Questions and Answers of Corporate Finance 8th Canadian

Assume Evco, Inc., has a current price of $64 and will pay a $2.15 dividend in one year, and its equity cost of capital is 11%. What price must you expect it to sell for immediately after paying the
Anle Corporation has a current price of $27, is expected to pay a dividend of $2 in one year, and its expected price right after paying that dividend is $28.a. What is Anle’s expected dividend
Suppose Acap Corporation will pay a dividend of $2.72 per share at the end of this year and $2.99 per share next year. You expect Acap’s stock price to be $53.72 in two years. If Acap’s equity
Krell Industries has a share price of $21.16 today. If Krell is expected to pay a dividend of $0.91 this year, and its stock price is expected to grow to $23.94 at the end of the year, what is
NoGrowth Corporation currently pays a dividend of $2.36 per year, and it will continue to pay this dividend forever. What is the price per share if its equity cost of capital is 13% per year?
Summit Systems will pay a dividend of $1.46 this year. If you expect Summit’s dividend to grow by 5.1% per year, what is its price per share if its equity cost of capital is 11.2%?
Dorpac Corporation has a dividend yield of 1.7%. Dorpac’s equity cost of capital is 8.4%, and its dividends are expected to grow at a constant rate.a. What is the expected growth rate of Dorpac’s
DFB, Inc., expects earnings at the end of this year of $4.01 per share, and it plans to pay a $2.09 dividend at that time. DFB will retain $1.92 per share of its earnings to reinvest in new projects
Colgate-Palmolive Company has just paid an annual dividend of $1.50. Analysts are predicting dividends to grow by $0.12 per year over the next five years. After then, Colgate’s earnings are
Halliford Corporation expects to have earnings this coming year of $2.77 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two years, the firm will
Suppose Amazon.com Inc. pays no dividends but spent $1.88 billion on share repurchases last year. If Amazon’s equity cost of capital is 8.1 %, and if the amount spent on repurchases is expected to
Benchmark Metrics, Inc. (BMI), an all-equity financed firm, just reported EPS of $4.43 in 2008. Despite the economic downturn, BMI is confident regarding its current investment opportunities. But due
Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:After then, the free cash flows are expected to grow at the industry average of 4.3% per
IDX Technologies is a privately held developer of advanced security systems based in Chicago. As part of your business development strategy, in late 2008 you initiate discussions with IDX’s founder
Sora Industries has 61 million outstanding shares, $121 million in debt, $49 million in cash, and the following projected free cash flow for the next four years:a. Suppose Sora’s revenue and free
You notice that PepsiCo (PEP) has a stock price of $72.06 and EPS of $3.93. Its competitor, the Coca-Cola Company (KO), has EPS of $2.13. Estimate the value of a share of Coca-Cola stock using only
Suppose that in January 2006, Kenneth Cole Productions had sales of $531 million, EBITDA of $51.3 million, excess cash of $107 million, $3.3 million of debt, and 23 million shares outstanding.a.
In addition to footwear, Kenneth Cole Productions designs and sells handbags, apparel, and other accessories. You decide, therefore, to consider comparables for KCP outside the footwear industry.a.
Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. While the plant was fully insured, the loss of production will
Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials are successful, Apnex stock would be worth $62 per
Characterize the difference between the two stocks in Problems 1 and 2. What trade-offs would you face in choosing one to hold?Problem 1The figure on page 383 shows the one-year return distribution
Using the data in Table 10.2,a. What was the average dividend yield for the SP500 from 2002–2014?b. What was the volatility of the dividend yield?c. What was the average annual return of the SP500
What if the last two and a half decades had been “normal”? Download the spreadsheet from containing the data for Figure 10.1.a. Calculate the arithmetic average return on the S&P 500 from
Consider two local banks. Bank A has 76 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 6% probability of default, in which case the bank is not repaid
Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good
Consider an economy with two types of firms, S and I. S firms all move together. I firms move independently. For both types of firms, there is a 70% probability that the firms will have a 7% return
Suppose the risk-free interest rate is 2%, and the stock market will return either 28% or -10% each year, with each outcome equally likely. Compare the following two investment strategies: (1) invest
What is an efficient portfolio?
What does the beta of a stock measure?
You turn on the news and find out the stock market has gone up 8%. Based on the data in Table 10.6, by how much do you expect each of the following stocks to have gone up or down:(1) Starbucks, (2)
Based on the data in Table 10.6, estimate which of the following investments you expect to lose the most in the event of a severe market down turn: (1) A $2000 investment in Hershey, (2) a $1500
Suppose the market portfolio is equally likely to increase by 20% or decrease by 13%.a. Calculate the beta of a firm that goes up on average by 39% when the market goes up and goes down by 29% when
Suppose the market risk premium is 6.6% and the risk-free interest rate is 4.6%. Calculate the cost of capital of investing in a project with a beta of 1.4.
State whether each of the following is inconsistent with an efficient capital market, the CAPM, or both:a. A security with only diversifiable risk has an expected return that exceeds the risk-free
You are considering how to invest part of your retirement savings. You have decided to put $300,000 into three stocks: 60% of the money in GoldFinger (currently $23/share), 30% of the money in
You own three stocks: 600 shares of Apple Computer, 10,000 shares of Cisco Systems, and 5000 shares of Colgate-Palmolive. The current share prices and expected returns of Apple, Cisco, and
Suppose two stocks have a correlation of 1. If the first stock has an above average return this year, what is the probability that the second stock will have an above average return?
Arbor Systems and Gencore stocks both have a volatility of 36%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a) +1.0,(b) 0.50, (c)
Suppose Wesley Publishing’s stock has a volatility of 40%, while Addison Printing’s stock has a volatility of 20%. If the correlation between these stocks is 15%, what is the volatility of the
Suppose Avon and Nova stocks have volatilities of 55% and 26%, respectively, and they are perfectly negatively correlated. What portfolio of these two stocks has zero risk?
Suppose Tex stock has a volatility of 44%, and Mex stock has a volatility of 22%. If Tex and Mex are uncorrelated,a. What portfolio of the two stocks has the same volatility as Mex alone?b. What
Suppose the average stock has a volatility of 49%, and the correlation between pairs of stocks is 18%. Estimate the volatility of an equally weighted portfolio with (a) 1 stock, (b) 30 stocks,(c)
What is the volatility (standard deviation) of an equally weighted portfolio of stocks within an industry in which the stocks have a volatility of 40% and a correlation of 40% as the portfolio
Consider an equally weighted portfolio of stocks in which each stock has a volatility of 40%, and the correlation between each pair of stocks is 27%.a. What is the volatility of the portfolio as the
Stock A has a volatility of 58% and a correlation of 27% with your current portfolio. Stock B has a volatility of 97% and a correlation of 28% with your current portfolio. You currently hold both
You currently hold a portfolio of three stocks, Delta, Gamma, and Omega. Delta has a volatility of 44%, Gamma has a volatility of 47%, and Omega has a volatility of 48%. Suppose you invest 30% of
Suppose Ford Motor stock has an expected return of 15% and a volatility of 38%, and Molson-Coors Brewing has an expected return of 12% and a volatility of 28%. If the two stocks are uncorrelated,a.
A hedge fund has created a portfolio using just two stocks. It has shorted $36,000,000 worth of Oracle stock and has purchased $95,000,000 of Intel stock. The correlation between Oracle’s and
Fred holds a portfolio with a 21% volatility. He decides to short sell a small amount of stock with a 48% volatility and use the proceeds to invest more in his portfolio. If this transaction reduces
Suppose Target’s stock has an expected return of 21% and a volatility of 43%, Hershey’s stock has an expected return of 11% and a volatility of 22%, and these two stocks are uncorrelated.a. What
You have $8600 to invest. You decide to invest $17,000 in Google and short sell $8400 worth of Yahoo! Google’s expected return is 14% with a volatility of 26% and Yahoo!’s expected return is 12%
You expect HGH stock to have a 20% return next year and a 45% volatility. You have $25,000 to invest, but plan to invest a total of $50,000 in HGH, raising the additional $25,000 by shorting either
Suppose you have $100,000 in cash, and you decide to borrow another $25,000 at a 6% interest rate to invest in the stock market. You invest the entire $125,000 in a portfolio J with a 24% expected
You have $55,000 to invest. You choose to put $105,000 into the market by borrowing $50,000.a. If the risk-free interest rate is 3% and the market expected return is 11%, what is the expected return
You currently have $85,000 invested in a portfolio that has an expected return of 12% and a volatility of 8%. Suppose the risk-free rate is 6%, and there is another portfolio that has an expected
In addition to risk-free securities, you are currently invested in the Tanglewood Fund, a broadbased fund of stocks and other securities with an expected return of 10.39% and a volatility of 27.22%.
You have noticed a market investment opportunity that, given your current portfolio, has an expected return that exceeds your required return. What can you conclude about your current portfolio?
The Optima Mutual Fund has an expected return of 19.5% and a volatility of 20.4%. Optima claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the risk-free
You are currently only invested in the Natasha Fund (aside from risk-free securities). It has an expected return of 15% with a volatility of 19%. Currently, the risk-free rate of interest is 3.2%.
A big pharmaceutical company, DRIg, has just announced a potential cure for cancer. The stock price increased from $1 to $137 in one day. A friend calls to tell you that he owns DRIg. You proudly
Your investment portfolio consists of $18,000 invested in only one stock—Microsoft. Suppose the risk-free rate is 6%, Microsoft stock has an expected return of 13% and a volatility of 44%, and the
Suppose you group all the stocks in the world into two mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size
Suppose the risk-free return is 3.5% and the market portfolio has an expected return of 11.2% and a volatility of 17.9%. Merck & Co. (Ticker: MRK) stock has a 21.5% volatility and a correlation with
Suppose Autodesk stock has a beta of 2.10, whereas Costco stock has a beta of 0.75. If the risk-free interest rate is 5.5% and the expected return of the market portfolio is 14%, what is the expected
Suppose Pepsico’s stock has a beta of 0.59. If the risk-free rate is 3% and the expected return of the market portfolio is 7%, what is Pepsico’s equity cost of capital?
Aluminum maker Alcoa has a beta of about 1.96, whereas Hormel Foods has a beta of 0.65. If the expected excess return of the marker portfolio is 3%, which of these firms has a higher equity cost of
Using the data in Problem 4, suppose you are holding a market portfolio and have invested $46,000 in Stock C.a. How much have you invested in Stock A?b. How many shares of Stock B do you hold?c. If
Suppose Best Buy stock is trading for $20 per share for a total market cap of $6 billion, and Walt Disney has 2.3 billion shares outstanding. If you hold the market portfolio, and as part of it hold
From the start of 1999 to the start of 2009, the S&P 500 had a negative return. Does this mean the market risk premium we should haved used in the CAPM was negative?
You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:a. What was XYZ’s average historical return?b. Compute the market’s and
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.73%.a. What is the highest expected return these bonds could have?b. At the time, similar maturity
In mid-2009, Rite Aid had CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 2%. Suppose the market risk premium is 4% and
During the recession in mid-2009, homebuilder KB Home had outstanding 7-year bonds with a yield to maturity of 8.7% and a BB rating. If corresponding risk-free rates were 3.5%, and the market risk
The Dunley Corp. plans to issue 5-year bonds. It believes the bonds will have a BBB rating. Suppose AAA bonds with the same maturity have a 4% yield. Assume the market risk premium is 5% and use the
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin’s equity beta is 0.88, the risk-free
Consider the setting of Problem 18. You decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second firm, Thurbinar Design, which is also
IDX Tech is looking to expand its investment in advanced security systems. The project will be financed with equity. You are trying to assess the value of the investment, and must estimate its cost
In mid-2015, Cisco Systems had a market capitalization of $99 billion. It had A-rated debt of $18 billion as well as cash and short-term investments of $52 billion, and its estimated equity beta at
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.53, expects to generate free cash flow of $76 million this year, and anticipates a 4%
Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $38 per share. HHI has 21 million shares outstanding, as well as $68 million in debt. The founder of HHI, Harry
Your company operates a steel plant. On average, revenues from the plant are $41 million per year. All of the plants costs are variable costs and are consistently 78% of revenues, including energy
Unida Systems has 42 million shares outstanding trading for $10 per share. In addition, Unida has $94 million in outstanding debt. Suppose Unida’s equity cost of capital is 16%, its debt cost of
You would like to estimate the weighted average cost of capital for a new airline business. Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of
Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 8% volatility and the risk-free rate is 4%. New news arrives that does not change any of these
Suppose that all investors have the disposition effect. A new stock has just been issued at a price of $60, so all investors in this stock purchased the stock today. A year from now the stock will be
Davita Spencer is a manager at Half Dome Asset Management. She can generate an alpha of 1.55% per year on up to $93 million. After that her skills are spread too thin, so she cannot add value and her
Assume the economy consisted of three types of people. 56% are fad followers, 41% are passive investors (they have read this book and so hold the market portfolio), and 3% are informed traders. The
Explain what the size effect is.
If you can use past returns to construct a trading strategy that makes money (has a positive alpha), it is evidence that market portfolio is not efficient. Explain why.
Consider a project with free cash flows in one year of $137,022 or $188,017, with each outcome being equally likely. The initial investment required for the project is $100,655, and the project’s
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund
Acort Industries owns assets that will have a 75% probability of having a market value of $48 million one year from now. There is a 25% chance that the assets will be worth only $18 million. The
Wolfrum Technology (WT) has no debt. Its assets will be worth $444 million in one year if the economy is strong, but only $226 million in one year if the economy is weak. Both events are equally
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of
Suppose Alpha Industries and Omega Technology have identical assets that generate identical cash flows. Alpha Industries is an all-equity firm, with 14 million shares outstanding that trade for a
Cisoft is a highly profitable technology firm that currently has $5 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these
Schwartz Industry is an industrial company with 103.5 million shares outstanding and a market capitalization (equity value) of $4.41 billion. It has $1.21 billion of debt outstanding. Management have
Zetatron is an all-equity firm with 270 million shares outstanding, which are currently trading for $23.64 per share. A month ago, Zetatron announced it will change its capital structure by borrowing
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.a. Suppose
Global Pistons (GP) has common stock with a market value of $470 million and debt with a value of $299 million. Investors expect a 13% return on the stock and a 5% return on the debt. Assume perfect

Showing 1 - 100 of 480