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Questions and Answers of Corporate Finance

Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the
Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be
Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of
Suppose Procter and Gamble (P&G) is considering purchasing $15 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it on a straight-line basis over the five
Suppose Amazon is considering the purchase of computer servers and network infrastructure to facilitate its move into cloud-based computing. In total, it will purchase $48 million in new equipment.
Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $225 million or lease it for $25 million per year. If
Answer the following questions:a. What is the difference between a firm’s cash cycle and its operating cycle?b. How will a firm’s cash cycle be affected if a firm increases its inventory, all
Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash poorly?
The Greek Connection had sales of $32 million in 2012, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:a. Calculate The Greek Connectionâ€™s net
Ohio Valley Homecare Suppliers, Inc. (OVHS) had $20 million in sales in 2009. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000.a. Calculate the average number
Which of the following short-term securities would you expect to offer the highest before-tax return: Treasury bills, certificates of deposit, short-term tax exempts, or commercial paper? Why?
Which of the following companies are likely to have high short-term financing needs? Why?a. A clothing retailerb. A professional sports teamc. An electric utilityd. A company that operates toll
What is the difference between permanent working capital and temporary working capital?
Quarterly working capital levels for your firm for the next year are included in the following table. What are the permanent working capital needs of your company? What are the temporaryneeds?
Consider two loans with a 1-year maturity 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
What is the difference between pledging accounts receivable to secure a loan and factoring accounts receivable?
Discuss the three different arrangements under which a firm may use inventory to secure a loan.
Why do you think mergers cluster in time, causing merger waves?
If you are planning an acquisition that is motivated by trying to acquire expertise, you are basically seeking to gain intellectual capital. What concerns would you have in structuring the deal and
How do the carryforward and carryback provisions of the U.S. tax code affect the benefits of merging to capture operating losses?
Diversification is good for shareholders. So why shouldn’t managers acquire firms in different industries to diversify a company?
How does a board become captured by a CEO?
Is it necessarily true that increasing managerial ownership stakes will improve firm performance?
How can proxy contests be used to overcome a captured board?
What are a board’s options when confronted with dissident shareholders?
What are the costs and benefits of prohibiting insider trading?
How can a controlling family use a pyramidal control structure to benefit itself at the expense of other shareholders?
The William Companies (WMB) owns and operates natural gas pipelines that deliver 12% of the natural gas consumed in the United States. WMB is concerned that a major hurricane could disrupt its
Genentech’s main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $450 million in the event of a major earthquake that disrupted its operations.
Your firm imports manufactured goods from China. You are worried that U.S.–China trade negotiations could break down next year, leading to a moratorium on imports. In the event of a moratorium,
Your firm faces a 9% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of this loss to 4%, but these new policies have an upfront
BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a production cost of $0.90 per pound.a. What will be BHP’s operating profit from
Your utility company will need to buy 100,000 barrels of oil in 10 days€™ time, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1000 barrels of
Suppose Starbucks consumes 100 million pounds of coffee beans per year. As the price of coffee rises, Starbucks expects to pass along 60% of the cost to its customers through higher prices per cup of
Suppose the current exchange rate is $1.80/£, the interest rate in the United States is 5.25%, the interest rate in the United Kingdom is 4%, and the volatility of the $/£ exchange rate is 10%.
Assume each of the following securities has the same yield-to-maturity: a five-year, zero-coupon bond; a nine-year, zero-coupon bond; a five-year annuity; and a nine-year annuity. Rank these
You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars):When you analyze the duration of loans, you find that the
The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $44.8 million. The duration of this portfolio of bonds is 13.5 years. The fund has borrowed to
Your firm needs to raise $100 million in funds. You can borrow short term at a spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen
Assume that in the original Ityesi example in Table 31.1, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping other costs the same,
Rally, Inc., is an all-equity firm with assets worth $25 billion and 10 billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firm’s corporate
Suppose the corporate tax rate is 40%, and investors pay a tax rate of 15% on income from dividends or capital gains and a tax rate of 33.3% on interest income. Your firm decides to add debt so it
Apple Corporation had no debt on its balance sheet in 2011, but paid $8 billion in taxes. Suppose Apple were to issue sufficient debt to reduce its taxes by $1 billion per year permanently. Assume
Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the 750 January 2014 call option.
Consider the at-the-money call option on Roslin Robotics evaluated in Problem 11. Suppose the call option is not available for trade in the market. You would like to replicate a long position in 1000
In recent years, large financial institutions such as mutual funds and pension funds have become the dominant owners of stock in the United States, and these institutions are becoming more active in
Why is the goal of financial management to maximize the current share price of the company’s stock? In other words, why isn’t the goal to maximize the future share price?
How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?
Why is it not necessarily bad for the cash flow from assets to be negative for a particular period?
Could a company’s change in net working capital be negative in a given year?
Bishop, Inc., has current assets of $5,700, net fixed assets of $27,000, current liabilities of $4,400, and long-term debt of $12,900. What is the value of the shareholders’ equity account for this
Building an Income Statement Travis, Inc., has sales of $387,000, costs of $175,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income
Market Values and Book Values Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.5 million. The machinery can be sold to the Romulans today for $6.5 million. Klingon’s
Calculating Taxes The Locker Co. had $273,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company€™s income taxes.What is the average tax rate? What is
Calculating OCF Ranney, Inc., has sales of $18,700, costs of $10,300, depreciation expense of $1,900, and interest expense of $1,250. If the tax rate is 40 percent, what is the operating cash flow,
Calculating Net Capital Spending Gordon Driving School’s 2011 balance sheet showed net fixed assets of $1.42 million, and the 2012 balance sheet showed net fixed assets of $1.69 million. The
The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago:Long-term debt ............................... $ 65,000,000Preferred stock
The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed long-term debt of $1.45 million, and the 2012 balance sheet showed long-term debt of $1.52 million. The 2012 income statement showed an
The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed $490,000 in the common stock account and $3.4 million in the additional paid-in surplus account. The 2012 balance sheet showed $525,000
Given the information for Anna’s Tennis Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2012 was $945,000 and that the firm reduced its
Ritter Corporation€™s accountants prepared the following financial statements for year-end 2012:RITTER CORPORATIONIncome Statement2012Revenue ..............................$750Expenses
The Stancil Corporation provided the following current information:Proceeds from long-term borrowing.............. $17,000Proceeds from the sale of common stock ......... 4,000Purchases of fixed
During the year, the Senbet Discount Tire Company had gross sales of $1.06 million. The firm’s cost of goods sold and selling expenses were $525,000 and $215,000, respectively. Senbet also had
Schwert Corp. shows the following information on its 2012 income statement: sales = $185,000; costs = $98,000; other expenses = $6,700; depreciation expense = $16,500; interest expense = $9,000;
Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales = $41,000; costs = $26,400; addition to retained earnings = $4,900; dividends paid = $1,570;
Huang, Inc., is obligated to pay its creditors $10,900 very soon.a. What is the market value of the shareholders’ equity if assets have a market value of $12,400?b. What if assets equal $9,600?
Corporation Growth has $ 86,000 in taxable income, and Corporation Income has $ 8,600,000 in taxable income.a. What is the tax bill for each firm?b. Suppose both firms have identified a new project
During 2012, Raines Umbrella Corp. had sales of $ 630,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $ 470,000, $ 95,000, and $ 140,000, respectively. In
In Problem 18, suppose Raines Umbrella Corp. paid out $ 34,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued
Cusic Industries had the following operating results for 2012: sales = $ 19,900; cost of goods sold = $ 14,200; depreciation expense = $ 2,700; interest expense = $ 670; dividends paid = $ 650. At
Consider the following abbreviated financial statements for Weston Enterprises:a. What is owners€™ equity for 2011 and 2012?b. What is the change in net working capital for 2012?c. In
For 2012, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.Use the following information for Ingersoll, Inc., for (assume the tax rate is 34percent):
You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $ 98 million in current taxes and
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax
Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small initial investment to start the company was made by Nick and his friends. Over the years, this same group
A financial ratio by itself tells us little about a company because financial ratios vary a great deal across industries. There are two basic methods for analyzing financial ratios for a company:
One tool of financial analysis is common- size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is
Consider the ratio EBITD/ Assets. What does this ratio tell us? Why might it be more useful than ROA in comparing two companies?
A ratio that is becoming more widely used is return on investment. Return on investment is calculated as net income divided by long-term liabilities plus equity. What do you think return on
Nuber Company has a debt– equity ratio of .80. Return on assets is 9.7 percent, and total equity is $ 735,000. What is the equity multiplier? Return on equity? Net income?
Y3K, Inc., has sales of $ 2,700, total assets of $ 1,310, and a debt– equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?
The most recent financial statements for Martin, Inc., are shown here:Assets and costs are proportional to sales. Debt and equity are not. A dividend of $ 2,500 was paid, and Martin wishes to
The most recent financial statements for Fontenot Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant debt
If the Layla Corp. has a 13 percent ROE and a 20 percent payout ratio, what is its sustainable growth rate?
The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next
Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $ 420 million. Current assets,
The Steiben Company has an ROE of 13.1 percent and a payout ratio of 40 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its
Prince Albert Canning PLC had a net loss of £ 37,543 on sales of £ 345,182. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any
The Optical Scam Company has forecast a 15 percent sales growth rate for next year. The current financial statements are shown here:a. Using the equation from the chapter, calculate the external
A company has net income of $ 265,000, a profit margin of 9.3 percent, and an accounts receivable balance of $ 145,300. Assuming 80 percent of sales are on credit, what is the company’s days’
The Le Bleu Company has a ratio of long- term debt to total assets of .35 and a current ratio of 1.25. Current liabilities are $ 950, sales are $ 5,780, profit margin is 9.4 percent, and ROE is 18.2
Titan Inc.’s net income for the most recent year was $ 8,320. The tax rate was 34 percent. The firm paid $ 1,940 in total interest expense and deducted $ 2,730 in depreciation expense. What was
The DuPont identity presented in the chapter is commonly referred to as the three- factor DuPont identity. Another common way that the DuPont identity is expressed is the five- factor model, which
In addition to common- size financial statements, common€“ base year financial statements are often used. Common€“base year financial statements are constructed by dividing the
The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2012 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend
Bulla Recording, Inc., wishes to maintain a growth rate of 12 percent per year and a debt–equity ratio of .40. Profit margin is 5.3 percent, and the ratio of total assets to sales is constant at
Use the sustainable growth rate equations from the previous problem to answer the following questions. No Return, Inc., had total assets of $ 285,000 and equity of $ 176,000 at the beginning of the
Financial planning can be more complex than the percentage of sales approach. Often, the assumptions behind the percentage of sales approach may be incorrect. For example, if the amount of fixed
Dan Ervin was recently hired by East Coast Yachts to assist the company with its short term financial planning and also to evaluate the company's financial performance. Dan graduated from college

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