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Corporate Finance
A house painting business had revenues of $16,000 and expenses of $9,000 last summer. There were no depreciation expenses. However, the business reported the following changes in working
A firm's balance sheets for year-end 2016 and 2017 contain the following data. What happened to investment in net working capital during 2017? All items are in millions of
Return to Better Mousetraps in Problem 18. Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV?
The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be
Reliable Electric is considering a proposal to manufacture a new type of industrial electric motor that would replace most of its existing product line. A research breakthrough has given Reliable a
Reconsider Blooper's mining project. Suppose that by investing an additional $1,000,000 initially, Blooper could reduce variable costs to 35% of sales.a. Using the base-case assumptions (Spreadsheet
Blooper's analysts have come up with the following revised estimates for its magnoosium mineConduct a sensitivity analysis using the revised data. Label your answers as follows:
The Finance in Practice box in Section 10.5 describes Korean Air's option to buy additional 737 airliners. Draw a decision tree showing the future choices faced by the airline.
In 2011-2015, mutual fund manager Diana Sauros produced the following percentage rates of return for the Mesozoic Fund. Rates of return on the market index are given for comparison. Calculate (a) the
Here are the returns on two stocks.a. Calculate the variance and standard deviation of each stock. Which stock is riskier if held on its own?b. Now calculate the returns in each month of a portfolio
Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $50. The stock will pay a dividend at year-end of $2. What
Here are rates of return on a broad stock market index and on Treasury bills between 2011 and 2015Year___________Stock Market Return (%)____________T-Bill Return
Use the data in Tables 11.1 and 11.4 to answer these questions:a. What was the average rate of return on large U.S. common stocks from 1900 to 2015?b. What was the average risk premium on large
The accompanying table shows annual stock prices on the Sulaco Stock Exchange in the republic of Costaguana for 2010-2015. Construct two stock market indexes, one using weights as in the Dow Jones
In February 2009, the Dow Jones Industrial Average was at a level of about 8,000. In January 2016, it was about 17,150. Would you expect the Dow in 2016 to be more or less likely to move up or down
We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions, when other firms are struggling. Consequently, its beta is negative,
A stock with a beta of .8 has an expected rate of return of 12%. If the market return this year turns out to be 5 percentage points below expectations, what is your best guess as to the rate of
Figure 12.10 plots monthly rates of return from 2010 to 2015 for the Snake Oil mutual fund. Was this fund fully diversified?
In view of your answer to Problem 25, explain why a mutual fund must be able to provide an expected rate of return in excess of that predicted by the security market line for investors to consider
According to the CAPM, would the expected rate of return on a security with a beta less than zero be more or less than the risk-free interest rate? Why would investors invest in such a security?
The total market value of the equity of Okefenokee Condos is $6 million, and the total value of its debt is $4 million. The treasurer estimates that the beta of the stock currently is 1.2 and that
In 2015, Caterpillar Inc. had about 582 million shares outstanding. Their book value was $27.30 per share, and the market price was $71.50 per share. The company's balance sheet shows that the
Pangbourne Whitchurch has preferred stock outstanding. The stock pays a dividend of $4 per share, and sells for $40. The corporate tax rate is 35%. What is the percentage cost of the preferred stock?
The following table presents information for Golden Fleece Financial. Calculate the company cost of capital. Ignore taxes.Long-term debt outstanding
Haricot Corp. and Pinto Corp. both havepre-tax profits of $100 million. Haricot is financed solely by equity, while Pinto has issued $150 million of 8% debt. If the corporate tax rate is 35%:a. How
Van Gogh Furniture has issued a zero-coupon 10-year bond that can be converted into 10 Van Gogh shares. Comparable nonconvertible bonds are yielding 8%. Van Gogh stock is priced at $50 a share. If
Book value of common stockholders' equity of FedExl, December 31, 2012 (figures in $ millions).Common stock ($.1 par value per share) $ 32Additional paid-in capital 2,786Retained earnings
Match Group went public in November 2015. The company sold 33,333,333 shares at $12 per share. The underwriting spread was $0.66 a share, and the direct expenses were $0.21 a share.a. What was the
Ethelbert.com is a young software company owned by two entrepreneurs. It currently needs to raise $400,000 to support its expansion plans. A venture capitalist is prepared to provide the cash in
The market value of the research firm Fax Facts is $600 million. The firm issues an additional $100 million of stock, but as a result the stock price falls by 2%. What is the cost of the price drop
Look back at your restaurant chain venture. Suppose that when you first approach your friendly VC, he decides that your shares are worth only $.40 each. a. How many shares will you need to sell to
Fishwick Enterprises has 200,000 shares outstanding, half of which are owned by Jennifer Fishwick and half by her cousin. The two cousins have decided to sell 100,000 shares in an IPO. Half of these
Gravenstein Chemicals wishes to raise $5 million by an issue of stock. It expects direct expenses to absorb 1% of the money raised and the underwriters to charge a spread of 4%. If the announcement
Mutt.Com was founded in 2013 by two graduates of the University of Wisconsin with help from Georgina Sloberg, who had built up an enviable reputation for backing new start-up businesses. Mutt.Com's
Hubbard's Pet Foods is financed 80% by common stock and 20% by bonds. The expected return on the common stock is 12%, and the rate of interest on the bonds is 6%. Assume that the bonds are default
Digital Fruit is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 million of debt and to use
River Cruises (see Section 16.1) is all-equity-financed with 100,000 shares. It now proposes to issue $250,000 of bonds and use the proceeds to repurchase 25,000 shares. Suppose an investor currently
River Cruises' management now understands that the trade-off theory of optimal capital structure implies managers will increase debt as long as the value of additional interest tax shields exceeds
The Salad Oil Storage Company (SOS) has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. a. Explain why
Access the Beyond the Page feature to read about Sealed Air's restructuring.What was the value of financial slack to Sealed Air before its restructuring? What does the success of the restructuring
In March 2018, the management team of Londonderry Air (LA) met to discuss a proposal to purchase five shorthaul aircraft at a total cost of $25 million. There was general enthusiasm for the
House of Haddock has 5,000 shares outstanding and the stock price is $100. The company is expected to pay a dividend of $20 per share next year, and thereafter the dividend is expected to grow
Little Oil has outstanding 1 million shares with a total market value of $20 million. The firm is expected to pay $1 million of dividends next year, and thereafter, the amount paid out is expected to
The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be $.50 per share, and there are 20,000 shares of stock outstanding. The market-value balance sheet for Payout is shown in
George Liu, the CEO of Penn Schumann, was a creature of habit. Every month, he and Jennifer Rodriguez, the company's chief financial officer, met for lunch and an informal chat at Pierre's. Nothing
We stated in Section 17.3 that MM's proof of dividend irrelevance assumes that any new shares are sold at a fair price. Consider the case in Problem 16 in which Hewlard Pocket pays the higher
Payout Corp. has regularly paid a quarterly dividend of $.50 per share on its 20,000 outstanding shares. Now suppose that Payout announces that instead of paying this dividend, it plans to repurchase
Here are several "facts" about typical corporate dividend policies. Which are true and which are false? a. The vast majority of companies pay out cash each year in the form of a dividend or a stock
Eagle Sports Supply has the following financial statements. Assume that Eagle's assets are proportional to its sales.INCOME STATEMENT, 2017Sales ...................................... $950Costs
The 2017 financial statements for Growth Industries are presented below. Sales and costs are projected to grow at 20% a year for at least the next 4 years. Both current assets and accounts payable
Loreto Inc. has the following financial ratios: asset turnover = 1.40; profit margin = 5%; payout ratio = 25%; equity/assets = .60.a. What is Loreto's sustainable growth rate?b. What is its internal
A firm's profit margin is 10%, and its asset turnover ratio is .6. It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the sustainable growth rate?
A firm has an asset turnover ratio of 2.0. Its plowback ratio is 50%, and it is all-equity-financed. If the profit margin of the firm is 6%, what is the maximum payout ratio that will allow it to
A firm has an asset turnover ratio of 2.0. Its plowback ratio is 50%, and it is all-equity-financed. If the profit margin of the firm is 6%, what is the maximum possible growth rate that can be
Garnett Jackson, the founder and CEO of Tech Tune-Ups, stared out the window as he finished his customary peanut butter and jelly sandwich, contemplating the dilemma currently facing his firm. Tech
The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed assets (i.e., assets net
Create the statement of cash flows from the following entries:Net income .................................... $1,500Dividends .......................................... 900Additions to inventory
Calculate Paymore's cash payments (from Problem 7) to its suppliers under the assumption that the firm pays for its goods with a 1-month delay. Therefore, on average, two-thirds of purchases are paid
Now suppose that Paymore's customers (from Problem 7) pay their bills with a 2-month delay. What is the forecast for Paymore's cash receipts in each quarter of the coming year? Assume that sales in
Assuming that Paymore's labor and administrative expenses (from Problem 7) are $65 per quarter and that interest on long-term debt is $40 per quarter, work out the net cash inflow for Paymore for the
Suppose that Paymore's cash balance (from Problem 7) at the start of the first quarter is $40 and its minimum acceptable cash balance is $30. Work out the short-term financing requirements for the
Each of the following events affects one or more of the tables in Sections 19.2 and 19.3. Show the effects of each event by adjusting the tables listed in parentheses. Treat each event
Suppose that Dynamic Mattress issued $5 million of additional long-term debt and used the proceeds to add to its cash balances. Recalculate its short-term financing plan (Table 19.6) now that it has
Recalculate Dynamic Mattress's 2017 financing plan (Table 19.6), assuming that the firm wishes to maintain a minimum cash balance of $30 million instead of $25 million. Assume the firm can convince
Fill in the blanks in the following statements. a. A firm has a cash surplus when its ____(i)____ exceeds its ____(ii)____. The surplus is normally invested in _____(iii)_____. b. In developing the
Table 19.7 shows Dynamic Mattress's year-end 2014 balance sheet, and Table 19.8 shows its income statement for 2015. Use these tables (and Table 19.2) to work out the statement of cash flows for
Company X sells on a 1/20, net 60, basis. Company Y buys goods with an invoice of $1,000.a. How much can company Y deduct from the bill if it pays on day 20?b. How many extra days of credit can
On each nondelinquent sale Cast Iron receives revenues with a present value of $1,200 and incurs costs with a present value of $1,050. Assuming there is no possibility of repeat orders and that the
In 2017, Cumnor Towers had sales of $618 million and cost of goods sold of $522 million. Its average inventory was $50 million.a. What was Cumnor's average inventory period?b. How much would the
Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size
The following table shows income statement and balance sheet data for five U.S. industries in 2015. Calculate the cash cycle for each industry.
Income Statement Data:Sales ................................................... $5,000Cost of goods sold .................................... 4,200Balance Sheet Data:Inventory
Capital. A junior analyst at Camberwell Corp. has jumbled the items on its balance sheet. Can you help him calculate the value ofa. Camberwell's current assets,b. Its current liabilities, andc. Its
For each of the following pairs, is firm A or firm B more likely to grant the longer credit period? a. Firm A sells hardware; firm B sells bread. b. Firm A's customers have an inventory turnover
Use the data in Example 20.2. But now suppose that 10% of Cast Iron's customers are slow payers and that slow payers have a probability of 30% of defaulting on their bills. If it costs $5 to
Will each of the following events increase or decrease the cash cycle? a. Higher financing rates induce the firm to reduce its level of inventory. b. The firm obtains a new line of credit that
True or false? a. Inventory levels tend to rise proportionately more than sales. b. Carrying costs include the cost of the capital tied up in inventory. c. Optimal inventory levels involve a
Which of the following should increase the optimal level of inventories? a. Freight rates decline. b. Interest rates rise. c. The cost of insuring the warehouse and contents rises. d. Changing
Redraw Figure 20.7 assuming that carrying costs are $60 a ton and that each order involves a fixed charge of $400.a. What is the optimal order quantity?b. Using your plot from part (a), about how
Treasury bill with face value of $100,000 and maturity of 3 months sells for $99,000.a. What would be the rate quoted on this bill on a discount basis?b. What would be its effective annual interest
Name the instrument that best fits each of the following descriptions: a. Short-term unsecured loan issued directly by the company. b. An agreement by a government bond dealer to buy back a bond that
Pick the term from the following list that best fits each description: haircut; commercial paper; collateral; revolving line of credit; self-liquidating loan; LIBOR; syndicated loan. a. Interest rate
Suppose that instead of making a cash offer as in Problem 9, Velcro Saddles considers offering Skiers' shareholders a 50% holding in Velcro Saddles.a. What is the value of the stock in the merged
As financial manager of Britwell Inc., you are investigating a possible acquisition of Salome. You have the basic data given in the following table. You estimate that investors expect a steady growth
Sweet Cola Corp. (SCC) is bidding to take over Salty Dog Pretzels (SDP). SCC has 3,000 shares outstanding, selling at $50 per share. SDP has 2,000 shares outstanding, selling at $17.50 a share. SCC
Why are both tender offers and proxy contests threatening to the current management of a firm? What are less contentious mechanisms that may lead to a change in management?
In Section 21.7, we described how Valeant and its ally, Pershing Square, lost the battle to acquire Allergan. Sometimes, the losers in a takeover battle can also win if they own a toehold stake in
McPhee Food Halls operated a chain of supermarkets in the west of Scotland. The company had had a lackluster record, and since the death of its founder in late 2007, it had been regarded as a prime
Use Table_22.1 to answer the following questions:a. How many euros can you buy for $100? How many dollars can you buy for 100 euros?b. How many Swiss francs can you buy for $100? How many dollars can
Use Table_22.1 to answer the following questions:If the 1-year forward exchange rate for the Brazilian real is USD1 = BRL4.480 and the 1-year interest rate on dollars is .5%, what is the 1-year
Suppose that the inflation rate in the United States is 4% and in Canada it is 5%. Would you expect the Canadian dollar to appreciate or depreciate against the U.S. dollar?
An American investor buys 100 shares of London Enterprises at a price of £50 when the exchange rate is USD2 = GBP1. A year later the shares are selling at £52. No dividends have been paid.a. What
You have bid for a possible export order that would provide a cash inflow of €1 million in 6 months. The spot exchange rate is USD1.30 = EUR1, and the 1-year forward rate is USD1.28 = EUR1. There
It is the year 2020 and Pork Barrels Inc. is considering construction of a new barrel plant in Spain. The forecast cash flows in millions of euros are as follows:The spot exchange rate is USD1.2 =
It is 2020 and Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecast cash flows from the
Suppose that 2-year interest rates are 5.2% in the United States and 1.0% in Japan. The spot exchange rate is JPY83.63 = USD1. Suppose that 1 year later interest rates are 3% in both countries,
Use Table 22.1 to answer the following questions:a. How many Brazilian reals do you get for your dollar?b. If the 1-year forward rate on the real is BRL4.012 = USD1, is the real at a forward discount
The spot and 1-year forward rates on the New Zealand dollar are currently NZD1.485 = USD1 and NZD1.455 = USD1, respectively. If the expectations theory of forward rates is correct, would you expect
Assume these simple exchange rate relationships to answer the questions below:Forward rate equals the expected spot rate. The interest differential between two countries must be equal to the
Dick Johnson, the treasurer of Sonora Mining, has noticed that the interest rate in Japan is below the rates in most other countries. He is, therefore, suggesting that the company should make an
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