Questions and Answers of Corporate Finance Core Principles

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
Vulcano 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 5 percent growth rate in
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $16, but management expects to reduce the payout by 3 percent per year indefinitely. If you require a return of 9.3
Synovec Corp. is experiencing rapid growth. Dividends are expected to grow at 27 percent per year during the next three years, 18 percent over the following year, and then 4 percent per year
Upton Co. is growing quickly. Dividends are expected to grow at 27 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the required return is
East Side Corporation is expected to pay the following dividends over the next four years: $12, $8, $7, and $2.85. Afterward, the company pledges to maintain a constant 5 percent growth rate in
Morning Dew, Inc., has an odd dividend policy. The company has just paid a dividend of $13 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 11 years, because the firm needs to plow back its earnings to fuel growth. The company will
Universal Laser, Inc., just paid a dividend of $2.73 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
The Blooming Flower Co. has earnings of $2.14 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
In the previous problem, assume that the company uses cumulative voting and there are four seats in the current election. How much will it cost you to buy a seat now?
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of DeJoria Enterprises. Unfortunately, you will be the only person
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.86 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 Tisch Enterprises earned $38.6 million this year. The report also stated that the firm’s return on equity is 14 percent. The firm retains 75 percent of its
John, Inc., has an issue of preferred stock outstanding that pays a dividend of $3.85 every year in perpetuity. If this issue currently sells for $108 per share, what is the required return?
O’Leary, Inc., is expected to maintain a constant 4.1 percent growth rate in its dividend indefinitely. If the company has a dividend yield of 5.4 percent, what is the required return on the
Cuban Corporation will pay a dividend of $3.08 per share next year. The company pledges to increase its dividend by 4.6 percent per year indefinitely. If you require a return of 11 percent on your
The next dividend payment by Greiner, Inc., will be $2.14 per share. The dividends are anticipated to maintain a growth rate of 4.4 percent forever. If the stock currently sells for $32 per share,
The Herjavec Co. just paid a dividend of $2.57 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
Some companies, such as Under Armour, have created classes of stock with no voting rights at all. Why would investors buy such stock?
You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $700 per month in a stock account in real dollars and $325 per month in a bond account in real
An engineer earned $22,400 per year when he began his career. Thirty years later, his annual salary was $97,500. The inflation index over this same period grew from 415.23 to 1,021.39. What was his
At one point, some Treasury bonds were callable. Consider the prices on the following three Treasury issues as of February 24, 2016:The bond in the middle is callable in February 2017. What is the
An investment offers a total return of 12.1 percent over the coming year. Alan Wingspan thinks the total real return on this investment will be only 7.6 percent. What does Alan believe the inflation
Ben Bates graduated from college six years ago with a finance undergraduate degree. Since graduation, he has been employed in the finance department at East Coast Yachts. Although he is satisfied
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary
You have 30 years left until retirement and want to retire with $2.2 million. Your salary is paid annually and you will receive $70,000 at the end of the current year. Your salary will increase at 3
You have recently won the super jackpot in the Set for Life Lottery. On reading the fine print, you discover that you have the following two options:a. You will receive 31 annual payments of
For the company in the previous problem, suppose fixed assets are currently $895,000 and sales are projected to grow to $997,000. How much in new fixed assets is required to support this growth in
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 six years, then pays $800
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 8.4 percent. Bond D has a coupon rate of 5.6 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and
Cavo Corp. has 6.3 percent coupon bonds making annual payments with a YTM of 7.14 percent. The current yield on these bonds is 6.95 percent. How many years do these bonds have left until they mature?
You purchase a bond with a coupon rate of 7.6 percent and a clean price of $1,060. 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 6.8 percent, and there are two months to the next semiannual coupon date. What is the clean price of the bond?
Hagelin Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6.4 percent coupon bonds on the market that sell for $1,121.80,make semiannual
Bonino Software has 6.4 percent coupon bonds on the market with 11 years to maturity. The bonds make semiannual payments and currently sell for 108 percent of par. What is the current yield on the
The Faulk Corp. has a bond with a coupon rate of 5.7 percent outstanding. The Gonas Company has a bond with a coupon rate of 12.3 percent outstanding. Both bonds have 14 years to maturity, make
Laurel, Inc., and Hardy Corp. both have 6.5 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
Miller Corporation has a premium bond making semiannual payments. The bond has a coupon rate of 8.2 percent, a YTM of 6.2 percent, and 13 years to maturity. The Modigliani Company has a discount bond
Locate the Treasury bond in Figure 5.4 that matures in August 2039. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in
Locate the Treasury bond in Figure 5.4 that matures in August 2028. What is its coupon rate? What is its bid price? What was the previous day€™s asked price? Assume a par value of
Mycroft Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the
Say you own an asset that had a total return last year of 11.4 percent. If the inflation rate last year was 3.9 percent, what was your real return?
Suppose the real rate is 1.8 percent and the inflation rate is 3.4 percent. What rate would you expect to see on a Treasury bill?
If Treasury bills are currently paying 4.8 percent and the inflation rate is 2.7 percent, what is the approximate real rate of interest? The exact real rate?
A Japanese company has a bond outstanding that sells for 103.25 percent of its ¥100,000 par value. The bond has a coupon rate of 4.9 percent paid annually and matures in 18 years. What is the yield
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company has a bond outstanding with
Lydic Corporation has bonds on the market with 12.5 years to maturity, a YTM of 6.4 percent, a par value of $1,000, and a current price of $1,040. The bonds make semiannual payments. What must the
Skolits Corp. issued 15-year bonds two years ago at a coupon rate of 5.1 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is
Microhard has issued a bond with the following characteristics:Par: $1,000Time to maturity: 23 yearsCoupon rate: 7 percentSemiannual paymentsCalculate the price of this bond if the YTM isa. 7
What is the dollar price of a zero coupon bond with 17 years to maturity, semiannual compounding, and a par value of $1,000, if the YTM isa. 4 percentb. 10 percentc. 14 percent
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 5.5 percent interest per week.a. What APR must the store report to its
You have just won the Life’s Downhill After 30 lottery. The lottery payments will be made for the next 30 years. The payments are slightly unusual in that you will be paid $600,000 every six months
What is the value of an investment that pays $30,000 every other year forever, if the first payment occurs one year from today and the discount rate is an APR of 11 percent compounded daily? What is
Your financial planner offers you two different investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 10-year, $31,000 annual annuity. Both plans will make their first payment one year
You have just won the lottery. You will receive $4,000,000 today, and then receive 40 payments of $1,750,000. These payments will start one year from now and will be paid every six months. A
An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as
Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost, because you just received an offer in the mail to transfer your $10,000 balance from your current
You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is
This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this:
There are two banks in the area that offer 30-year, $225,000 mortgages at 5.4 percent compounded monthly and charge a $2,400 loan application fee. However, the application fee charged by Insecurity
The interest rate on a one-year loan is quoted as 9 percent plus three points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?
You are looking at a one-year loan of $10,000. The interest rate is quoted as 12.5 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 14.5
After deciding to get a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $38,000. The dealer has a special leasing arrangement where you pay
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $25,000 per month for20 years, with the first
On September 1, 2014, Susan Chao bought a motorcycle for $35,000. She paid $1,000 down and financed the balance with a five-year loan at an APR of 5.8 percent compounded monthly. She started the
Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $65,000. He will receive his first annual salary payment one year from the
You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate
You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at an APR of 9.7 percent, compounded monthly. Since the clubs cost $3,100 retail,
Rework Problem 51 assuming that the loan agreement calls for a principal reduction of $17,000 every year instead of equal annual payments.Data from Problem 51Prepare an amortization schedule for a
Prepare an amortization schedule for a three-year loan of $51,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
Reigle Pharmaceuticals is considering a drug project that costs $1,650,000 today and is expected to generate end-of-year annual cash flows of $185,000, forever. At what discount rate would the
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.9 percent per year, compounded monthly for the first six months, increasing thereafter to 16
Mike Bayles has just arranged to purchase a $825,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has an APR of 5.4 percent, compounded monthly, and calls for equal
What is the value today of a 15-year annuity that pays $825 a year? The annuity’s first payment occurs six years from today. The annual interest rate is 9 percent for Years 1 through 5, and 12
The Dent Company has an ROE of 13.15 percent and a payout ratio of 30 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its
Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 15 percent to $211.6 million. Current assets,
The most recent financial statements for Retro Machine, Inc., follow. Sales for 2017 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout
In the previous problem, suppose the firm was operating at only 85 percent capacity in 2016. What is EFN now? Data from previous problem RETRO MACHINE INC2016 Income
Breyfolge Mfg., Inc., is currently operating at only 92 percent of fixed asset capacity. Current sales are $905,000. How fast can sales grow before any new fixed assets are needed?
In addition to common-size financial statements, common-base-year financial statements are often used. Common-base-year financial statements are constructed by dividing the current-year account
Sexton Corp. has current liabilities of $263,000, a quick ratio of .75, inventory turnover of 10.35, and a current ratio of 1.25. What is the cost of goods sold for the company?
What is the value today of an annuity of $5,700 per year, with the first cash flow received 3 years from today and the last one received 25 years from today? Use a discount rate of 6.8 percent.
A prestigious investment bank designed a new security that pays a quarterly dividend of $1.75 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the
Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be
You’re trying to choose between two different investments, both of which have up-front costs of $55,000. Investment G returns $105,000 in five years. Investment H returns $235,000 in 11 years.
First Simple Bank pays 7.4 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to
You are planning to save for retirement over the next 30 years. To do this, you will invest $750 per month in a stock account and $325 per month in a bond account. The return of the stock account is
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $18,000 per year forever. If the required return on this investment is 4.3 percent, how
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 $80 annually if the next payment occurs one
Imprudential, Inc., has an unfunded pension liability of $540 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back
PVA Inc.’s net income for the most recent year was $21,460. The tax rate was 34 percent. The firm paid $7,340 in total interest expense and deducted $8,720 in depreciation expense. What was the
The Arkham Company has a ratio of long-term debt to long-term debt plus equity of .45 and a current ratio of 1.25. Current liabilities are $1,215, sales are $9,360, profit margin is 7.5 percent, and
The most recent financial statements for Incredible Edibles, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividends are
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover..................................... = 3.20Profit
If the SGS Corp. has an ROE of 14.5 percent and a payout ratio of 25 percent, what is its sustainable growth rate?
The most recent financial statements for Weyland Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant

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