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fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
Tempest Corporation expects an EBIT of $37,700 every year forever. The company currently has no debt, and its cost of equity is 11 percent. The tax rate is 22 percent.a. What is the current value of
The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are
Gatto, Inc., has declared a $5.85 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the
The owners’ equity accounts for Vulcano International are shown here:Common stock ($.50 par value) ............ $ 20,000Capital surplus ......................................... 210,000Retained
On Tuesday, December 5, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3.
Stockton Mineral Operations, Inc. (SMO), currently has 540,000 shares of stock outstanding that sell for $83 per share. Assuming no market imperfections or tax effects exist, what will the share
The balance sheet for Quinn Corp. is shown here in market value terms. There are 12,000 shares of stock outstanding.The company has declared a dividend of $1.45 per share. The stock goes ex dividend
In Problem 5, suppose the company has announced it is going to repurchase $17,400 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be
The market value balance sheet for Murray Manufacturing is shown here. The company has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend
The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $64 per share. What effects will the distribution of the stock
You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.45 per share dividend in one year. In two years, the company will pay a liquidating dividend of $62 per share. The
Erna Corporation is evaluating an extra dividend versus a share repurchase. In either case, $53,500 would be spent. Current earnings are $1.79 per share, and the stock currently sells for $64 per
The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year .................... Cash Flow 0 .................... −$52,000,000 1
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial
Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be
A proposed project has fixed costs of $76,000 per year. The operating cash flow at 9,200 units is $108,700. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise
At an output level of 14,500 units, you have calculated that the degree of operating leverage is 3.41. The operating cash flow is $81,000 in this case. Ignoring the effect of taxes, what are fixed
Rework Problems 1 and 2 assuming the ending share price is $61.Problem 1Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year X Y 1 13% 27% 2 26 36 3 7 11 4 -5 -29 11 16
You bought one of Great White Shark Repellant Co.’s 5.1 percent coupon bonds one year ago for $1,010. These bonds have a par value of $1,000, make annual payments, and mature 14 years from now.
You find a certain stock that had returns of 18 percent, −23 percent, 16 percent, and 9 percent for four of the last five years. If the average return of the stock over this period was 10.3
A stock has had the following year-end prices and dividends:What are the arithmetic and geometric average returns for the stock? Year Price Dividend 1 $73.20 2 81.27 $1.05 90.37 1.15 4 86.18 1.26
Over a 40-year period, an asset had an arithmetic return of 12.8 percent and a geometric return of 9.7 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5
A stock has a beta of 1.15, the expected return on the market is 11.3 percent, and the risk free rate is 3.6 percent. What must the expected return on this stock be?
A stock has an expected return of 11.4 percent, the risk-free rate is 3.9 percent, and the market risk premium is 6.8 percent. What must the beta of this stock be?
A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be?
A stock has an expected return of 10.45 percent, its beta is .85, and the expected return on the market is 11.8 percent. What must the risk-free rate be?
Asset W has an expected return of 8.8 percent and a beta of .90. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has a beta of .80 and an expected return of 8.5 percent. If the risk-free rate is 3.2 percent and the market risk premium is
A stock has a beta of 1.19 and an expected return of 12.4 percent. A risk-free asset currently earns 2.7 percent.a. What is the expected return on a portfolio that is equally invested in the two
Consider the following information about three stocks:a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The
You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.1 percent. If Stock X has an expected return of 10.28
Consider the following information about Stocks I and II:The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has the most systematic risk? Which one has the most
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Expected Security
Suppose you observe the following situation:a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock B’s
The Tribiani Co. just issued a dividend of $2.90 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock
The Swanson Corporation’s common stock has a beta of 1.07. If the risk-free rate is 3.4 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?
Stock in Jansen Industries has a beta of 1.05. The market risk premium is 7 percent, and T bills are currently yielding 3.5 percent. The company’s most recent dividend was $2.45 per share, and
Suppose Wacken, Ltd., just issued a dividend of $2.73 per share on its common stock. The company paid dividends of $2.31, $2.39, $2.48, and $2.58 per share in the last four years. If the stock
Savers has an issue of preferred stock with a stated dividend of $3.85 that just sold for $87 per share. What is the bank’s cost of preferred stock?
Sunrise, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 96 percent of face value. The issue makes semiannual payments
Jiminy’s Cricket Farm issued a 30-year, 4.5 percent semiannual bond three years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 22 percent.a. What is
For the firm in Problem 7, suppose the book value of the debt issue is $75 million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left to
Suppose Tom O’Bedlam, president of Bedlam Products, Inc., has hired you to determine the firm’s cost of debt and cost of equity capital.a. The stock currently sells for $50 per share, and the
Ninecent Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5
Brannan Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC?
Fama’s Llamas has a weighted average cost of capital of 8.4 percent. The company’s cost of equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What is
Dani Corp. has 5.5 million shares of common stock outstanding. The current share price is $83, and the book value per share is $5. The company also has two bond issues outstanding. The first bond
In Problem 12, suppose the most recent dividend was $3.85 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
Given the following information for Lightning Power Co., find the WACC. Assume the company’s tax rate is 21 percent.Debt: 12,000 bonds with a 4.6 percent coupon outstanding, $1,000 par value, 25
Lingenburger Cheese Corporation has 6.4 million shares of common stock outstanding, 200,000 shares of 3.8 percent preferred stock outstanding, par value of $100, and 120,000 bonds with a semiannual
Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2
Shinedown Company needs to raise $95 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company
Lebleu, Inc., is considering a project that will result in initial aftertax cash savings of $2.9 million at the end of the first year, and these savings will grow at a rate of 2 percent per year
Cookies ’n Cream, Inc., recently issued new securities to finance a new TV show. The project cost $45 million, and the company paid $2.2 million in flotation costs. In addition, the equity issued
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 22 percent, what is the aftertax
Ginger Industries stock has a beta of 1.08. The company just paid a dividend of $.85, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.3 percent, and
Derry Corp. is expected to have an EBIT of $2.1 million next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $80,000, and
In the previous problem, instead of a perpetual growth rate in adjusted cash flow from assets, you decide to calculate the terminal value of the company with the price-sales ratio. You believe that
Ursala, Inc., has a target debt-equity ratio of .65. Its WACC is 10.4 percent, and the tax rate is 23 percent.a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt?b. If
You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.34 and the total portfolio is equally as risky as the market, what must the beta be for
You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36,
A portfolio is invested 45 percent in Stock G, 40 percent in Stock J, and 15 percent in Stock K. The expected returns on these stocks are 11 percent, 9 percent, and 15 percent, respectively. What is
Based on the following information, calculate the expected return and standard deviation for Stock A and Stock B: Rate of Return if State Occurs Probability of State of Economy State of Economy Stock
Based on the following information, calculate the expected return: Probability of State of Portfolio State of Return if State Economy Economy Occurs Recession .10 -.17 Normal .60 .08 Boom .30 .27
Based on the following information, calculate the expected return: Probability of Portfolio State of State of Return Economy Economy if State Occurs Recession .20 -.13 Boom .80 .19
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.4 percent and Stock Y with an expected return of 10.1 percent. If your goal is to create a
You own a portfolio that is invested 15 percent in Stock X, 35 percent in Stock Y, and 50 percent in Stock Z. The expected returns on these three stocks are 9 percent, 15 percent, and 12 percent,
You own a portfolio that has $4,450 invested in Stock A and $9,680 invested in Stock B. If the expected returns on these stocks are 8 percent and 11 percent, respectively, what is the expected return
What are the portfolio weights for a portfolio that has 145 shares of Stock A that sell for $47 per share and 200 shares of Stock B that sell for $21 per share?
A stock has had returns of 6 percent, 29 percent, 13 percent, −19 percent, 34 percent, and −2 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel® to answer the following questions:a. What
Given that Zoom was up by about 250 percent for in the first half of 2020, why didn’t all investors hold this stock?
Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2019? Why do you think they were so high during this period? What
You’ve observed the following returns on Pine Computer’s stock over the past five years: 8 percent, −12 percent, 14 percent, 21 percent, and 16 percent.a. What was the arithmetic average return
Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $83. Compute the percentage total return.
In an effort to capture the large jet market, Airbus invested $13 billion developing its A380, which is capable of carrying 800 passengers. The plane had a list price of $280 million. In discussing
Refer to Table 12.1 in the text and look at the period from 1973 through 1980.a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this
Consider a project to supply Detroit with 20,000 tons of machine screws annually for automobile production. You will need an initial $3.1 million investment in threading equipment to get the project
What was the average annual return on large-company stocks from 1926 through 2019:a. In nominal terms?b. In real terms?
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year ............................ Unit Sales1 .................................... 71,0002
We are evaluating a project that costs $845,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected
Suppose you bought a bond with an annual coupon of 6 percent one year ago for $1,010. The bond sells for $1,025 today.a. Assuming a $1,000 face value, what was your total dollar return on this
Given that Hertz was down by 88 percent in the first half of 2020, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $365 per set. The company has spent $150,000 for a marketing study that
As we have seen, over the 1926–2019 period, small-company stocks had the highest return and the highest risk, while U.S. Treasury bills had the lowest return and the lowest risk. While we certainly
Use the results of Problem 26 to find the degree of operating leverage for the company in Problem 27 at the base-case output level of 20,000 tons. How does this number compare to the sensitivity
Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2019 Toyota RAV4 Hybrid, which had a list price of $5,900
You are considering a new product launch. The project will cost $1,675,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195 units
Consider a four-year project with the following information: Initial fixed asset investment = $655,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $28;
In each of the following cases, find the unknown variable: Accounting Unit Variable Break-Even Unit Price Cost Fixed Costs Depreciation 143,286 $39 $30 $ 820,000 104,300 ? 27 2,320,000 $975,000
In the previous problem, suppose fixed costs are $183,000. What is the operating cash flow at 38,000 units? The degree of operating leverage?Previous problemAt an output level of 40,000 units, you
At an output level of 40,000 units, you calculate that the degree of operating leverage is 3.19. If output rises to 44,000 units, what will the percentage change in operating cash flow be? Will the
Consider a project with the following data: Accounting break-even quantity = 14,300 units; cash break-even quantity = 9,700 units; life = 5 years; fixed costs = $205,000; variable costs = $19 per
You are at work when a co-worker excitedly comes to your desk and shows you the scenario analysis that he has just completed for a potential new project. All three scenarios show a positive NPV. He
A project has the following estimated data: Price = $53 per unit; variable costs = $22 per unit; fixed costs = $31,460; required return = 12 percent; initial investment = $46,200; life = four years.
In each of the following cases, calculate the accounting break-even and the cash break even points. Ignore any tax effects in calculating the cash break-even. Unit Price Unit Variable Cost Fixed
Your small remodeling business has two work vehicles. One is a small passenger car used for job site visits and for other general business purposes. The other is a heavy truck used to haul equipment.
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