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Questions and Answers of Corporate Finance

Floyd industries stock has a beta of 1.15. The company just paid a dividend of $.60, and the dividends are expected to grow at 5 percent. The expected return of the market is 11.5 percent, and
Photo chronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 0.8. It’s considering building a new $75 million manufacturing
Flotation Costs Trower Corp has a debt-equity ratio of .75. The company is considering a new plant that will cost $1.25 million to build. When the company issues new equity, it incurs a flotation
Project Evaluation this is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial
Debt versus Equity offering Size in the aggregate, debt offerings are much more common than equity offerings and typically much larger as well. Why?
Debt versus Equity Flotation Costs why are the costs of selling equity so much larger than the costs of selling debt?
Bond Ratings and Flotation Costs why do non investment grade bonds have much higher direct costs than investment grade issues
Under pricing in debt Offerings why is under pricing not a great concern with bond offerings? Use the following information to answer the next three questions. Eyetech Pharmaceuticals, Inc., a
IPO Pricing the Eyetech IPO was underpriced by about 54 percent. Should Eyetech be upset at Merrill Lynch over the under-pricing?
IPO Pricing in the previous question, would it affect your thinking to know that the company was incorporated less than four years earlier, had only $30 million in revenues for the first nine months
In the previous two questions, how would id affect your thinking to know that in addition to the 6.5 million shares offered in the IPO, Eyetech had an additional 32 million shares outstanding? Of
Cash offer versus Right offer Ren-Stimpy international is planning to raise fresh equity capital by selling a large new issue of common stock. Ren-Stimpy is currently a publicly traded corporation,
IPO Under pricing in 1980, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approximately one month and then sold. The investment
Rights Offerings Rebel, Inc. is proposing a rights offering. Presently there are 400,000 shares outstanding at $75 each. There will be 70,000 new shares offered at $70 each.a. What is the new market
Rights Offerings the Clifford Corporation has announced a rights offer to raise $50 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the
Rights Red Shoe Co, had 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
IPO Under pricing the Woods Co, and the Mickelson Co, have both announced IPOs at $40 per share. One of these is undervalued by $8, and the other is overvalued by $5, but you have to no way of
Calculating Flotation Costs the Educated Horses Corporation needs to raise $40 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash
Calculating Flotation Costs in the previous problem, if the SEC filing fee and associated administrative expense of the offering are $900,000, how many shares need to be sold?
Calculating Flotation Costs the Huff Co, has just gone public. Under a firm commitment agreement, Huff received $15.05 for each of the 5 million shares sold. The initial offering price was $26 per
Price Dilution CEO, Inc., 100,000 shares of stock outstanding. Each share is worth $80 so the company’s market value of equity is $800,000. Suppose the firm issues 20,000 new shares at the
Dilution Teardrop Inc., wishes to expand its facilities. The company currently has 10 million shares outstanding and no debt. The stock sells for $50 per share, but the book value per share is $20.
Dilution the Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here.MHMM is considering an investment that
Dilution in the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $98 per share (Assume the PE ratio remains constant). What is the NPV
Rights No Fool Mfg is considering a rights offer. The company has determined that the ex-rights price would be $52. The current price is $55 per share, and there are 5 million shares outstanding. The
Business Risk versus Financial Risk explains what is meant by business risk and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of
M&M Propositions how would you answer in the following debate?Q: Isn’t it true that the riskiness of a firm’s equity will rise if the firm increases its use of debt financing?A: Yes, that’s
Optimal Capital Structure is there an easily identifiable debt-equity ratio that will maximize the value of a firm? Why or why not?
Financial Leverage why is the use of debt financing referred to as financial “leverage”?
Homemade Leverage what is homemade leverage?
Bankruptcy and Corporate Ethics as mentioned in the text, some firms have filed for bankruptcy because of actual or likely litigation-related losses. Is this a proper use of the bankruptcy process?
Bankruptcy and Corporate Ethics firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases, the firm is using bankruptcy laws
Bankruptcy and Corporate Ethics as mentioned in the text, Continental Airlines filed for bankruptcy, at least in part, as a means of reducing labor costs. Whether this move was ethical, or proper,
Capital structure goal what is the basic goal of financial management with regard to capital structure?
EBIT and Leverage wild side, Inc has no debt outstanding and a total market value of $200,000. Earnings before interest and taxes, EBIT, are projected to be $25,000 if economic conditions are normal.
EBIR, Taxes, and Leverage repeat parts (a) and (b) in Problem 1 assuming Wild Side has a tax rate of 35 percent.a. Calculate earnings per share (EPS) under each of the three economic scenarios before
ROE and Leverage suppose the company in problem 1 has a market-to-book ratio of 1.0.a. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Also
Break Even EBIT petty Corporation is comparing two different capital structure an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Petty would have 200,000 shares of stock
M&M and Stock Value in problem 4, use M&M proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?
Break-Even EBIT and Leverage Kolby Corp, is comparing two different capital structures. Plan I would result in 1,500 shares of stock and $520,000 in debt. Plan II would result in 1,100 shares of
Leverage and Stock Value ignoring taxes in problem 6, what is the price per share of equity under Plan I Plan II what principle is illustrated by your answers?
Homemade Leverage home body, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 50 percent debt. Currently, there are 5,000
Homemade Leverage and WACC ABC Co, and XYZ Co, are identical firms in all respects except for their capital structure. ABC is all equity financed with $800,000 in stock. XYZ uses both stock and
M&M Lamont Corp, uses no debt. The weighted average cost of capital is 11 percent. If the current market value of the equity is $25 million and there are no taxes, what is EBIT?
M&M and Taxes in the previous question, suppose the corporate tax rate is 35 percent. What is EBIT in this case? What is the WACC? Explain.
Calculating WACC Maxwell Industries has a debt-equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 8 percent. The corporate tax rate is 35 percent.a. What is Maxwell’s cost of
Calculating WACC second Base Corp has no debt but can borrow at 7.5 percent. The firm’s WACC is currently 10 percent, and the tax rate is 35 percent.a. What is Second Base’s cost of equity?b. If
M&M and Taxes Bruce & Co, expects its EBIT to be $85,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. If the tax
M&M and taxes in problem 14, what is the cost of equity after recapitalization, what is the WACC? What are the implications for the firm’s capital structure decision?
M&M Tool manufacturing has an expected EBIT of $45,000 in perpetuity and a tax rate of 35 percent. The firm has $80,000 in outstanding debt at an interest rate of 9 percent, and its un-levered
Firm Value Old School Corporation expects and EBIT of $12,000 every year forever. Old School corporate tax rate is 35 percent, what is the value of the firm? What will the value be if old school
Homemade Leverage the Veblen Company and the Knight Company are identical in ever respect except that Veblen is not levered. Financial information for the two firms appears in the following table.
Weighted Average Cost of Capital in a world of corporate taxes only, show that the WACC can be written as WACC = RU x [1 – TC (D/V)].
Cost of Equity and Leverage assuming a world of corporate taxes only show that the cost of equity, RE is as given in the chapter by M&M Proposition II with corporate taxes
Business and Financial Risk assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, Rf Define βA as the firm’s asset beta-that is, the systematic risk of the
Stock holder risk suppose a firm’s business operations are such that they mirror movements is the economy as a whole very closely; that is, the firm’s asset beta is 1.0. Use the result of Problem
Dividend Policy Irrelevance how is it possible that dividends are so important, but at the same time, dividend policy is irrelevant?
Stock repurchases what is the impact of a stock repurchase on a company’s debt ratio? Does this suggest another use for excess cash?
Dividend Policy what is the chief drawback to a strict residual dividend policy? What is this a problem? How does a compromise policy work? How does it differ from a strict residual policy?
Dividend Chronology 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
Alternative Dividends some corporation, like one British company that offers its large shareholders free crematorium use, pay dividends in kind (that is, offer their services to shareholder at
Dividends and Stock Price if increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?
Dividends and Stock Price last month, central Virginia Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was
Dividend Reinvestment Plans the DRK Corporation has recently developed a dividend reinvestment plan, or DRIP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for
Dividend Policy for initial public offerings of common stock, 2005 was a relatively slow year with about $28.4 billion raised by the process. Relatively few of the 162 firms involved paid cash
Investment and Dividends the Phew Charitable Trust pay no taxes on its capital gains or on its dividend income or interest income. Would it be irrational for it to have low-dividend, high-growth
Ex-Dividend Stock Prices how do you think this tax law change affects ex-dividend stock prices?
Stock repurchases how do you think this tax law change affected the relative attractiveness of stock repurchases compared to dividend payments?
Dividends and Taxes Sharp Dress, Inc has declared a $5.00 per share dividend, suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be
Stock Dividends the owner's equity accounts for Quadrangle International are shown here:a. If Quadrangle stock currently sells for $25 per share and a 10 percent stock dividend is declared, how many
Stock Splits for the company in problem 2, show how the equity accounts will change if.a. Quadrangle declares a four-for-one stock split. How many shares are outstanding now? What is the new par
Stock Splits and Stock Dividends Red Rocks Corporation (RRC) currently has 250,000 shares of stock outstanding that sell for $75 per share. Assuming no market imperfections or tax effects exist, what
Regular Dividends the balance sheet for apple pie Corp, is shown here in market values terms. There are 5,000 shares of stock outstanding.The company has declared a dividend of $1.20 per share. The
Share Repurchase in the previous problem, suppose apply Pie has announced it is going to repurchase $6,000 worth of stock. What effects will this transaction have on the equity of the firm? How many
Stock Dividends the market value balance sheet for inbox Manufacturing is shown here. Inbox has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock
Stock Dividends the company with the common equity accounts equity shown here has declared a 15 percent stock dividend when the market value of its stock is $20 per share. What effects on the equity
Stock Splits in the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 90-cent per share cash dividend on the new (post split) shares represents and
Residual Dividend Policy Soprano, Inc., a litter recycling company, uses a residual dividend policy. A debt-equity ratio of 1.20 is considered optimal. Earnings for the period just ended were $1,500,
Mansker Station Corporation has declared an annual dividend of $0.80 per share. For the year just ended, earnings were %6.40 per share.a. What is Mansker Station’s payout ratio?b. Suppose Mansker
Red Zeppelin Corporation follows a strict residual dividend policy. Its debt-equity ratio is 2.5.a. If earnings for the year are $190,000, what is the maximum amount of capital spending possible with
Rock N roll (RNR), Inc predicts that earnings in the coming year will be $75 million. There are 12 million shares, and RNR maintains a debt-equity ratio of 1.5.a. Calculate the maximum investment
Homemade Dividends you own 1,000 shares of stock in Avondale Corporation. You will receive a $1.50 per share dividend in one year. In two years, on Avondale stock is 15 percent. What is the current
In the previous problem, suppose you want only $200 total in dividends the first year. What will your homemade dividend be in two years?
Stock repurchase fly chucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $1.20 per share, and the stock
Expected Return, Dividends, and Taxes the gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas
As discussed in the text, in the absence of marker imperfection and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once
Operating Cycle what are some of the characteristics of a firm with a long operating cycle?
Cash Cycle what are some of the characteristics of a firm with a long cash cycle?
Sources and Uses for the year just ended, you have gathered the following information about the Holly Corporation.a. A $200 dividend was paid.b. Accounts payable increased by $500.c. Fixed asset
Cost of current Assets Loftis Manufacturing, Inc., has recently installed a just-in-time (JIT inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage
Operating and Cash Cycles is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or why not. Use the following information to answer Questions Last month,
Operating and Cash Cycles what impact did this change in payables policies have on Blue-Sky’s operating cycle, its cash cycle?
Operating and Cash Cycles what impact did the announcement have on Blue-Sky’s suppliers?
Corporate Ethics is it ethical for large firms to unilaterally lengthen their payables periods, particularly when dealing with smaller suppliers?
Payables Period why don’t all firms simply increase their payables periods to shorten their cash cycles?
Payables Period Blue-Sky lengthened its payables period to “control costs and optimize cash flow.” Exactly what is the cash benefit to Blue-sky from this change?
Changes in the Cash Account indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs:a. A dividend is paid with
Cash Equation Details Corp has a book net worth of $8,500. Long-term debt is $1,800. Net working capital, other than cash, is $2,380. Fixed assets are $6,400. How much cash does the company have? If
Changes in the Operating Cycle indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no
Changes in Cycles indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no

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