is 4%.a. Having $200 today is equivalent to having what amount in one year?b. Having $200 in one year is equivalent to having what amount today?c. Which would you prefer,
Consider the following alternatives:i. $100 received in one yearii. $200 received in 5 yearsiii. $300 received in 10 yearsa. Rank the alternatives from most valuable to least valuable if the interest
Suppose you invest $1000 in an account paying 8% interest per year.a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”?b. What is
Calculate the future value of $2000 ina. 5 years at an interest rate of 5% per year.b. 10 years at an interest rate of 5% per year.c. 5 years at an interest rate of 10% per year.d. Why is the amount
What is the present value of $10,000 receiveda. 12 years from today when the interest rate is 4% per year?b. 20 years from today when the interest rate is 8% per year?c. 6 years from today when the
Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?
Your cousin is currently 12 years old. She will be going to college in 6 years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the account
Your mom is thinking of retiring. Her retirement plan will pay her either $250,000 immediately on retirement or $350,000 five years after the date of her retirement. Which alternative should she

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