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principles corporate finance
Questions and Answers of
Principles Corporate Finance
What other financial term should immediately spring to mind when you hear the word“returns”?
In your view, are more securities issued on the primary market or exchanged on the secondary market?
What other financial term should immediately spring to mind when you hear the word “risk”?
Which instrument carries the greater risk – shares or bonds? Why?
Explain how the poor performance of the secondary market can impact the primary market.
What are the two biggest flaws of a bad financial manager?
Why do you believe management has to do some roadshows before issuing new shares or bonds?
In what condition can a bottle of wine be considered as a financial product?
The Lager Brewing Corporation has acquired the Philadelphia Pretzel Company in a vertical merger. Lager Brewing has issued \($300,000\) in new long-term debt to pay for its purchase. (\($300,000\) is
The following table shows the projected cash flows and their respective discount rates after the acquisition of Small Fry Co. by Whale Co. Fill in the blanks and calculate the stock price of the new
Coldran Aviation has voted in favor of being bought out by Arcadia Financial Corporation.Information about each company is presented below.Stockholders in Coldran Aviation will receive six-tenths of
Freeport Manufacturing is considering making an offer to purchase Portland Industries.The treasurer of Freeport has collected the following information:The treasurer also knows that securities
Harrods PLC has a market value of £600 million and 30 million shares outstanding.Selfridge Department Store has a market value of £200 million and 20 million shares outstanding. Harrods is
Determine whether arbitrage opportunities exist given the following foreign exchange rates. a. $1.8/L DM2/$ DM4/L b. 100/$ DM2/$ 50/DM c. HKD7.8/$ 100/$ Y14/HKD
The North County Publishing Company has provided the following data:North County Publishing proposes to offer a discount policy of 2/10, net 30. It anticipates that 50 percent of its customers will
The Webster’s Company sells on credit terms of net 45. Its accounts are on average 45 days past due. If annual credit sales are \($5\) million, what is the company’s balance in accounts
The Tropeland Company has obtained the following information:The company is considering offering terms of 4/10, net 30. It anticipates that 50 percent of its customers will take advantage of the
Berkshire Sports, Inc., operates a mail-order running-shoe business. Management is considering dropping its policy of no credit. The credit policy under consideration by Berkshire follows:a. Should
The Theodore Bruin Corporation, a manufacturer of high-quality stuffed animals, does not extend credit to its customers. A study has shown that, by offering credit, the company can increase sales
Fast Typing Co. is in the business of manufacturing and selling Fast-Line Typewriters. It does not offer any credit sales currently. The per unit price and cost of each Fast-Line typewriter are
The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 300 cycles. The average cost to the shop of a cycle is \($240.\)
Major Electronics sells 85,000 personal stereos each year at a price per unit of \($55.\) All sales are on credit; the terms are 3/15, net 40. The discount is taken by 40 percent of the customers.
The Allen Company has monthly credit sales of \($600,000.\) The average collection period is 90 days. The cost of production is 70 percent of the selling price. What is the Allen Company’s average
The factoring department of Inter American Bank (IAB) is processing 100,000 invoices per year with average invoice value of \($1,500.\) IAB buys the accounts receivable at 4 percent off the invoice
What are the reasons for holding cash?
Indicate whether the following actions increase, decrease, or cause no change in a company’s cash balance.a. Interest rates paid on money-market securities rise.b. Commissions charged by brokers
A company’s weekly average cash balances are as follows:If the annual interest rate is 12 percent, what return can be earned on the average cash balances? Week 1 $24,000 Week 2 34,000 Week 3 10,000
The Casablanca Piano Company is currently holding \($800,000\) in cash. It projects that over the next year its cash outflows will exceed its cash inflows by \($345,000\) per month. Each time
Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is \($20\) million. The annual interest rate on marketable securities is 7.5 percent.
The variance of the daily net cash flows for the Tseneg Asian Import Company is \($1.44\) million. The opportunity cost to the firm of holding cash is 8 percent per year. The fixed cost of buying and
Gold Star Co. and Silver Star Co. both manage their cash flows according to the MillerOrr model. Gold Star’s daily cash flow is controlled between \($100,000\) and \($200,000,\) whereas Silver
A large New England lumber producer, Salisbury Stakes, Inc., is planning to use a lockbox system to speed collections from its customers located in the midwestern United States. A Chicago-area bank
Each business day, on average, a company writes checks totaling \($12,000\) to pay its suppliers. The usual clearing time for these checks is five days. Each day, the company receives payments from
The Walter Company disburses checks every two weeks that average \($200,000\) in total and take three days to clear. How much cash can the Walter Company save annually if it delays the transfer of
The Miller Company has an agreement with the First National Bank by which the bank handles \($4\) million in collections each day and requires a \($500,000\) compensating balance. Miller is
Anthony Marino, CFO of Thousand Years Inc., is evaluating two alternatives of float management: lockbox and concentration banking. The average number of daily payments to lockboxes is 250 with the
What are the important characteristics of short-term marketable securities?
Derive the cash equation from the basic balance sheet equation: assets = liabilities + equity.
Indicate whether the following corporate actions increase, decrease, or cause no change to cash.a. Cash is paid for raw materials purchased for inventory.b. A dividend is paid.c. Merchandise is sold
Below are the 20X2 balance sheet and income statement for Country Kettles, Inc. Use this information to construct a sources-and-uses-of-cash statement. Assets COUNTRY KETTLES, INC. Balance Sheet
Following are the 20X2 balance sheet and income statement for the S/B Corporation. Use them to construct a sources-and-uses-of-cash statement. Assets Cash... Accounts receivable Inventories. Net
On Eastern Printing Machines Co.’s income statement of 20X1, the cost of goods sold and the credit sales are \($200\) million and \($240\) million, respectively. The following data are from its
Define:a. Operating cycleb. Cash cyclec. Accounts payable period
Indicate whether the following company actions increase, decrease, or cause no change to the cash cycle and the operating cycle.a. The use of discounts offered by suppliers is decreased.b. More
a. Define flexible short-term financing.b. Define restrictive short-term financing.c. When is flexible short-term financing optimal?d. When is restrictive short-term financing optimal?
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms.Their financial statements are printed below.a. How are the current assets of each firm financed?b. Which firm has the
The following is the sales budget for the Smithe and Wreston Company for the first quarter of 20X1.The aging of credit sales is 30 percent collected in the month of sale 40 percent collected in the
The sales budget for your company in the coming year is based on a 20-percent quarterly growth rate with the first quarter projection at $100 million. In addition to this basic trend, the seasonal
Below are some important figures from the budget of Pine Mulch Company for the second quarter of 20X2.The company predicts that 10 percent of its sales will never be collected; 50 percent of its
What are the most important considerations in deciding the most appropriate amount of short-term borrowing?
List several short-term external financing options.
After examining patterns from recent years, management found the following regressionestimated relationships between some company balance sheets and income statement accounts and sales.The
Cheryl Colby, the CFO of Charming Florist Ltd. has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow at 10 percent to the level of \($330\) million.
The Stieben Company has determined that the following will be true next year:a. What is Stieben’s sustainable growth rate in sales?b. Can Stieben’s actual growth rate in sales be different from
The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future. Its financial statements for the current year are presented below.The current financial policy of
The MBI Company does not want to grow. The company’s financial management believes it has no positive NPV projects. The company’s operating financial characteristics area. Calculate the
Throughout this text, you have learned that financial managers should select positive netpresent-value projects. How does this project-selection criterion relate to financialplanning models?
Your firm recently hired a new MBA. She insists that your firm is incorrectly computing its sustainable growth rate. Your firm computes the sustainable growth rate using the following formula:Your
Atlantic Transportation Co. has a payout ratio of 60 percent, debt-equity ratio of 50 percent, return on equity of 16 percent, and an assets-sales ratio of 175 percent.a. What is its sustainable
Define:a. Forward contractb. Futures contract
Explain the three ways in which futures contracts and forward contracts differ.
The following table lists the closing prices for wheat futures contracts. Suppose you bought one contract at $5.00 at the opening of trade on March 15.a. Suppose that on March 18 you receive from
Two days ago, you agreed to buy a 10-year, zero-coupon bond that would be issued in a year. Today, both the 1-year and 11-year spot rates unexpectedly shifted downward an equal amount. What should
a. How is a short hedge created?b. In what type of situation is a short hedge a wise strategy?c. How is a long hedge created?d. In what type of situation is a long hedge a wise strategy?
A speculator is an investor who uses his or her private information to profit from futures contracts. Mary Johnson is a speculator, who believes that wheat futures prices will fall in a month. What
A classmate of yours recently entered the import/export business. During a visit with him last week, he said to you, “If you play the game right, this is the safest business in the world. By
This morning you agreed to buy a two-year Treasury bond six months from today. The bond carries a 10-percent coupon rate and has a \($1,000\) face. Below are listed the expected spot rates of
Derive the relationship between the spot price (S0) and the futures price (F) by comparing the following two strategies:Strategy 1: Buy the silver at S0 today and hold it for one month.Strategy 2:
Aiko Miyazawa is a Japanese student who is planning a one-year stay in America for studying English. She expects to leave for America in eight months. Since she is worried about the unstable exchange
After reading the text’s example about Ron Cooke, the mortgage banker, you decide to enter the business. You begin small; you agree to provide \($300,000\) to an old college roommate to finance the
Available are three zero-coupon, \($1,000\) face-value bonds. All of these bonds are initially priced using an 11-percent interest rate. Bond A matures one year from today, bond B matures five years
Calculate the duration of a perpetuity that pays \($100\) at each year-end. Assume the annual discount rate of 12 percent. What if the discount rate is 10 percent?
Consider two four-year bonds. Each bond has a \($1,000\) face value. Bond A’s coupon rate is 7 percent, while bond B’s coupon rate is 11 percent.a. What is the price of each bond when the market
The following balance sheet is for Besdall Community Banka. What is the duration of Besdall’s assets?b. What is the duration of Besdall’s liabilities?c. Is Besdall Community Bank immune from
Consider the following balance sheet for California Commercial Bank.a. What is the duration of California’s assets? What is the duration of liabilities?b. Is the bank immunized from interest-rate
The Miller Company and the Edwards Company both need to raise money to fund facilities improvements at their manufacturing plants in New York. Miller has been in business for 40 years and has a very
William Hurt is the Chief Executive Officer of the First Pacific Trading Company (FPTC).His annual straight salary is \($1\) million.The current value of FPTC stock is \($50\) per share. Mr. Hurt has
Mr. Hurt has been quoted as saying that he doesn’t want stock options. He has said he would be satisfied with straight pay of \($1.25\) million. The board of directors disagrees.Who is right?
The market for golf putters is notoriously fickle. One year mallet head putters can be the hottest seller and the next it can be blade putters that are in demand. Tims Golf Company(TGC) has a
John Lusk is a real estate developer who owns the right to put up an office building on a parcel of land in downtown Los Angeles. The office building will cost \($50\) million. John Lusk does not
We are examining a new project. We expect to sell 10,000 units a year of a new golf video at \($200\) net cash flow each for the next five years. The relevant discount is 15 percent and the initial
Define:a. Warrantsb. Convertibles
Suppose the GR Company, which was discussed in the text, sells Mrs. Fiske a warrant.Prior to the sale, the company has two shares outstanding. Mr. Gould owns one share and Ms. Rockefeller owns the
General Autos has its warrants traded in the market and they will expire five years from today. Each warrant is entitled to purchase 0.25 shares of General Autos common stock at \($10\) per share.a.
Pace Western Crystal, Inc., has outstanding 10 million common shares and 200,000 warrants. Each warrant can purchase five shares of common stock at \($15\) per share.Warrant holders exercised all of
A warrant entitles the holder to buy 10 shares of common stock at \($21\) per share. When the market price of the stock is \($15,\) will the market price of the warrant equal zero? Why or why not?
Grand Mills Corporation has 4 million shares of common stock outstanding. The company has 500,000 warrants being traded in the market. Each warrant has the right to buy one share of common stock at
Express Transportation’s current market-balance sheet shows assets of the firm are \($150\) million. The market value of the debt Express has issued is \($47\) million. Express has 1.5 million
Consider the following warrants.Warrant X: For each warrant held, three shares of common stock can be purchased at an exercise price of \($20\) per share.Warrant Y: For each warrant held, two shares
At issuance of McArthur Corp.’s convertible bonds, one of the two following sets of characteristics was true.Which of the relationships do you believe was more likely to have prevailed? Why? A B
Ms. Mary Malone is a CEO of Malone, Inc., and owns 500,000 shares of the common stock. The company’s total number of common shares outstanding is 4 million. The company also has \($20\) million of
Ryan Home Products, Inc., issued \($430,000\) of 8-percent convertible debentures. Each bond is convertible into 28 shares of common stock anytime before maturity.a. Suppose the current price of the
Acme Medical Supplies, Inc., issued a zero coupon convertible bond due 10 years from today. The bond has a face value of \($1,000\) at maturity. Each bond can be converted into 25 shares of Acme’s
A \($1,000\) par convertible debenture has a conversion price for common stock of \($180\) per share. With the common stock selling at \($60,\) what is the conversion value of the bond?
You are a financial analyst hired to value a new 30-year callable, convertible bond. The bond has a 6-percent coupon payable annually. The conversion price is \($125.\) The stock currently sells for
Discuss the validity of each of the following statements.a. Leasing reduces risk and can reduce a firm’s cost of capital.b. Leasing provides 100-percent financing.c. Firms that do a large amount of
Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax-loss carryforwards. Thus, Quartz’s effective
Super Sonics Entertainment is considering borrowing money at 11 percent and purchasing a machine that costs \($350,000.\) The machine will be depreciated over five years by the straight-line method
Maxwell, Inc., is entering negotiations for the lease of equipment that has a \($200,000\) purchase price. Maxwell’s effective tax rate is zero. Maxwell will be negotiating the lease with Mercer
Raymond Rayon Corporation wants to expand its manufacturing facilities. Liberty Leasing Corporation has offered Raymond Rayon the opportunity to lease a machine for \($100,000\) for five years. The
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