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Corporate Finance
Colton Conveyance, Inc., is a large U.S. natural gas pipeline company that wants to raise $120 million to finance expansion. Colton wants a capital structure that is 50% debt and 50% equity. Its
Using the original weighted average cost of capital data for Trident used in the chapter in "Sample Calculation: Trident's Cost of Capital," calculate both the CAPM and ICAPM weighted average
Kashmiri is the largest and most successful specialty goods company based in Bangalore, India. It has not yet entered the North American marketplace, but is considering establishing both
Cargill is generally considered to be the largest privately held company in the world. Headquartered in Minneapolis, Minnesota, the company has been averaging sales of over $113 billion per year over
You have joined your friends at the local watering hole, The Tombs, for your weekly debate on international finance. The topic this week is whether the cost of equity can ever be cheaper than the
Senior management at Genedak-Hogan are actively debating the implications of diversification on its cost of equity. All agree that the company's returns will be less correlated with the reference
Theoretically, MNEs should be in a better position than their domestic counterparts to support higher debt ratios because their cash flows are diversified internationally. However, recent empirical
JPMorgan's Latin American Equity Research department produced the following WACC calculation for Petrobrás of Brazil versus Lukoil of Russia in their June 18, 2004, report. Evaluate the
Grupo Modelo, a Mexican brewer, exports such well-known varieties as Corona, Modelo, and Pacifico, is Mexican by incorporation. However, the company evaluates all business results, including
UNIBANCO estimated the weighted average cost of capital for Petrobrás to be 13.2% in Brazilian reais in August of 2004. Evaluate the methodology and assumptions used in the calculation.
Citigroup regularly performs a U.S. dollar-based discount cash flow (DCF) valuation of Petrobrás in its coverage. That DCF analysis requires the use of a discount rate based on the company's
In a report dated June 17, 2003, Citigroup SmithBarney calculated a WACC for Petrobrás denominated in Brazilian reais (R$). Evaluate the methodology and assumptions used in this cost of capital
BBVA utilized a rather innovative approach to dealing with both country and currency risk in their December 20, 2004, report on Petrobrás. Evaluate the methodology and assumptions used in this cost
McDougan Associates, a U.S.-based investment partnership, borrows €80,000,000 at a time when the exchange rate is $1.3460/€. The entire principal is to be repaid in three years, and interest is
Sunrise Manufacturing, Inc., a U.S. multinational company, has the following debt components in its consolidated capital section. Sunrise's finance staff estimates their cost of equity to be 20%.
In January 2002, the government of Argentina broke away from its currency board system that had tied the peso to the U.S. dollar and devalued the peso from APs1.0000/$ to APs1.40000. This caused some
Why would anyone, individual or corporation, want to deposit U.S. dollars in a bank outside of the United States when the natural location for such deposits would be a bank within the United States?
Avon is a U.S.- based direct seller of a wide array of products. Avon markets leading beauty, fashion, and home products in more than 100 countries. As part of the training in its corporate treasury
Pacific Jewel Airlines is a U.S.-based airfreight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a long-term planning report for the parent
Kraftstoff is a German-based company that manufactures electronic fuel-injection carburetor assemblies for several large automobile companies in Germany, including Mercedes, BMW, and Opel. The firm,
a. What is a value-added tax? b. Although the value-added tax has been proposed numerous times, the United States has never adopted one. Why do you think the United States is so negative on it when
Explain the strategies that an MNE can use to manage each of the cultural and institutional risks that you identified in Question 20, except protectionism. • Differences in allowable ownership
a. What are the traditional methods for countries to implement protectionism? b. What are some typical non-tariff barriers to trade? c. How can MNEs overcome host country protectionism?
What are the main strategies used by MNEs to manage the global-specific risks you have identified in Question 24? What are the main types of political risks that are global in origin?
Natural Mosaic Company (U.S.) is considering investing Rs50,000,000 in India to create a wholly owned tile manufacturing plant to export to the European market. After five years, the subsidiary would
Finisterra, S.A., located in the state of Baja California, Mexico, manufactures frozen Mexican food that enjoys a large following in the U.S. states of California and Arizona. In order to be closer
Doohicky Devices, Inc., manufactures design components for personal computers. Until the present, manufacturing has been subcontracted to other companies, but for reasons of quality control Doohicky
Privately owned Wenceslas Refining Company is considering investing in the Czech Republic so as to have a refinery source closer to its European customers. The original investment in Czech korunas
Evaluate the proposed investment in Argentina by Hermosa Components (U.S.). Hermosa's management wishes the baseline analysis to be performed in U.S. dollars (and implicitly also assumes the exchange
As a result of their analysis in Problem 7, Hermosa wishes to explore the implications of being able to grow sales volume by 4% per year. Argentine inflation is expected to average 5% per year, so
How should an MNE factor host country inflation into its evaluation of an investment proposal?
Sankey, Inc., has current assets of $4,900, net fixed assets of $25,000, current liabilities of $4,100, and long-term debt of $10,300. What is the value of the shareholders' equity account for this
Given the information for Jordan's Golf Shop, Inc., in the previous two problems, suppose you also know that the firm's net capital spending for 2015 was $975,000 and that the firm reduced its net
Ritter Corporation's accountants prepared the following financial statements for year-end 2015:a. Explain the change in cash during 2015.b. Determine the change in net working capital in 2015.c.
The Stancil Corporation provided the following current information:Proceeds from long-term borrowing ...................................$17,800Proceeds from the sale of common
During the year, the Senbet Discount Tire Company had gross sales of $925,000. The firm's cost of goods sold and selling expenses were $490,000 and $220,000, respectively. Senbet also had notes
Schwert Corp. shows the following information on its 2015 income statement: sales = $215,000; costs = $117,000; other expenses = $6,700; depreciation expense = $18,400; interest expense = $10,000;
Given the following information for O'Hara Marine Co., calculate the depreciation expense: sales = $44,000; costs = $27,500; addition to retained earnings = $5,200; dividends paid = $1,670; interest
Josipovich, Inc., is obligated to pay its creditors $11,300 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 $82,500 in taxable income, and Corporation Income has $8,250,000 in taxable income.Table 2.3a. What is the tax bill for each firm?b. Suppose both firms have identified a new
During 2015, Rainbow Umbrella Corp. had sales of $590,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $455,000, $85,000, and $125,000, respectively. In
In Problem 18, suppose Rainbow 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
Shelton, Inc., has sales of $435,000, costs of $216,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the
Cusic Industries had the following operating results for 2015: sales = $20,300; cost of goods sold = $14,500; depreciation expense = $2,900; interest expense = $690; dividends paid = $660. At the
Consider the following abbreviated financial statements for Weston Enterprises:a. What is owners' equity for 2014 and 2015?b. What is the change in net working capital for 2015?c. In 2015, Weston
Use the following information for Ingersoll,Inc., (assume the tax rate is 34 percent):Draw up an income statement and balance sheet for this company for 2014 and 2015.
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 $84 million in current taxes and
Refer to the corporate marginal tax rate information in Table 2.3.Table 2.3a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then
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 current balance sheet shows net
The Stefani Co. had $198,000 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 the marginal tax rate?Table
Barrett, Inc., has sales of $19,800, costs of $10,900, depreciation expense of $2,100, and interest expense of $1,250. If the tax rate is 40 percent, what is the operating cash flow, or OCF?
The following table presents the long-term liabilities and stockholders' equity of Information Control Corp. one year ago:Long-term debt........................................ $ 55,000,000Preferred
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
Liquidity True or false: All assets are liquid at some price. Explain.
Gordon Driving School's 2014 balance sheet showed net fixed assets of $1.32 million, and the 2015 balance sheet showed net fixed assets of $1.51 million. The company's 2015 income statement showed
The 2014 balance sheet of Jordan's Golf Shop, Inc., showed long-term debt of $1.625 million, and the 2015 balance sheet showed long-term debt of $1.73 million. The 2015 income statement showed an
The 2014 balance sheet of Jordan's Golf Shop, Inc., showed $510,000 in the common stock account and $3.6 million in the additional paid-in surplus account. The 2015 balance sheet showed $545,000
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
Firm A and Firm B have debt-total asset ratios of 25 percent and 40 percent and returns on total assets of 8 percent and 7 percent, respectively. Which firm has a greater return on equity?
Prince Albert Canning PLC had a net loss of £26,832 on sales of £294,813. 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 sales growth rate of 15 percent 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 $314,000 a profit margin of 8.9 percent, and an accounts receivable balance of $152,800. Assuming 80 percent of sales are on credit, what is the company's days' sales in
The Whisenhunt Company has a ratio of long-term debt to long-term debt and equity of .29 and a current ratio of 1.20. Current liabilities are $1,280, sales are $6,140, profit margin is 8.9 percent,
Panda Inc.'s net income for the most recent year was $9,620. The tax rate was 34 percent. The firm paid $2,380 in total interest expense and deducted $3,170 in depreciation expense. What was the
In addition to commonsize financial statements, common-base year financial statements are often used. Common-base year financial statements are constructed by dividing the current year account
Thorpe Mfg., Inc., is currently operating at only 90 percent of fixed asset capacity. Current sales are $680,000. How much can sales increase before any new fixed assets are needed?The discussion of
Synovec Company has a debt-equity ratio of .70. Return on assets is 8.4 percent, and total equity is $840,000. What is the equity multiplier? Return on equity? Net income?
For the company in the previous problem, suppose fixed assets are $640,000 and sales are projected to grow to $790,000. How much in new fixed assets are required to support this growth in sales?The
The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2016 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend
In the previous problem, suppose the firm was operating at only 80 percent capacity in 2015. What is EFN now?Capital intensity ratio = Fixed assets/Full-capacity sales = $1,800/$1,111 = 1.62This
Shinedown, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .35. Profit margin is 4.9 percent, and the ratio of total assets to sales is constant at .75. Is
Y3K, Inc., has sales of $3,100, total assets of $1,340, and a debt-equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?
Use the sustainable growth rate equations from the previous problem to answer the following questions. I Am Myself, Inc., had total assets of $410,000 and equity of $230,000 at the beginning of the
The most recent financial statements for Wise Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 2.85Profit margin = 5.9%Equity multiplier = 1.70Payout ratio = 60%
The most recent financial statements for Williamson 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
Dahlia 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 $360 million. Current assets, fixed
Financial planning can be more complex than the percentage of sales approach indicates. Often, the assumptions behind the percentage of sales approach may be too simple. A more sophisticated model
If Wilkinson, Inc., has an equity multiplier of 1.35, total asset turnover of 2.10, and a profit margin of 5.2 percent, what is its ROE?
The Wintergrass Company has an ROE of 11.4 percent and a payout ratio of 25 percent.a. What is the company's sustainable growth rate?b. Can the company's actual growth rate be different from its
Based on the results in Problem 27, show that the internal and sustainable growth rates can be calculated as shown in Equations 3.24 and 3.25.For the internal growth rate, set EFN equal to zero and
If the Hunter Corp. has a ROE of 12 percent and a payout ratio of 15 percent, what is its sustainable growth rate?
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
First City Bank pays 7.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest compounded annually. If you made a $7,000 deposit in each bank,
Compute the future value of $1,900 continuously compounded fora. 9 years at an APR of 12 percent.b. 5 years at an APR of 8 percent.c. 17 years at an APR of 5 percent.d. 10 years at an APR of 9
Wilkinson Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18
Investment X offers to pay you $3,900 per year for nine years, whereas Investment Y offers to pay you $6,100 per year for five years. Which of these cash flow streams has the higher present value if
An investment offers $5,650 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the investment? What would the value
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $12,000 per year forever. If the required return on this investment is 4.7 percent, how
Find the EAR in each of the following cases:APR .............Number of Times Compounded ..........EAR6.7% ...........................................Quarterly12.4
Find the APR, in each of the following cases:APR ..........................Number of Times Compounded ............EAR..........................................................Semiannually............
First National Bank charges 10.3 percent compounded monthly on its business loans. First United Bank charges 10.5 percent compounded semiannually. As a potential borrower, to which bank would you go
You are planning to save for retirement over the next 30 years. To do this, you will invest $750 per month in a stock account and $250 per month in a bond account. The return of the stock account is
For each of the following, compute the present value:
Audrey Sanborn has just arranged to purchase a $650,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 5.2 percent APR, compounded monthly, and calls for equal
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.40 percent per year, compounded monthly for the first six months, increasing thereafter to
Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $72,500, and you plan to spend all of it. However, you
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $4,300 per year at the current interest rate of 10 percent per
You need a 30-year, fixed-rate mortgage to buy a new home for $250,000. Your mortgage bank will lend you the money at an APR of 4.5 percent for this 360-month loan. However, you can only afford
The present value of the following cash flow stream is $7,300 when discounted at 7.1 percent annually. What is the value of the missing cash flow?Year ......................Cash Flow1
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