Questions and Answers of Corporate Finance Core Principles and Applications

Zoysia University must purchase mowers for its landscape department. The university can buy five EVF mowers that cost $6,800 each and have annual, year-end maintenance costs of $1,430 per mower. The
SGS Golf Academy is evaluating different golf practice equipment. The “Dimple-Max” equipment costs $104,300, has a seven-year life, and costs $13,900 per year to operate. The relevant discount
Sandbelt Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $376,000. The company is an ongoing operation, but it expects competitive pressures
Perkins, Inc., is considering an investment of $730,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first
Squirrel Spring Water, Inc., expects to sell 7.3 million bottles of drinking water each year in perpetuity. This year, each bottle will sell for $1.24 in real terms and will cost $.83 in real terms.
Consider the following cash flows on two mutually exclusive projects:The cash flows of Project A are expressed in real terms while those of Project B are expressed in nominal terms. The appropriate
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3.1 million and will last for six years. Variable costs are 35 percent of sales and
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 ProblemGeller Machine
Geller Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $530,000 is estimated to result in $192,000 in annual pretax cost savings.
You are evaluating two different silicon wafer milling machines. The Techron I costs $490,000, has a three-year life, and has pretax operating costs of $90,000 per year. The Techron II costs
Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.57 million. The marketing department predicts that sales related to
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $8.95 million and will be sold for $1.96 million at the end of the
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 ProblemCori’s Meats
Cori’s Meats is looking at a new sausage system with an installed cost of $304,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the
Your firm is contemplating the purchase of a new $655,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $60,000 at
In the previous problem, suppose the project requires an initial investment in net working capital of $450,000 and the fixed asset will have a market value of $575,000 at the end of the project. What
Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.75 million. The fixed asset will be depreciated straight-line to
The Fleming Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash,
Avignon Restaurant is considering the purchase of a $37,000 soufflé maker. The soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. The machine
Because East Coast Yachts is producing at full capacity, Larissa has decided to have Dan examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $3.5 million to open and
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash
An investment under consideration has a payback of six years and a cost of $745,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year ......Cash Flow0 .......−$1,750,0001 ..............560,0002
Consider the following cash flows of two mutually exclusive projects for Spartan Rubber Company. Assume the discount rate for both projects is 10 percent.a. Based on the payback period, which project
The treasurer of Tropical Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows:Suppose the relevant discount rate is 12 percent per year.a. Compute the profitability index
Consider the following cash flows of two mutually exclusive projects for A-Z Motorcars. Assume the discount rate for both projects is 10 percent.a. Based on the payback period, which project should
Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as a PC game, but not both. Consider the following cash flows
Bohrer Mining, Inc., is trying to evaluate a project with the following cash flows:Year .....................Cash Flow0 ....................−$63,000,0001 ........................89,000,0002
The Simpson Corporation is trying to choose between the following two mutually exclusive design projects:a. If the required return for both projects is 10 percent and the company applies the
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of 15 percent.As a financial analyst for the
Suppose you are offered a project with the following payments.Year ..........Cash Flows0 ....................$ 15,9001 .......................−5,9002 .......................−5,7003
Suppose the following two independent investment opportunities are available to Woodland, Inc. The appropriate discount rate is 10 percent.a. Compute the profitability indexes for each of the two
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $187,000. Bill expects aftertax cash inflows of $62,000 annually for seven years, after which he
Compute the internal rate of return for the cash flows of the following two projects. Cash Flows Year Project A Project B -$8,100 -$5,400 1 2,900 2,200 2 4,600 2,700 3,100 2,300 3.
Schaueffle Machines, Inc., has a project with the following cash flows.Year .........Cash Flows0 .................−$20,3001 .......................9,6002 .....................13,7003
The Mickelson Group has invested $34,000 in a high-tech project lasting three years. Depreciation is $9,600, $15,900, and $8,500 in Years 1, 2, and 3, respectively. The project generates earnings
Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts.The machine generates, on average, $6,100 per year in additional net income.a. What is
In November 2018, Toyota and Mazda broke ground on a $1.6 billion plant to be operated jointly in Alabama. Toyota and Mazda apparently felt that they would be better able to compete and create value
An investment project costs $15,500 and has annual cash flows of $4,400 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 7 percent?
An investment project has annual cash inflows of $5,100, $5,700, $6,200, and $6,400, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost
An investment project provides cash inflows of $1,530 per year for eight years. What is the project payback period if the initial cost is $4,900? What if the initial cost is $7,900? What if it is
Greystone, 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
1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.2. Based on your analysis, should the
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $81.15 and all the dividend information remains the same. What required return must investors be
Storico Co. just paid a dividend of $3.65 per share. The company will increase its dividend by 16 percent next year and will then reduce its dividend growth rate by 4 percentage points per year until
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current
Consider four different stocks, all of which have a required return of 16 percent and a most recent dividend of $4.15 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
Anya Manufacturing has projected sales of $138 million next year. Costs are expected to be $77 million, and net investment is expected to be $11 million. Each of these values is expected to grow at
Bootstrap Corp. has yearly sales of $42.8 million and costs of $24.6 million. The company’s balance sheet shows debt of $63 million and cash of $24 million. There are 960,000 shares outstanding,
Sparrow Corp. currently has an EPS of $3.75, and the benchmark PE for the company is 18. Earnings are expected to grow at 6.5 percent per year.a. What is your estimate of the current stock price?b.
Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $1.4 million. Without new projects, both firms will continue to generate earnings of $1.4 million in
Four years ago, Bling Diamond, Inc., paid a dividend of $1.02 per share. The firm paid a dividend of $1.87 per share yesterday. Dividends will grow over the next five years at the same rate they grew
Juggernaut Satellite Corporation earned $36.3 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out
Amos, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4 percent forever. The current stock price is
Richard, Inc., will pay a quarterly dividend per share of $.61 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1.1 percent forever. The
You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividend of $3.15 per share. You will receive a dividend of $3.27 two years from now. You will sell the stock for
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What is the annual dividend? What was the closing price for this stock that appeared
Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $7 in perpetuity, beginning 10 years from now. If the market requires a return of 4.1 percent on
Maddon Corporation stock currently sells for $57.13 per share. The market requires a return of 11 percent on the firm’s stock. If the company maintains a constant 4 percent growth rate in
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $14, but management expects to reduce the payout by 3 percent per year indefinitely. If you require a return of 9.6
Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 17 percent over the following year, and then 4 percent per year
Upton Co. is growing quickly. Dividends are expected to grow at 26 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is
West Side Corporation is expected to pay the following dividends over the next four years: $15, $11, $9, and $2.65. Afterward, the company pledges to maintain a constant 5 percent growth rate in
Nelson, Inc., has an odd dividend policy. The company has just paid a dividend of $11 per share and has announced that it will increase the dividend by $3.50 per share for each of the next five
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will
BenchMark, Inc., just paid a dividend of $3.29 on its stock. The growth rate in dividends is expected to be a constant 4 percent per year indefinitely. Investors require a return of 15 percent on the
The Blooming Flower Co. has earnings of $4.21 per share. The benchmark PE for the company from a comparables analysis is 18. What stock price would you consider appropriate? What if the benchmark PE
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Fitzpatrick Enterprises. Unfortunately, you will be the only
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.08 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each company’s
The newspaper reported last week that Jernigan Enterprises earned $31.5 million this year. The report also stated that the firm’s return on equity is 13 percent. The firm retains 75 percent of its
Ollie, Inc., has an issue of preferred stock outstanding that pays a dividend of $3.50 every year in perpetuity. If this issue currently sells for $96 per share, what is the required return?
Griffith Corp. pays a constant $8.75 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on
Suppose you know that a company’s stock currently sells for $76 per share and the required return on the stock is 10.8 percent. You also know that the total return on the stock is evenly divided
Douglas, Inc., is expected to maintain a constant 3.9 percent growth rate in its dividend indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the
Romo Corporation will pay a dividend of $3.64 per share next year. The company pledges to increase its dividend by 4.3 percent per year indefinitely. If you require a return of 11 percent on your
For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?Data from Previous ProblemThe next dividend payment by Zone, Inc., will be $1.84 per
The next dividend payment by Zone, Inc., will be $1.84 per share. The dividends are anticipated to maintain a growth rate of 4.4 percent forever. If the stock currently sells for $34 per share, what
The Cricket Co. just paid a dividend of $3.14 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. If investors require a return of 11
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $900 and has an existing customer base of 575. Paul plans to raise the annual fee by 6 percent every
You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $600 per month in a stock account in real dollars and $275 per month in a bond account in real
When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former
An engineer earned $26,300 per year when he began his career. Thirty years later, his annual salary was $105,350. The inflation index over this same period grew from 455.18 to 1,046.27. What was his
At one point, some Treasury bonds were callable. Consider the prices on the following three Treasury issues as of February 24, 2019:The bond in the middle is callable in February 2020. What is the
The Grimm Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first 6 years, then pays $800 every
You will earn the YTM on a bond if you hold the bond until maturity and if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding
Bond P is a premium bond with a coupon of 7.8 percent. Bond D has a coupon rate of 4.2 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 6 percent, and
Suppose the following bond quote for IOU Corporation appears in the financial page of today’s newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2019. What is
You purchase a bond with a coupon rate of 7.1 percent and a clean price of $1,030. If the next semiannual coupon payment is due in four months, what is the invoice price?
You purchase a bond with an invoice price of $945. The bond has a coupon rate of 5.6 percent, and there are two months to the next semiannual coupon date. What is the clean price of the bond?
Baxter Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 5.6 percent coupon bonds on the market that sell for $1,094.30, make semiannual
Stuart Software has 5.7 percent coupon bonds on the market with 11 years to maturity. The bonds make semiannual payments and currently sell for 93 percent of par. What is the current yield on the
The Faulk Corp. has a bond with a coupon rate of 6.4 percent outstanding. The Gonas Company has a bond with a coupon rate of 12.6 percent outstanding. Both bonds have 18 years to maturity, make
Laurel, Inc., and Hardy Corp. both have 7.3 percent coupon bonds outstanding, with semiannual interest payments, and both are currently priced at the par value of $1,000. The Laurel, Inc., bond has 4
Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 7.4 percent, a YTM of 5.4 percent, and 13 years to maturity. The Modigliani Company has a discount bond
Union Local School District has bonds outstanding with a coupon rate of 3.9 percent paid semiannually and 16 years to maturity. The yield to maturity on these bonds is 4.2 percent and the bonds have
Layton Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.6 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the dollar
You find a zero coupon bond with a par value of $10,000 and 13 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the dollar price of the bond? Assume semiannual
Say you own an asset that had a total return last year of 10.9 percent. If the inflation rate last year was 3.8 percent, what was your real return?
An investment offers a total return of 13.5 percent over the coming year. Powell Arms thinks the total real return on this investment will be only 8.6 percent. What does Powell believe the inflation

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