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Corporate Finance
Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $21 million in perpetuity. The current required return on the firm's equity is 16 percent, and the firm distributes
Mojito Mint Company has a debt-equity ratio of .35. The required return on the company's unlevered equity is 12.8 percent, and the pretax cost of the firm's debt is 6.5 percent. Sales revenue for the
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .40, but the industry target debt-equity ratio is
Gemini, Inc., an all-equity firm, is considering an investment of $1.4 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to
If Wild Widgets, Inc., were an all-equity company, it would have a beta of .95. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 11 percent, and
North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.10 if both were all equity financed. The market value information for each
Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 7.5 percent loan with gross proceeds of $4,450,000. The interest payments on the loan will be made annually. Flotation costs are
Watson, Inc., is an all-equity firm. The cost of the company's equity is currently 11.9 percent, and the risk-free rate is 3.5 percent. The company is currently considering a project that will cost
National Electric Company (NEC) is considering a $68 million project in its power systems division. Tom Edison, the company's chief financial officer, has evaluated the project and determined that
Bolero, Inc., has compiled the following information on its financing costs:The company is in the 35 percent tax bracket and has a target debt-equity ratio of 60 percent. The target short-term
Cheek Products, Inc. (CPI) was founded 53 years ago by Joe Cheek and originally sold snack foods such as potato chips and pretzels. Through acquisitions, the company has grown into a conglomerate
You are determining whether your company should undertake a new project and have calculated the NPV of the project using the WACC method when the CFO, a former accountant, notices that you did not
Lee Ann, Inc., has declared a $7.50 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld when the
You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $2.60 per share in one year. In two years, Avondale will pay a liquidating dividend of $53 per share. The
In the previous problem, suppose you want only $500 total in dividends the first year. What will your homemade dividend be in two years?
Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case $6,300 would be spent. Current earnings are $2.60 per share, and the stock currently sells for $51 per
Gibson Co. has a current period cash flow of $1.3 million and pays no dividends. The present value of the company's future cash flows is $18 million. The company is entirely financed with equity and
The Sharpe Co. just paid a dividend of $1.60 per share of stock. Its target payout ratio is 40 percent. The company expects to have earnings per share of $5.10 one year from now.a. If the adjustment
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different divided policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield
National Business Machine Co. (NBM) has $4.5 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets.
The owners' equity accounts for Hexagon International are shown here:Common stock ($1 par value)...............$ 40,000Capital surplus.................................155,000Retained
For the company in Problem 2, show how the equity accounts will change if:a. The company declares a four-for-one stock split. How many shares are outstanding now? What is the new par value per
Roll Corporation (RC) currently has 465,000 shares of stock outstanding that sell for $73 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. RC
The balance sheet for Levy Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding.The company has declared a dividend of $1.60 per share. The stock goes ex dividend
In the previous problem, suppose the company has announced it is going to repurchase $22,400 worth of stock. What effect will this transaction have on the equity of the company? How many shares will
The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a stock dividend of 25 percent. The stock goes ex dividend tomorrow (the chronology for a stock dividend is
The company with the common equity accounts shown here has declared a stock dividend of 15 percent when the market value of its stock is $57 per share. What effects on the equity accounts will the
In the previous problem, suppose the company instead decides on a five for-one stock split. The firm's 45 cent per share cash dividend on the new (postsplit) shares represents an increase of 10
The bird-in-the-hand argument, which states that a dividend today is safer than the uncertain prospect of a capital gain tomorrow, is often used to justify high dividend payout ratios. Explain the
On Tuesday, December 8, 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. When
For initial public offerings of common stock, 2007 was a relatively slow year, with only about $35.6 billion raised by the process. Relatively few of the 159 firms involved paid cash dividends. Why
Chanelle, Inc., is proposing a rights offering. Presently, there are 625,000 shares outstanding at $87 each. There will be 85,000 new shares offered at $78 each.a. What is the new market value of the
Teardrop, Inc., wishes to expand its facilities. The company currently has 6.8 million shares outstanding and no debt. The stock sells for $65 per share, but the book value per share is $20. Net
The all-equity firm Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:Stock
In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ratio remains constant.) What is the NPV of this
Valley Corp.'s stock is currently selling at $37 per share. There are 1 million shares outstanding. The firm is planning to raise $2.5 million to finance a new project. What are the ex-rights stock
The Clifford Corporation has announced a rights offer to raise $26 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
Stone Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly
The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $11, and the other is overvalued by $3, but you have no way of knowing which is which. You
The St. Anger Corporation needs to raise $55 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If
In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $1,900,000, how many shares need to be sold?
The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $29.96 for each of the 7.5 million shares sold. The initial offering price was $32 per share, and the
Raggio, Inc., has 145,000 shares of stock outstanding. Each share is worth $75, so the company's market value of equity is $10,875,000. Suppose the firm issues 30,000 new shares at the following
In the aggregate, debt offerings are much more common than equity offerings and typically much larger as well. Why?
The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow
Why are the costs of selling equity so much larger than the costs of selling debt?
An asset costs $720,000 and will be depreciated in a straightline manner over its three-year life. It will have no salvage value. The corporate tax rate is 34 percent, and the appropriate interest
Wolfson Corporation has decided to purchase a new machine that costs $2.8 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax
An asset costs $590,000 and will be depreciated in a straightline manner over its three-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee can borrow at 9
Automobiles are often leased, and there are several terms unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $32,000. This is the
Return to the case of the diagnostic scanner discussed in Problems 1 through 6. Suppose the entire $5,800,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the
High electricity costs have made Farmer Corporation's chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is
In April 2014, International Lease Finance Corporation (ILFC) announced a deal to purchase eight Airbus A330-200 and A350-900 passenger aircraft. ILFC then signed a long-term lease contract on the
In April 2014, International Lease Finance Corporation (ILFC) announced a deal to purchase eight Airbus A330-200 and A350-900 passenger aircraft. ILFC then signed a long-term lease contract on the
In April 2014, International Lease Finance Corporation (ILFC) announced a deal to purchase eight Airbus A330-200 and A350-900 passenger aircraft. ILFC then signed a long-term lease contract on the
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it
T-bills currently yield 3.9 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year.a.
What are the prices of a call option and a put option with the following characteristics?Stock price = $57Exercise price = $60Risk-free rate = 6% per year, compounded continuouslyMaturity = 4
What are the prices of a call option and a put option with the following characteristics?Stock price = $93Exercise price = $90Risk-free rate = 4% per year, compounded continuouslyMaturity = 5
What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?Stock price = $76Exercise price = $70Risk-free rate = 5% per year,
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.3 million. Over the past five years, the price of land in the area has increased 12 percent per
In the previous problem, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the
You are given the following information concerning options on a particular stock:Stock price = $83Exercise price = $80Risk-free rate = 6% per year, compounded continuouslyMaturity = 6 monthsStandard
A stock is currently priced at $84. The stock will either increase or decrease by 17 percent over the next year. There is a call option on the stock with a strike price of $80 and one year until
The price of Ervin Corp. stock will be either $53 or $67 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent.a. Suppose the current price
You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production, and distribution of lighting equipment and specialty products
Gary Levin is the chief executive officer of Mountain brook Trading Company. The board of directors has just granted Mr. Levin 25,000 at-the money European call options on the company's stock, which
Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $475,000, his three-year contract states that his compensation
Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $2.65 per gallon. Gasoline is currently selling on the wholesale market at $2.34 per
The Webber Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This
Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current
Sardano and Sons is a large, publicly held company that is considering leasing a warehouse. One of the company's divisions specializes in manufacturing steel, and this particlar warehouse is the only
Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now the company will know whether
There is a European put option on a stock that expires in two months. The stock price is $82, and the standard deviation of the stock returns is 70 percent. The option has a strike price of $90, and
Vital Silence Corp. has just issued a 30-year callable, convertible bond with an annual coupon rate of 6 percent. The bond has a conversion price of $93. The company's stock is selling for $28 per
Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 850,000 shares of stock. The company currently has 5.1 million shares of stock and convertible bonds with a face value
Bauble, Inc., an all-equity firm, has eight shares of stock outstanding. Yesterday, the firm's assets consisted of nine ounces of platinum, currently worth $1,650 per ounce. Today, the company issued
The capital structure of Ricketti Enterprises, Inc., consists of 25 million shares of common stock and 1.5 million warrants. Each warrant gives its owner the right to purchase one share of common
A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $64 per share. The current market price of the stock is $68. What is the minimum value of the
Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $49. The bonds are available for immediate conversion. The current price of the company's common stock is $43 per
What is the primary difference between a warrant and a traded call option?
What is wrong with the simple view that it is cheaper to issue a bond with a warrant or a convertible feature because the required coupon is lower?
Refer to Table 25.2 in the text to answer this question. Suppose you purchase a March 2015 cocoa futures contract on January 8, 2015, at the last price of the day. What will your profit or loss be if
Refer to Table 25.2 in the text to answer this question. Suppose you sell five March 2015 silver futures contracts on January 8, 2015, at the last price of the day. What will your profit or loss be
Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $65 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise
You are long 10 gold futures contracts, established at an initial settle price of $1,210 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at
You are short 25 gasoline futures contracts, established at an initial settle price of $1.36 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline
What is the duration of a bond with three years to maturity and a coupon of 6.1 percent paid annually if the bond sells at par?
What is the duration of a bond with four years to maturity and a coupon of 8.6 percent paid annually if the bond sells at par?
Blue Steel Community Bank has the following market value balance sheet:a. What is the duration of the assets?b. What is the duration of the liabilities?c. Is the bank immune to interest rate risk?
Refer to Table 25.2 in the text to answer this question. Suppose today is January 8, 2015, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2015 for an upcoming
Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2016:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its
Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:
The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent, with the first-quarter sales projection at $185 million. In addition to this basic trend, the
Blizzard Corp. has a book value of equity of $14,750. Long-term debt is $8,300. Net working capital, other than cash, is $1,950. Fixed assets are $20,730 and current liabilities are $1,930. How much
The Litzenberger Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $335. The company has a 45-day collection
Consider the following financial statement information for the Rivers Corporation:Calculate the operating and cash cycles. How do you interpret your answer?
Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers assuming
The Thakor Corporation's purchases from suppliers in a quarter are equal to 75 percent of the next quarter's forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20
The following is the sales budget for Shleifer, Inc., for the first quarter of 2016:January February MarchSales budget .................$258,000 ..............$274,200 ...........$298,000Credit sales
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