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principles corporate finance

Questions and Answers of Principles Corporate Finance

In December 2017, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later she sells the shares for 550 pesos each.
In March 2017, the exchange rate for the Narnian leo was L2,419 = $1. Inflation in the year to March 2018 was about 30% in Narnia and 2% in the United States.a. If purchasing power parity held, what
Look again at Table 27.1. Which countries would you expect to have a lower 1-year interest rate than the United States? Table 27.1 Forward Rates 1 Year Abbreviation Spot Rate 3 Months 6 Months
1. What would Exacta’s true exposure be from its new U.S. operations, and how would it change from the company’s current exposure?2. Given that exposure, what would be the most effective and
Look at Table 27.1. a. How many Japanese yen do you get for your dollar? b. What is the three-month forward rate for yen? c. Is the yen at a forward discount or premium on the dollar? d. Use the
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter’s production of catalytic converters. It buys three-month futures contracts for 10,000 ounces at a
“Northern Refineries does not avoid risk by selling oil futures. If prices stay above $2.40 a gallon, then it will actually have lost by selling oil futures at that price.” Is this a fair comment?
In March 2018, six-month bitcoin futures were priced at $7,925. The spot price was $7,946. The six-month interest rate was 1.92%.a. What was the convenience yield?b. Is your answer to part (a)
After a record harvest, grain silos are full to the brim. Are storage costs likely to be high or low? What does this imply for the net convenience yield?
Residents of the northeastern United States suffered record-setting low temperatures throughout November and December 2024. Spot prices of heating oil rose 25%, to over $7 a gallon.a. What effect did
In December 2017, six-month futures on the Australian S&P/ASX 200 Index traded at 5,947. Spot was 6,001. The interest rate was 1.8% a year, and the dividend yield was about 4.4% a year. Were the
Yesterday, you sold six-month futures on the German DAX stock market index at a price of 13,200. Today, the DAX closed at 13,150 and DAX futures closed at 13,250. You get a call from your broker, who
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,300 an ounce, but the price is extremely volatile and could fall as low as $1,220 or rise as
1. Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and exposure to changing interest rates. Give an example of a portfolio that would accomplish this objective.
Look again at the National Waferonics lease in Problem 11. Suppose that National Waferonics is highly levered and is unable to deduct further interest payments for tax.a. Does this make a lease more
Suppose that you are a banker responsible for approving corporate loans. Nine firms are seeking secured loans. They offer the following assets as collateral:a. Firm A, a heating oil distributor,
Match each of the following terms with one of the definitions below:A. Revolving creditB. Bridge loanC. Term loanD. Syndicated loanE. Commitment feeF. Maintenance covenanta. Requirement that borrower
The Surplus Value Company had $10 million (face value) of convertible bonds outstanding in 2015. Each bond has the following features. a. What is the bond?s conversion value? b. Can you explain why
Maple Aircraft has issued a 4¾% convertible subordinated debenture due 2023. The conversion price is $47.00 and the debenture is callable at 102.75% of face value. The market price of the
a. Look at Table 24.1. Suppose that AMAT decides to call the bond one year before it is due to expire. The interest rate on one-year Treasury bonds is 2%. What price must AMAT pay to call the
Suppose that the AMAT bond was issued at face value and that investors continue to demand a yield of 5.85%. Sketch what you think would happen to the bond price as the first interest payment date
Look back at Section 23-4. Suppose that the standard deviation of the return on Upsilon’s assets is 50%. Recalculate the probability that the company will default.
What variables are required to use the Merton model to calculate the risk-neutral probability that a company will default on its debt?
A friend has mentioned that she has read somewhere that the following variables can be used to predict bankruptcy:(a) The company debt ratio;(b) The interest coverage;(c) The amount of cash relative
Square File’s assets are worth $100. It has $80 of zero-coupon debt outstanding that is due to be repaid at the end of two years. The risk-free interest rate is 5%, and the standard deviation of
The difference between the value of a government bond and a similar corporate bond is equal to the value of an option. What is this option, and what is its exercise price?
It is 2030 and the yields on corporate bonds are as follows: Tau Corp wishes to raise $10 million by an issue of 9% 10-year bonds. What will be the likely issue price (as a percent of face value)
In February 2018, Aaa bonds yielded 3.38%, Baa bonds yielded 4.51%, and comparable Treasuries yielded 2.86%.a. What was the credit spread on Aaa bonds?b. What was the spread on Baa bonds?c. What do
a. In Section 21-3, we calculated the risk (beta) of a six-month call option on Amazon stock with an exercise price of $900. Now repeat the exercise for a similar option with an exercise price of
“A call option is always riskier than the stock it is written on.” True or false? How does the risk of an option change when the stock price changes?
In April 2017, Facebook’s stock price was about $145. An eight-month call on the stock, with an exercise price of $145, sold for $10.18. The risk-free interest rate was 1% a year. How much would
To finance the Madison County project (see Problem 10), Wishing Well needs to arrange an additional $80 million of long-term debt and make a $20 million equity issue. Underwriting fees, spreads, and
1. If the law firm takes the lease, it will invest $950,000 and, in effect, borrow $9,050,000, repaid by 19 installments of $950,000. What is the interest rate on this disguised loan?2. The law firm
Here are key financial data for House of Herring Inc.:Earnings per share for 2025 $5.50Number of shares outstanding 40 millionTarget payout ratio 50%Planned dividend per share $2.75Stock price,
In 2017, Entergy paid a regular quarterly dividend of $.89 per share.a. Match each of the following dates.(A1) Friday, October 27(A2) Tuesday, November 7(A3) Wednesday, November 8(A4) Thursday,
Look at Marvin’s first attempt to raise financing. (Refer to Section 15.1 and the Marvin Prospectus in the appendix at the end of this chapter.) Suppose that First Meriam decides that Marvin’s
Some individuals are eager to spend income before it arrives; others want to postpone consumption. Give some examples of intermediaries that provide services to these individuals.
Explain briefly how each of the following allow individuals or companies to spread their risk:a. An exchange traded fund.b. Commodity markets.c. A life insurance company.
Saga City has a declassified board with nine directors.a. How many directors come up for election each year?b. Would Saga be more or less vulnerable to a hostile takeover if it had a classified board?
What do we mean when we say that stockholders have control rights and residual cash flow rights? How in practice do they exercise their control rights?
True or false?a. Banks are huge investors in corporate equity.b. Insurance companies are huge investors in corporate debt.c. Rather than investing directly in corporate equities, most households
Here are alphas and betas for Est?e Lauder and Caterpillar Tractor for the 60 months ending June 2017. Alpha is expressed as a percent per month. Explain how these estimates would be used to
The second column in Table 13.1 shows the monthly return on the British FTSE 100 index from January 2015 through July 2017. The remaining columns show returns on the stocks of two firms?Executive
True or false?a. If markets are efficient, shareholders should expect to receive only the risk-free interest rate on their investment.b. If markets are efficient, investment in the stock market is a
Supply the missing words: “There are three forms of the efficient-market hypothesis. Tests of randomness in stock returns provide evidence for the form of the hypothesis. Tests of stock price
In recent years, several large banks have paid management bonuses partly in bonds and partly in stock. What do you think is the reason for this? Do you think it is a good idea?
The Cambridge Opera Association has come up with a unique door prize for its December 2019 fund-raising ball: Twenty door prizes will be distributed, each one a ticket entitling the bearer to receive
What is the NPV of the electric scooter project under the following scenario?Unit sales are 20% below expectations.Unit price is 10% below expectations.Unit variable cost remains at 50% of
In footnote 4, we noted that the minimum-risk portfolio contained an investment of 53% in Amazon and 47% in Southwest Airlines. Prove it. (Hint: You need a little alculus to do so.)
The scene: John and Marsha hold hands in a cozy French restaurant in downtown Manhattan, several years before the mini-case in Chapter 9. Marsha is a futures-market trader. John manages a $250
Suppose that Sudbury Mechanical Drifters is proposing to invest $10 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 40%, and the discount rate
1. Calculate the NPV of the proposed investment, using the inputs suggested in this case. How sensitive is this NPV to future sales volume?2. What are the pros and cons of waiting for a year before
EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta?
1. Calculate the NPV of the wildcat oil well, taking account of the probability of a dry hole, the shipping costs, the decline in production, and the forecasted increase in oil prices. How long does
Suppose that in year 2030, investors become much more willing than before to bear risk. As a result, they require a return of 8% to invest in common stocks rather than the 10% that they had required
Integrated Potato Chips (IPC) does not pay a dividend. Its current stock price is $150 and there is an equal probability that the return over the coming year will be –10%, +20%, or +50%.a. What is
The level of the Syldavia market index is 21,000 at the start of the year and 25,500 at the end. The dividend yield on the index is 4.2%.a. What is the return on the index over the year?b. If the
You can allow partial investments, that is, 0 ? x ? 1. Calculate and interpret the shadow prices16 on the capital constraints. Project Co C2 NPV - 10,000 - 10,000 +6,700 +9,000 х -20,000 +5,000 +
Consider the following two projects: a. If the opportunity cost of capital is 11%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these
Plot the NPVs for the following projects for discount rates from 0% to 30%: a. Which one of these projects has no IRR? b. One of the projects has two IRRs. Which is this project and what are the
Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows: Phoenix?s recovery will be complete by 2024, and there
Suppose the horizon date is set at a time when the firm will run out of positive NPV investment opportunities. How would you calculate the horizon value? What is the P/EPS ratio when PVGO = 0?
Under what conditions does r, a stock’s market capitalization rate, equal its earnings–price ratio EPS1/P0?
Here are forecasts for next year for two stocks: a. What are the dividend payout ratios for each firm?b. What are the expected dividend growth rates for each stock?c. If investors require a return
Here is a small part of the order book for Mesquite Foods: a. Georgina Sloberg submits a market order to sell 100 shares. What price will she receive? b. Norman Pilbarra submits a market order to
a. “I would like to sell 1000 shares of Walmart at best.”b. “I would like to buy 500 shares of Hattersley at $50 or better.”Which of these is a limit order and which is a market order? If the

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