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Finance
What is the modified internal rate of return for the project in question 6 if the finance rate is 10 percent and the reinvestment rate is 13 percent?In question 6What is the net present value of a
What is the profitability index for the project in question 6?What is the modified internal rate of return for the project in question 6 if the finance rate is 10 percent and the reinvestment rate
What is the payback period for the project in question 6?In question 6what is the net present value of a project with a $40,000 initial investment and expected net cash flows of $15,000, $20,000,
All things being equal, would you expect to receive a higher or lower interest payment if a bond had a sinking fund?
On the basis of the following stock information, describe the features of the stock and assess its performance: dividends per share = $0.80, current share price = $28.50, current dividend yield = 2.8
What type of investor is most likely to purchase a private placement?
Given the "stylized facts" related to IPO performance, if you were able to obtain IPO shares at the issue price, when might be the best time to sell the shares: after the first day of trading or
If research employs an event study, what form of the efficient market hypothesis is it most likely testing?
Suppose an investor uncovers a strategy by which she or he is able to predict future stock prices by observing trends in past prices. What form of the efficient market hypothesis would this be
Suppose a firm is involved in major litigation and is expected to lose its case, which would cost the firm millions of dollars. Surprisingly the firm wins the case and immediately the stock price
All things being equal, would you expect to receive a higher or lower interest payment if a bond had a call provision?
Twice Lucky, Inc. was planning a 10-year bond issue with a 6% coupon rate. Just prior to the issue, a major credit rating agency announced a surprise upgrade in its rating. How might this
What is the average annual compound (geometric) return over two years for a stock that goes from $10 to $20, then back to $10?
What is the average arithmetic return over two years for a stock that goes from $10 to $20, then back to $10?
Historical U.S. market returns tend to approximately follow a normal distribution, which implies that returns are plus or minus one standard deviation from the mean (arithmetic return) two-thirds of
Based on the information in Figure 9.5 and focusing on mean returns for "all stocks,"What is the range of returns that are two standard deviations from the mean?
What factors would impact the price of preferred shares?
On the basis of the following bond information, describe the features of the bond and explain the timing of the expected cash flows (assuming today is January 1, 2014): coupon = 6.4 percent; maturity
Explain the relationship between the cost of raising funds from the firm's perspective and the required return on bonds, preferred shares, and common shares from the investor's perspective.
How would your answer in question 9 change if the dividend was expected to be $1.80 and the perpetual growth of the dividend 4 percent?
Based on the chart of betas in Figure 10-16,If an investment in the overall stock market was expected to return 10 percent over the next year, what return would you expect if you invested in IBM?
Based on the chart of betas in Figure 10-16How would you describe the relative riskiness of investing in Bank of America?
Suppose the current long-term government bond yield is 2 percent and the estimated market risk premium is 5 percent. Fastest Company's beta is estimated to be 1.15. Using CAPM, estimate Fastest
How would your answer in question 13 changes if the current long-term government bond yield was 3 percent and Fastest Company's beta was 1.5?In question 13 suppose the current long-term government
Suppose Fastest Company's current balance sheet showed book value weights of 32 percent debt, 11 percent preferred shares, and 57 percent common equity. Assuming its cost of debt was 3 percent,
Consider the same estimated costs as in question 15. Fastest Company is not planning to issue preferred shares in the future but anticipates a target capital structure of 40 percent debt and 60
Explain whether Fastest Company would consider investing in any project with an expected return less than the estimated WACC.
Suppose Fastest Company, a new start-up firm, initially has $50 million in common equity and its common shareholders require or expect a return of 14 percent on this investment. After the first year,
Explain what we mean by diversification and how it relates to firm-specific (unsystematic) risk and market (systematic) risk?
Suppose Fastest Company is offered accounts payable terms of "2 percent, 10 days, net 30 days" but its suppliers actually allow it to repay in 45 days. Estimate the annualized opportunity cost for
Fastest Company has a debt rating of A and a tax rate of 35 percent. The current long-term government bond yield is 2 percent. Suppose the typical spread between long-term government yields and
How would your answer in question 5 change if Fastest Company's debt rating deteriorated to BBB and the typical spread between long-term government yields and BBB-rated firms was 3 percent?
Fastest Company's preferred shares were issued last year at $30 per share but are now trading at $28.50. Fastest pays annual preferred dividends of $2.25 per share. Estimate Fastest Company's cost of
What would you expect to happen to the price of Fastest Company's preferred shares if inflation increased and the Fed increased interest rates, with banks following suit?
Fastest Company's common shares are currently trading for $30. It is expected that Fastest Company will pay an annual common share dividend of $2 next year. It is also expected that the dividend will
Explain why a hotel company might have a higher proportion of debt in its capital structure relative to a drug company.
Now suppose the firm in question #9 has a payout ratio of 30 percent. Given the earnings retention, what will be next year's dividend, at what rate will the firm be able to grow the dividend, and
Which of the following is not a perfect capital markets assumption?a. There are no taxes.b. No firm faces financial distress or bankruptcy.c. Individuals can borrow or lend at the same rate as
According to Modigliani and Miller (M&M), in a world of perfect capital markets, what will be the expected equity return (or cost of equity) for a firm that has a cost of capital of 10 percent,
How will your answer in question #3 change if we now relax the M&M perfect capital markets assumption and incorporate a corporate tax rate of 35 percent?
Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate is 7 percent and the corporate tax rate is 35 percent, what is the value of the interest tax shield?
How would your answer in question #5 change if the interest rate was 5 percent?Question-5Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate is 7
According to the trade-off model of capital structure, why is there an optimal capital structure for a particular firm?
According to the pecking-order model of capital structure, firms will tend to raise capital in which of the following orders?a. Equity, debt, internal financingb. Internal financing, debt, equityc.
What is the value of an all-equity firm that:a. Has a dividend payout ratio of 100 percentb. Is expected to generate net income each year (forever) of $1 million,c. Has a required equity return (also
Assume that a firm's earnings per share (EPS) are expected to be $2.00 next year and that analysts have determined that an appropriate forward-looking multiple is 15 times the projected earnings.
Which of the following would not be a characteristic of a firm that would tend to have a high proportion of debt in its capital structure:a. Steady profitabilityb. A large amount of fixed assetsc.
Suppose that the firm in question #1 plans to increase the proportion of debt as part of its capital structure. The projected EPS would then be $2.50. In a world with no financial distress, determine
Calculate an EBIT breakeven between a debt firm (DF) and an all-equity firm (EF) based on the following information: DF interest = $40,000; DF number common shares = 6,000; EF number of common shares
Calculate the cash flow coverage ratio based on the following information: EBIT = $540,000; depreciation and amortization = $65,000; interest payments = $180,000; principal repayment = $75,000; and
Suppose a firm has an EBIT of $5 million, interest expenses of $2 million, depreciation expenses of $1 million, and a tax rate of 35 percent. Its bank agrees to lend up to 4 times its EBITDA. How
Suppose an all-equity firm has a beta estimated to be 1.2. If the firm changes its capital structure such that its debt-to-equity ratio is now 0.4, what should be the revised beta estimate if it
Repeat the cost of capital calculations in Figure 12.8, assuming market value weights instead of book value weights.In figure 12.8
Suppose BetLev Inc. has a capital structure with 65 percent debt and 35 percent equity, a (levered) beta of 1.3, and a corporate tax rate of 35 percent. Estimate the unlevered beta of BetLev.
Now suppose BetLev wishes to have a target capital structure of 50 percent debt and 50 percent equity. What will be its levered beta at the target capital structure?
PrivCo Inc. is a small private firm with a book value of assets of $550,000 and liabilities of $250,000. Its assets include property listed at a cost of $80,000 but with a recently assessed market
Eeeva has 1 million shares outstanding and its current share price is trading at $6. Its book value of debt is similar to its estimated market value of debt. Using this information and that provided
Bigco Inc. is considering acquiring Smallco Inc., a publically traded firm in the same industry. Smallco is currently trading at $12 per share and has 20 million shares; it is believed to be trading
1. Free Cash Inc. is anticipated to make earnings before interest and taxes (EBIT) of $30,000, $40,000, and $50,000 in each of the next three years. Depreciation is estimated to be $3,000, $3,500,
Relever Inc. has a debt-to-equity (D/E) ratio of 0.3; its target D/E is 1.6. Relever currently has an estimated beta of 1.1. Relever's estimated tax rate is 35 percent. What is the estimate of
Pepper Inc. is expected to have before-tax earnings of $2.5 million next year. The tax rate is 35 percent. There are 2 million common shares outstanding. Comparable firms in the same industry are
Extra Value Inc. is expected to generate EBIT of $20 million next year, with anticipated depreciation and amortization of $3 million. Extra Value has debt of $40 million. Comparable firms are trading
Eeeva Inc. has an EBIT of $1.5 million. The tax rate is 35 percent. Eeeva has a debt of $2.5 million and common equity of $5 million. Eeeva's cost of capital is estimated to be 11 percent.
Depreciation is a noncash charge. Why then is it important in Lease-Buy analysis?
Tuscaloosa Co. is a U.S. firm that assembles phones in Argentina and transports the final assembled products to the parent, which sells them in the U.S.. The assembled products are invoiced in
Tuscaloosa Co. is a U.S. firm that assembles phones in Argentina and transports the final assembled products to the parent, which sells them in the U.S.. The assembled products are invoiced in
a. What are the main components of the current account? b. What are the main components of the financial account?
Explain how syndicated loans are used in international markets.
Explain why the Greece credit crisis can cause contagion effects throughout Europe.
In July 2015, Greece was negotiating to obtain its third bailout from several European governments over a five-year period. Greece argued that austerity measures should not be imposed. Offer some
One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year
This morning, a Canadian dollar call option contract has a $.71 strike price, a premium of $.02, and expiration date of one month from now. This afternoon, news about international economic
Review the logic regarding how currency options are priced. Consider a speculator who plans to purchase currency options for the option at the money on whatever currency has the lowest premium. He
Assume that you expect that the European central bank (ECB) plans to engage in central bank intervention in which it plans to use euros to purchase a substantial amount of U.S. dollars in the foreign
Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the U.S.
Assume that interest rate parity exists and will continue to exist. As of today, the one-year interest rate of Singapore is 4% versus 7% in the U.S. The Singapore central bank is expected to decrease
Assume that interest rate parity (IRP) exists, along with the following information: Spot rate of British pound = $1.80 6-month forward rate of pound=$1.82 12-month forward rate of pound=$1.78 a. Is
Assume that the annual U.S. interest rate is currently 8 percent and Japan's annual interest rate is currently 7 percent. The spot rate of the Japanese yen is $.01. The one-year forward rate of the
1that interest rate parity exists. Does the forward rate quoted today for the Australian dollar exhibit a premium, or a discount, or does your answer vary with specific conditions? Briefly explain.
During the period from 2008 (when the international credit crisis occurred) and 2014, the U.S. government maintained interest rates at extremely low levels. Assume that interest rate parity existed
a. Russia commonly experiences a high rate of inflation. Explain why the high Russian inflation typically places severe downward pressure on the value of the Russian ruble. b. In some periods, the
Brazil commonly has a much higher nominal interest rate than the U.S. Yet, some large institutional investors do not invest in Brazilian money market securities, even when they believe the securities
Assume that interest rate parity exists. Assume that you have payables in Argentine pesos. You have noticed that historically, the forward rate of the Argentine peso quoted by the banks exhibits a
Assume that interest rate parity exists. Today, the one-year U.S. interest rate is equal to 8%, while Mexico's one-year interest rate is equal to 10%. Today, the two-year annualized U.S. interest
Assume that interest rate parity exists. One year ago, the spot rate of the euro was $1.40 and the spot rate of the Japanese yen was $.01. At that time, the one-year interest rate of the euro and
Assume that interest rate parity exists and it will continue to exist in the future. Kentucky Co. wants to forecast the value of the Japanese yen in one month. The Japanese interest rate is lower
Some U.S.-based MNCs have business in developing countries in which it is difficult to hedge their exposure to exchange rate risk. Their forecasts of the currency's future exchange rate is subject
Assume that Maine Co. (a U.S. firm) measures its economic exposure to movements in the British pound by applying regression analysis to data over the last 36 quarters: SP = b0 + b1e + u Where SP
Quartz Co. has its entire operations in Miami, Florida, and is an exporter of products to Eurozone countries. All of its earnings are derived from its exports. The exports are denominated in euros.
Spencer Co. is a U.S. firm that has a large subsidiary in Singapore, which generates a large amount of earnings. Spencer's stock is commonly valued at about 16 times its reported earnings per share.
Bag Company of the U.S. has a business of offering cruises along the coast of Argentina that are solely for American tourists. The cruise ships charge American tourists in U.S. dollars but all of
The managers of many U.S.-based MNCs have heard arguments that an MNC's exposure to currency movements will have unfavorable effects on its cash flows and earnings in some periods, and favorable
How can a firm hedge long term currency positions? Elaborate on each method.
Assume that Hampshire Co. has net payables of 200,000 Mexican pesos in 180 days. The Mexican interest rate is 7% over 180 days, and the spot rate of the Mexican peso is $.10. Suggest how the U.S.
Assume that the country of Dreeland has a currency (called the dree) that tends to move in tandem with the Chile peso and is expected to continue to move in tandem with the Chilean peso in the
Consider MNCs that produce products in the United States and export the products to developing countries. The MNCs could reduce their exposure to exchange rate risk if they set up their operations
Some MNCs establish a manufacturing facility where there is a relatively low cost of labor, but they sometimes close the facility later because the cost advantage dissipates. Why do you think the
Facebook has expanded its business internationally, as described by various web links (based on online search terms "Facebook" and "international expansion"). Write a short essay to explain
The appendix to this chapter explains how tax laws can affect how much earnings the subsidiaries remit to parents. Explain how U.S. tax laws may encourage foreign subsidiaries to reinvest their
Explain how U.S. corporate income tax laws have encouraged some U.S.-based MNCs to consider moving their parent to another country?
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