Questions and Answers of Corporate Finance Core Principles and Applications

In exchange for a $300 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.95 percent per quarter on any funds actually borrowed.2. Maintain a compensating
DeAngelo Bank offers your firm a discount interest loan with an interest rate of 9.1 percent for up to $20 million, and in addition requires you to maintain a compensating balance of 4.5 percent
Simpkins, Inc., is proposing a rights offering. Presently, there are 425,000 shares outstanding at $65 each. There will be 90,000 new shares offered at $57 each.a. What is the new market value of the
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 author pays a
Blue Shoe Co. has 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 determined
The Koepka Co. and the Woods Co. have both announced IPOs at $30 per share. One of these is undervalued by $7, and the other is overvalued by $4, but you have no way of knowing which is which. You
The Trafford Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the
In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $1.3 million, how many shares need to be sold?Data from Previous ProblemThe Trafford
The Cypress Co. has just gone public. Under a firm commitment agreement, the company received $20.46 for each of the 12 million shares sold. The initial offering price was $22 per share, and the
Choi, Inc., has 125,000 shares of stock outstanding. Each share is worth $58, so the company’s market value of equity is $7.25 million. Suppose the firm issues 33,750 new shares at the following
Naccarato Corp.’s stock is currently selling at $31 per share. There are 1.45 million shares outstanding. The firm is planning to raise $2.8 million to finance a new project. What are the ex-rights
Kiser Mfg. is considering a rights offer. The company has determined that the ex-rights price will be $53. The current price is $58 per share, and there are 9.2 million shares outstanding. The rights
Cimaroli Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $40. At the close
Suppose the spot exchange rate for the Canadian dollar is Can$1.29 and the six-month forward rate is Can$1.34.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP
Suppose the Japanese yen exchange rate is ¥105 = $1, and the British pound exchange rate is £1 = $1.34.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥136 = £1.
Use Figure 20.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.9 percent. What must the six month risk-free
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .39 percent per month. The interest rate in Great Britain is .41 percent per
Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 20.1. You have just placed an order for 30,000 motherboards at a cost to you of 124.60
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 8.53 and Kr 8.61, respectively. The annual risk-free rate in the United States is 3.2 percent, and the annual risk-free rate
You observe that the inflation rate in the United States is 2.2 percent per year and that T-bills currently yield 3.4 percent annually. What do you estimate the inflation rate to be in:a. Australia,
Suppose the spot and three-month forward rates for the yen are ¥114.61 and ¥114.18, respectively.a. Is the yen expected to get stronger or weaker?b. Estimate the difference between the inflation
Suppose the spot exchange rate for the Hungarian forint is HUF 268. Interest rates in the United States are 1.63 percent per year. They are 2.19 percent in Hungary. What do you predict the exchange
Lakonishok Equipment has an investment opportunity in Europe. The project costs €10.9 million and is expected to produce cash flows of €2.8 million in Year 1, €2.8 million in Year 2, and €3.1
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be Fr 19.6 million. The cash flows from the project would be Fr 6.1 million
Herbert International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 48,000 solaris, debt in the amount of 15,000 solaris, and equity of 33,000
In the previous problem, assume the equity increases by 2,100 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet
Who, Inc., has offered $275 million cash for all of the common stock in Dunn IT Corporation. Based on recent market information, Dunn IT is worth $241 million as an independent operation. If the
In 2015, General Electric (GE) spun off numerous businesses, including Synchrony Bank. The total value of the company’s spin-offs for the year was $157 billion. Why might a company do this? Is
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.7 million
The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:Flannery’s shareholders will receive one share of
Harrods PLC has a market value of £93 million and 5 million shares outstanding. Selfridge Department Store has a market value of £30.4 million and 2 million shares outstanding. Harrods is
Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown below:Bentley currently has a bond issue
What are the portfolio weights for a portfolio that has 165 shares of Stock A that sell for $41 per share and 280 shares of Stock B that sell for $29 per share?
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the NORMDIST function in Excel® to answer the following questions:a. What
You bought one of Elkins Manufacturing Co.’s 5.4 percent coupon bonds one year ago for $1,030. These bonds make annual payments, mature eight years from now, and have a par value of $1,000. Suppose
A stock has had the following year-end prices and dividends:What are the arithmetic and geometric average returns for the stock? Year Price Dividend $64.27 1 68.95 $.95 76.38 1.15 3 71.27 1.40 4
A stock has had returns of −24 percent, 32 percent, 17 percent, −6 percent, 29 percent, and 13 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
You find a certain stock that had returns of 13 percent, 9 percent, −7 percent, and 11 percent for four of the last five years. If the average return of the stock over this period was 10.35
Refer back to Table 10.2. What range of returns would you expect to see 68 percent of the time for large-company stocks? What about 95 percent of the time? Average Return Standard Series Deviation
Refer back to Table 10.2. What range of returns would you expect to see 68 percent of the time for long-term corporate bonds? What about 95 percent of the time? Average Return Standard Series
You bought a stock three months ago for $61.18 per share. The stock paid no dividends. The current share price is $64.32. What is the APR of your investment? The EAR?
You bought a share of 2.8 percent preferred stock for $94.16 last year. The market price for your stock is now $96.20. The par value is $100. What is your total return for last year?
You purchased a zero coupon bond one year ago for $425.32. The market interest rate is now 4.3 percent. If the bond had 20 years to maturity when you originally purchased it, what was your total
A stock has had returns of −13.18 percent, 17.63 percent, 24.87 percent, 8.32 percent, and 13.41 percent over the past five years, respectively. What was the holding period return for the stock?
Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?Data from Problem 9Suppose the average inflation rate over
In Problem 9, suppose the average inflation rate over this period was 2.6 percent and the average T-bill rate over the period was 3.25 percent.a. What was the average real return on the company’s
Using the following returns, calculate the average returns, the variances, and the standard deviations for X and Y. Returns Year X Y 1 19% 38% 2 13 16 8 19 4 -9 -27 17 18
What was the arithmetic average annual return on large-company stocks from 1926 through 2018:a. In nominal terms?b. In real terms?
Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2018? Why do you think they were so high during this period? What
Suppose you bought a bond with a coupon rate of 5.2 percent one year ago for $1,015. The bond sells for $1,032 today. The bond pays annual coupons. a. Assuming a $1,000 face value, what was your
Rework Problems 1 and 2 assuming the ending share price is $64.Problem 1 and 2In Problem 1, what was the dividend yield? The capital gains yield?Data from Problem 1Suppose a stock had an initial
In Problem 1, what was the dividend yield? The capital gains yield?Data from Problem 1Suppose a stock had an initial price of $76 per share, paid a dividend of $1.31 per share during the year, and
Given that Coty was down by 67 percent for 2018, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Suppose a stock had an initial price of $76 per share, paid a dividend of $1.31 per share during the year, and had an ending share price of $87. Compute the total percentage return.
Given that Twilio was up by 278 percent for 2018, why didn’t all investors hold Twilio?
First Person Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $3.7 million. The company expects a total annual operating cash flow
In Problem 26, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to
You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite-like material in its tennis rackets. The company has estimated the information in the table
Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 10 unitsper year at $153,000 net cash
Tag Products, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $6.8 million for the next 10 years. The required return for this project is 14
Samuelson, Inc., has just purchased a $726,000 machine to produce calculators. The machine will be fully depreciated by the straight-line method over its economic life of five years and will produce
Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town
Your buddy comes to you with a surefire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says,
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if
In the previous problem, suppose you think it is likely that expected sales will be revised upward to 19,000 units if the first year is a success and revised downward to 3,700 units if the first year
We are examining a new project. We expect to sell 14,000 units per year at $64 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $64 ×
McGilla Golf (see Problem 14) would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of
In the previous problem, you feel that the units sold, variable costs, and fixed costs are accurate to within only ±10 percent. What are the best-case and worst-case NPVs?Data from Previous
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $850 per set and have a variable cost of $445 per set. The company has spent $150,000 for a marketing study that
You are considering a new product launch. The project will cost $830,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 250 units per
Consider a four-year project with the following information: initial fixed asset investment = $385,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $26;
Chartreuse Co. has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of six years. The depreciation schedule for the machine is straight-line
You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information:Sales price per abalone .........= $52.25Variable costs per abalone
B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 60 percent chance of success. However, the firm can conduct customer segment
The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 40 percent chance of success. For $60,000, the manager can conduct a
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $495,000 per year. You believe the technology used in the machine has a 10-year life; in other
Jed’s Cars, Inc., just purchased a $538,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for $34.
In each of the following cases, find the unknown variable. Ignore taxes. Accounting Break-Even Unit Price Unit Variable Cost Fixed Costs Depreciation 96,200 $37 $23 $740,000 ? 12,318 49 855,000
In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV
We are evaluating a project that costs $772,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected
After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is to produce a medication for
Sony International has an investment opportunity to produce a new stereo HDTV. The required investment on January 1 of this year is $95 million. The firm will depreciate the investment to zero using
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect
Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $2.8 million. The company can continue to rent the building to the
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $344,000; the new one will cost $371,000. The new machine will be depreciated straight-line to zero over
Your company has been approached to bid on a contract to sell 20,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be
The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV
Guthrie Enterprises needs someone to supply it with 165,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the
A proposed cost-saving device has an installed cost of $580,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year ...........Unit Sales1 ......................75,0002 ......................86,0003
Merton Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $875,000 and its economic life is five years. The machine will be fully
Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $2,400 and will last for three years. The copier will require a real aftertax cost of $160 per year
Gold Star Industries is contemplating a purchase of computers. The firm has narrowed its choices to the SAL 5000 and the HAL 1000. The company would need nine SALs, and each SAL costs $3,600 and
Pilot Plus Pens is deciding when to replace its old machine. The machine’s current salvage value is $1.87 million. Its current book value is $1.14 million. If not sold, the old machine will require
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Data from Previous ProblemYou have been
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago
With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital,
Bing Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $2.35 million. The facility is to be fully depreciated on a straight-line basis over seven years. It is
A firm is considering an investment in a new machine with a price of $9.26 million to replace its existing machine. The current machine has a book value of $2.48 million, and a market value of $4.16
Hurzdan, Inc., is considering the purchase of a $755,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The

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