Questions and Answers of Corporate Finance Core Principles and Applications

In September 2020, Unilever and JP Morgan entered into a $500 million 10-year swap, the first swap to use SOFR as the reference interest rate. The interest rate swap effectively converted $500
In Problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 3,310 units and all other values remain
In Problem 14, what is the break-even quantity for the new credit policy?Data in Problem 14,The Branson Corporation is considering a change in its cash-only policy. The new terms would be net one
In Problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same.Data in Problem 15,Fitzgerald Corp. currently has an all-cash credit policy.
What are the costs of shortages? Describe them.
Why don’t all firms increase their payables periods to shorten their cash cycles?
Use the information in Figure 31.1 to answer the following questions:Data in Figure 31.1a. Which would you rather have, $100 or £100? Why?b. Which would you rather have, 100 Swiss francs (SF) or
In the previous problem, assume that the probability of default is 15 percent. Should the orders be filled now? Assume the number of repeat customers is affected by the defaults. In other words, 30
What are some benefits of financial distress?
Why doesn’t financial distress always cause firms to go under?
What is the difference between liquidation and reorganization?
Use Figure 31.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 2.3 percent. What must the six-month risk-free
Ritter Corporation’s accountants prepared the following financial statements for year-end 2021:a. Explain the change in cash during 2021.b. Determine the change in net working capital in
Would the goal of maximizing the value of the stock differ for financial management in a foreign country? Why or why not?
We define the following variables as:Assuming that all debt is constant, show that EFN can be written as: S = Previous year's sales A = Total assets E = Total equity g= Projected growth in sales PM
Bing, Inc., has current assets of $5,400, net fixed assets of $28,100, current liabilities of $4,100, and long-term debt of $10,600. What is the value of the shareholders’ equity account for this
You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $81 million in current taxes and
For each of the following, compute the present value: Present Value Years 17 9 23 35 Interest Rate 9% 7 13 21 Future Value $ 16,832 48,318 886,073 550, 164
Gia, Inc., has sales of $497,000, costs of $276,000, depreciation expense of $43,000, interest expense of $24,000, and a tax rate of 21 percent. What is the net income for the firm? Suppose the
Why is it not necessarily bad for the operating cash flow to be negative for a particular period?
During the year, the Senbet Discount Tire Company had gross sales of $895,000. The firm’s cost of goods sold and selling expenses were $461,000 and $215,000, respectively. The company also had
Polska, Inc., is obligated to pay its creditors $10,300 very soon.a. What is the market value of the shareholders’ equity if assets have a market value of $11,600?b. What if assets equal $9,400?
In Problem 17, suppose Raines Umbrella Corp. paid out $128,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued
Find the APR in each of the following cases: APR Number of Times Compounded Semiannually Monthly Weekly Infinite EAR 14.2% 18.4 11.1 8.9
What happens to the future value of an annuity if you increase the rate r? What happens to the present value?
Compute the future value of $1,640 compounded annually for:a. 10 years at 5 percent.b. 10 years at 10 percent.c. 20 years at 5 percent.d. Why is the interest earned in part (c) not twice the
An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $50 annually if the next payment occurs one
Compute the internal rate of return for the cash flows of the following two projects: Year 0 1 2 3 Project A -$8,500 4,250 3,860 2,890 Project B -$4,870 2,360 2,530 1,920
What is the future value in 11 years of $1,200 invested in an account with an APR of 7.8 percent:a. Compounded annually?b. Compounded semiannually?c. Compounded monthly?d. Compounded
Amanda Rice has arranged to purchase a $775,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 4.9 APR compounded monthly and calls for equal monthly payments over
Janina, Inc., has the following mutually exclusive projects.a. Suppose the company’s payback period cutoff is two years. Which of these two projects should be chosen?b. Suppose the company uses the
A firm evaluates all projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project? WN - 08 Year Cash Flows -$41,000 20,000 23,000 14,000
Mateo has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $83,000. He will receive his first annual salary payment one year from the day
You have recently won the super jackpot in the Washington State Lottery. After reading the fine print, you discover that you have the following two options:a. You will receive 31 annual payments of
You have 35 years left until retirement and want to retire with $4.5 million. Your salary is paid annually, and you will receive $91,000 at the end of the current year. Your salary will increase at 3
On September 1, 2021, Susan Chao bought a motorcycle for $35,000. She paid $4,500 down and financed the balance with a five-year loan at an annual percentage rate of 6.8 percent compounded monthly.
You have won the lottery. You will receive $5 million today, and then receive 40 payments of $2.1 million. These payments will start one year from now and will be paid every six months. A
In March 2020, Ireland-based Kerry Group announced plans to spend $125 million to expand production at its Georgia plant. The new investment would allow Kerry to double production at the plant,
Suppose the following two independent investment opportunities are available to a company. The appropriate discount rate is 8.5 percent.a. Compute the profitability index for each of the two
Vince plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $365,000, to be paid immediately. Vince expects aftertax cash inflows of $79,000 annually for 7
Suppose you are offered a project with the following cash flows:a. What is the IRR of this project?b. If the appropriate discount rate is 10 percent, should you accept this project?c. If the
Symon’s Sausage Corporation is trying to choose between the following two mutually exclusive design projects:a. If the required return is 10 percent and the company applies the profitability index
Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless
Mako Corp. has a project with the following cash flows:What is the IRR of the project? What is happening here? Year 0 1 2 Cash Flow $25,000 -11,000 7,000
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,500, including a set of eight chairs. The
Roll Corporation (RC) currently has 365,000 shares of stock outstanding that sell for $87 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. RC
Iron Corporation is evaluating an extra dividend versus a share repurchase. In either case, $11,008 would be spent. Current earnings are $4.50 per share, and the stock currently sells for $89 per
Security F has an expected return of 11 percent and a standard deviation of 47 percent per year. Security G has an expected return of 14 percent and a standard deviation of 63 percent per year.a.
Benton Industries stock has a beta of 1.15. The company just paid a dividend of $.95, and the dividends are expected to grow at 3.9 percent per year. The expected return on the market is 11 percent,
Suppose the president of the company in the previous problem stated that the company should increase the amount of debt in its capital structure because of the tax-advantaged status of its interest
Essence of Skunk Fragrances, Ltd., sells 4,100 units of its perfume collection each year at a price per unit of $435. All sales are on credit with terms of 1/10, net 40. The discount is taken by 65
The Eventbrite IPO was underpriced by about 59 percent. Should Eventbrite be upset at Goldman Sachs and JP Morgan over the underpricing?In September 2018, ticketing and events company Eventbrite went
Stencil, Inc., wishes to expand its facilities. The company currently has 6.8 million shares outstanding and no debt. The stock sells for $65 per share, but the book value per share is $20. Net
A company’s stock currently sells for $68 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit $6 and three rights.a. What is the
Suppose the current exchange rate for the Polish złoty is zł 3.74. The expected exchange rate in three years is zł 3.93. What is the difference in the annual inflation rates for the United States
Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $520,000, has a four-year life, and requires $145,000 in pretax annual operating costs. System B
Ang Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $24 million. If the HD DVD fails, the
Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $6.5 million investment in threading equipment to get the project
You’ve observed the following returns on Bennington Corporation’s stock over the past five years: 21 percent, −11 percent, 8 percent, 17 percent, and 13 percent.a. What was the arithmetic
You own a portfolio that has $4,260 invested in Stock A and $6,490 invested in Stock B. If the expected returns on these stocks are 8.4 percent and 12.3 percent, respectively, what is the expected
You own a portfolio that is 45 percent invested in Stock X, 35 percent invested in Stock Y, and 20 percent invested in Stock Z. The expected returns on these three stocks are 9.2 percent, 11.8
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 11.9 percent and Stock Y with an expected return of 9.7 percent. If your goal is to create a
Based on the following information, calculate the expected return. Probability of State of Economy State of Rate of Return Economy If State Occurs Recession .35 -.14 Normal .50 .16 Вoom .15 .43
Based on the following information, calculate the expected return and standard deviation for the two stocks. Rate of Return If State Occurs Probability of State of Economy State of Economy Stock A
Based on the following information, calculate the expected return and standard deviation of the following stock. Probability of State of Economy State of Rate of Return Economy If State Occurs
A portfolio is invested 20 percent in Stock G, 65 percent in Stock J, and 15 percent in Stock K. The expected returns on these stocks are 8.6 percent, 10.8 percent, and 13.4 percent, respectively.
Consider the following information:a. Your portfolio is invested 35 percent each in A and C, and 30 percent in B. What is the expected return of the portfolio?b. What is the variance of this
You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .83, 1.24, 1.13, and 1.41,
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.27 and the total portfolio is equally as risky as the market, what must the beta be for
A stock has a beta of 1.08, the expected return on the market is 10.9 percent, and the risk-free rate is 2.7 percent. What must the expected return on this stock be?
A stock has an expected return of 10.9 percent, the risk-free rate is 3.1 percent, and the market risk premium is 6.9 percent. What must the beta of this stock be?
A stock has an expected return of 9.7 percent, its beta is .89, and the risk-free rate is 2.9 percent. What must the expected return on the market be?
A stock has an expected return of 11.5 percent, its beta is 1.09, and the expected return on the market is 10.8 percent. What must the risk-free rate be?
Asset W has an expected return of 10.8 percent and a beta of 1.15. If the risk-free rate is 2.7 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.15 and an expected return of 12.6 percent. Stock Z has a beta of .83 and an expected return of 9.5 percent. If the risk-free rate is 4.3 percent and the market risk premium is
In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?Data from Previous ProblemStock Y has a beta of 1.15 and an expected return of 12.6
A stock has a beta of 1.13 and an expected return of 11.8 percent. A risk-free asset currently earns 2.6 percent.a. What is the expected return on a portfolio that is equally invested in the two
Consider the following information on three stocks:a. If your portfolio is invested 25 percent each in A and B and 50 percent in C, what is the portfolio expected return? The variance? The standard
You want to create a portfolio equally as risky as the market, and you have $1 million to invest. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A
You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.1 percent. If Stock X has an expected return of 11.3
Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the
Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two
Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .10, E(RB) = .13, σA = .41, and σB = .59, respectively.a. Calculate the expected return and standard deviation of
You have been provided the following data on the securities of three firms, the market portfolio, and the risk-free asset:a. Fill in the missing values in the table.b. Is the stock of Firm A
The market portfolio has an expected return of 10.7 percent and a standard deviation of 19 percent. The risk-free rate is 3.2 percent.a. What is the expected return on a well-diversified portfolio
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 6 percent and a standard deviation of 11 percent. The risk-free rate is 2.9 percent, and the expected
Suppose the risk-free rate is 2.1 percent and the market portfolio has an expected return of 11.1 percent. The market portfolio has a variance of .0387. Portfolio Z has a correlation coefficient with
Consider the following information on Stocks I and II:The market risk premium is 7.5 percent, and the risk-free rate is 3 percent. Which stock has the most systematic risk? Which one has the most
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Security Beta
Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock B’s beta
The Angelina Corporation’s common stock has a beta of 1.08. If the risk-free rate is 3.7 percent and the expected return on the market is 10 percent, what is the company’s cost of equity?
J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 95 percent of face value. The issue makes
Marysa Corp. issued a 30-year, 5.8 percent semiannual bond seven years ago. The bond currently sells for 97 percent of its face value. The company’s tax rate is 21 percent.a. What is the pretax
For the firm in the previous problem, suppose the book value of the debt issue is $65 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to
Croft Corporation has a target capital structure of 75 percent common stock and 25 percent debt. Its cost of equity is 11.2 percent, and the cost of debt is 5.8 percent. The tax rate is 21 percent.
Bento, Inc., has a target debt-equity ratio of .80. Its cost of equity is 12 percent, and its cost of debt is 7 percent. If the tax rate is 21 percent, what is the company’s WACC?
Fama’s Llamas has a weighted average cost of capital of 8.6 percent. The company’s cost of equity is 11.2 percent and its pretax cost of debt is 6.4 percent. The tax rate is 21 percent. What is
Pandora Manufacturing has 5.8 million shares of common stock outstanding. The current share price is $52, and the book value per share is $4. The company also has two bond issues outstanding. The
In the previous problem, suppose the company’s stock has a beta of 1.20. The risk-free rate is 3.1 percent, and the market risk premium is 6.5 percent. Assume that the overall cost of debt is the
Butler, Inc., has a target debt-equity ratio of .45. Its WACC is 9.6 percent and the tax rate is 21 percent.a. If the company’s cost of equity is 12.4 percent, what is its pretax cost of debt?b. If

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