Questions and Answers of Corporate Finance 8th Canadian

Roslin Robotics stock has a volatility of 35% and a current stock price of $60 per share. Roslin pays no dividends. The risk-free interest is 5%. Determine the Black-Scholes value of a oneyear,
Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $99 and expires in 92 days. The current price of Up stock is $119.16, and the stock has
Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the 800 January 2014 call
Harbin Manufacturing has 10 million shares outstanding with a current share price of $23.58 per share. In one year, the share price is equally likely to be $28 or $20. The risk-free interest rate is
You would like to estimate the unlevered beta of Schwartz Industries (SI). SI’s value of outstanding equity is $365.45 million, and you have estimated its beta to be 1.2. SI has fouryear
The J. Miles Corp. has 26 million shares outstanding with a share price of $18 per share. Miles also has outstanding zero-coupon debt with a 5-year maturity, a face value of $890 million, and a yield
It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing
A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture
Consider again the electric car dealership in Section 22.3. Suppose the current value of a dealership is $5.2 million and the first-year free cash flow is expected to be $520,000 rather than
Under the same assumptions as in Section 22.3, suppose your corporation owns an operating electric car dealership, together with one-year options to open five more.a. What is the value and beta of
The management of Southern Express Corporation is considering investing 20% of all future earnings in growth. The company has a single growth opportunity that it can take either now or in one period.
Your R&D division has just synthesized a material that will superconduct electricity at room temperature; you have given the go ahead to try to produce this material commercially. It will take five
You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares
You own a wholesale plumbing supply store. The store currently generates revenues of $1 million per year. Next year, revenues will either decrease by 9.6% or increase by 4.8%, with equal probability,
What implicit assumption is made when managers use the equivalent annual benefit method to decide between two projects with different lives that use the same resource?
You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $491 per month per cab, or you can purchase the cabs
Your engineers are developing a new product to launch next year that will require both software and hardware innovations. The software team requests a budget of $6 million and forecasts an 80% chance
Your firm is thinking of expanding. If you invest today, the expansion will generate $11 million in FCF at the end of the year and will have a continuation value of either $145 million (if the
Suppose venture capital firm GSB partners raised $50 million of committed capital. Each year over the 12-year life of the fund, 1.5% of this committed capital will be used to pay GSB’s management
Three years ago, you founded your own company. You invested $110,000 of your own money and received 5.5 million shares of Series A preferred stock. Since then, your company has been through three
Roundtree Software is going public using an auction IPO. The firm has received the following bids:Assuming Roundtree would like to sell 1.92 million shares in its IPO, what will the winning auction
Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your
Margoles Publishing recently completed its IPO. The stock was offered at a price of $16 per share. On the first day of trading, the stock closed at $22 per share. What was the initial return on
Your firm has 12 million shares outstanding, and you are about to issue 4 million new shares in an IPO. The IPO price has been set at $16 per share, and the underwriting spread is 8%. The IPO is a
You have an arrangement with your broker to request 1050 shares of all available IPOs. Suppose that 10% of the time, the IPO is “very successful” and appreciates by 102% on the first day, 84% of
On January 20, Metropolitan, Inc., sold 8 million shares of stock in an SEO. The current market price of Metropolitan at the time was $42.50 per share. Of the 8 million shares sold, 5 million shares
On January 15, 2020, the U.S. Treasury issues a ten-year inflation-indexed note with a coupon of 5%. On the date of issue, the CPI is 414. By January 15, 2030, the CPI index increases to 282. What
Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond issue.
General Electric has just issued a callable 10-year, 5% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a
Suppose an H1200 supercomputer has a cost of $300,000 and will have a residual market value of $75,000 in four years. The risk-free interest rate is 6.1% APR with monthly compounding.a. What is the
Suppose the risk-free interest rate is 5.7% APR with monthly compounding. If a $2.8 million MRI machine can be leased for five years for $48,000 per month, what residual value must the lessor recover
Consider a six-year lease for a $350,000 bottling machine, with a residual market value of $122,500 at the end of six years. If the risk-free interest rate is 5.9% APR with monthly compounding,
Your firm is considering leasing a $50,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9.3% APR with monthly compounding. Classify each
Craxton Engineering will either purchase or lease a new $752,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the
Riverton Mining plans to purchase or lease $290,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be
Suppose Clorox can lease a new computer data processing system for $972,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of
Suppose Procter and Gamble (P&G) is considering purchasing $19 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it on a straight-line basis over the five
Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $221.7 million or lease it for $25 million per year.
The Greek Connection had sales of $32 million and a cost of goods sold of $12.8 million in 2015. A simplified balance sheet for the firm appears below:a. Calculate The Greek Connection’s net
The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide. The owner of the firm is investigating the benefit of employing a billing firm to do her billing and
The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system
The Manana Corporation had sales of $83 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?
Simple Simon’s Bakery purchases supplies on terms of 1.6/10, Net 30. If Simple Simon’s chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A
Use the financial statements supplied on the next page for International Motor Corporation (IMC) to answer the following questions.a. Calculate the cash conversion cycle for IMC for both 2015 and
Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels.
The Needy Corporation borrowed $14,000 from Bank Ease. According to the terms of the loan, Needy must pay the bank $488 in interest every three months for the three-year life of the loan, with the
The Treadwater Bank wants to raise $1.1 million using three-month commercial paper. The net proceeds to the bank will be $1,084,600. What is the effective annual rate of this financing for Treadwater?
The Signet Corporation has issued four-month commercial paper with a $6.3 million face value. The firm netted $6,113,898 on the sale. What effective annual rate is Signet paying for these funds?
The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $540,000. Interest on the loan will be 9.6% (APR, annual
Your company has earnings per share of $4. It has 1.6 million shares outstanding, each of which has a price of $56. You are thinking of buying TargetCo, which has earnings per share of $1, 1.3
You are invested in GreenFrame, Inc. The CEO owns 4% of GreenFrame and is considering an acquisition. If the acquisition destroys $57 million of GreenFrame’s value, but the present value of the
Loki, Inc., and Thor, Inc., have entered into a stock swap merger agreement whereby Loki will pay a 22% premium over Thor’s premerger price. If Thor’s premerger price per share was $42 and
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $48 per share and LE is trading for $74 per share, implying a premerger value of LE of approximately $4.5
ABC has 1 million shares outstanding, each of which has a price of $25. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.59. Assume
What is a whistle-blower?
What is a say-on-pay vote?
Genentech’s main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $550 million in the event of a major earthquake that disrupted its operations.
Your firm imports manufactured goods from China. You are worried that U.S.—China trade negotiations could break down next year, leading to a moratorium on imports. In the event of a moratorium,
Your firm faces a 13% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of this loss to 4%, but these new policies have an upfront
BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a production cost of $0.85 per pound.a. What will be BHP’s operating profit from
Your utility company will need to buy 115,000 barrels of oil in 10 days’ time, and it is worried about fuel costs. Suppose you go long 115 oil futures contracts, each for 1000 barrels of oil, at
Suppose Starbucks consumes 110 million pounds of coffee beans per year. As the price of coffee rises, Starbucks expects to pass along 70% of the cost to its customers through higher prices per cup of
Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $110,000 in three months’ time when the
You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 3600 kilograms of
Suppose the current exchange rate is $1.78/£, the interest rate in the United States is 5.24%, the interest rate in the United Kingdom is 3.78%, and the volatility of the $/£ exchange rate is 9.3%.
You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars):When you analyze the duration of loans, you find that the
The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $45.1 million. The duration of this portfolio of bonds is 13.3 years. The fund has borrowed to
Your firm needs to raise $97.7 million in funds. You can borrow short term at a spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.57% over 10-year
You are a U.S. investor who is trying to calculate the present value of a ;14 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.137/; and the forward rate
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in Bulgaria and is expecting a BGN17 million cash inflow in one year. The current spot rate is S = $0.5717/ BGN and
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in the euro area. You are in Etemadi’s corporate finance department and are responsible for deciding whether to
Maryland Light, a U.S. light fixtures manufacturer, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 13.34%. You are in the corporate treasury department, and
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.6%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen
Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in the euro area. You are in Manzetti’s corporate finance department and are responsible for deciding
Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. U.S. tax law requires U.S. corporations to pay taxes on their foreign earnings at the same
Suppose the interest on Russian government bonds is 7.9%, and the current exchange rate is 28.6 rubles per dollar. If the forward exchange rate is 29.1 rubles per dollar, and the current U.S.
Are hostile takeovers necessarily bad for firms or their investors? Explain.
Find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources:a. From the company’s Web page www.starbucks.com. Search for “investor relations.”b. From
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their income statement:a. What were
Suppose your firm receives a $4.1 million order on the last day of the year. You fill the order with $2.9 million worth of inventory. The customer picks up the entire order the same day and pays $1.5
Nokela Industries purchases a $38.5 million cyclo-converter. The cyclo-converter will be depreciated by $7.7 million per year over five years, starting this year. Suppose Nokela’s tax rate is
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. What were Mydeco’s retained earnings each year?b. Using the data from 2012, what was Mydeco’s total
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. What were Mydeco’s gross margins each year?b. Comparing Mydeco’s gross margin, EBIT margin, and net profit
Consider a retailing firm with a net profit margin of 3.1%, a total asset turnover of 1.85, total assets of $44.4 million, and a book value of equity of $18.2 million.a. What is the firm’s current
Honda Motor Company is considering offering a $2500 rebate on its minivan, lowering the vehicle’s price from $21,000 to $18,500. The marketing group estimates that this rebate will increase sales
You are an international shrimp trader. A food producer in the Czech Republic offers to pay you 2.2 million Czech koruna today in exchange for a year’s supply of frozen shrimp. Your Thai supplier
Suppose the current market price of corn is $4.23 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $1.47 per bushel, at
Suppose your employer offers you a choice between a $5700 bonus and 120 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for $58 per
Suppose the risk-free interest rate is 3.9%.a. Having $500 today is equivalent to having what amount in one year?b. Having $500 in one year is equivalent to having what amount today?c. Which would
Your firm has a risk-free investment opportunity where it can invest $161,000 today and receive $178,000 in one year. For what level of interest rates is this project attractive?
Your computer manufacturing firm must purchase 12,000 keyboards from a supplier. One supplier demands a payment of $144,000 today plus $12 per keyboard payable in one year. Another supplier will
Suppose Bank One offers a risk-free interest rate of 10.0% on both savings and loans, and Bank Enn offers a risk-free interest rate of 10.5% on both savings and loans.a. What arbitrage opportunity is
An American Depositary Receipt (ADR) is security issued by a U.S. bank and traded on a U.S. stock exchange that represents a specific number of shares of a foreign stock. For example, Nokia
An Exchange-Traded Fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of one share of Hewlett-Packard (HPQ), two
Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:a. What is the no-arbitrage price of a security that pays cash flows
Suppose a security with a risk-free cash flow of $154 in one year trades for $137 today. If there are no arbitrage opportunities, what is the current risk-free interest rate?
You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $6000. You plan to put down $2000 and borrow $4000. You will need to make annual payments of $1250 at
You currently have a four-year-old mortgage outstanding on your house. You make monthly payments of $2000. You have just made a payment. The mortgage has 26 years to go (i.e., it had an original term
Calculate the future value of $4000 ina. Three years at an interest rate of 6% per year.b. Six years at an interest rate of 6% per year.c. Three years at an interest rate of 12% per year.d. Why is
What is the present value of $13,000 receiveda. Ten years from today when the interest rate is 4% per year?b. Twenty years from today when the interest rate is 8% per year?c. Five years from today

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