Questions and Answers of Corporate Finance Core Principles

The expected rates of return and the beta coefficients of the alternatives, as supplied by Barney Smith’s computer program, are as follows:(1) Do the expected returns appear to be related to each
The expected rates of return and the beta coefficients of the alternatives, as supplied by Barney Smith’s computer program, are as follows:
(1) Should portfolio effects influence how investors think about the risk of individual stocks (2) If you decided to hold a one-stock portfolio and consequently were exposed to more risk than
Suppose an investor starts with a portfolio consisting of one randomly selected stock. As more and more randomly selected stocks are added to the portfolio, what happens to the portfolio’s risk and
Suppose you created a two-stock portfolio by investing $50,000 in Alta Industries and $50,000 in Repo Men. (1) Calculate the expected return (r^ p), the standard deviation(σp), and the coefficient
Suppose you suddenly remembered that the coefficient of variation (CV) is generally regarded as being a better measure of stand-alone risk than the standard deviation when the alternatives being
You should recognize that basing a decision solely on expected returns is appropriate only for risk-neutral individuals. Because your client, like virtually everyone, is risk averse, the riskiness of
(1) Why is the T-bill’s return independent of the state of the economy? Do T-bills promise a completely risk-free return? (2) Why are Alta Industries’s returns expected to move with the economy
Briefly describe bankruptcy law. If a firm were to default on its bonds, would the company be liquidated immediately? Would the bondholders be assured of receiving all of their promised payments?
What is reinvestment rate risk? Which has more reinvestment rate risk: a 1-year bond or a 10 year bond?
Suppose a 10-year, 10% semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years
(1) What is the yield to maturity on a 10-year, 9% annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does the fact that a bond sells at a discount or at a
(1) What would be the value of the bond described in part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13% return?
How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10% annual coupon if its required rate of return is 10%?
How does one determine the value of any asset whose value is based on expected future cash flows?
Suppose that on January 1 you deposit $100 in an account that pays a nominal (or quoted) interest rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account on
1. Construct an amortization schedule for a $1,000, 10% annual rate loan with 3 equal installments.2. During Year 2, what is the annual interest expense for the borrower, and what is the annual
1. Define the stated (quoted) or nominal rate INOM as well as the periodic rate IPER.2. Will the future value be larger or smaller if we compound an initial amount more often than annually—for
What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10%, compounded annually.
1. What’s the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%?2. What’s the present value of the annuity?3. What would the future and present values be
What’s the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change the time line to show the other type of annuity?
If you want an investment to double in 3 years, what interest rate must it earn?
1. What’s the future value of an initial $100 after 3 years if it is invested in an account paying 10% annual interest?2. What’s the present value of $100 to be received in 3 years if the
Explain the following statement: “Whereas the balance sheet can be thought of as a snapshot of the firm’s financial position at a point in time, the income statement reports on operations over a
Find the most recent financial statements for Starbuck’s Corporation (ticker symbol: SBUX) using the following sources:a. From the company’s webpage Search for “investor relations”.b.
Why can we not simply rely on regulators to monitor managers?
What is the difference between grey directors and outside directors?
What does it mean to say that international capital markets are integrated?
What assumptions are necessary to value foreign cash flows using the domestic WACC method?
How are Canadian firms taxed on their foreign earnings?
What agency conflict do corporate governance structures address?
What does it mean for a board to be captured?
How can compensation design help mitigate principal-agent problems?
What is the main reason for tying managers’ compensation to firm performance?
Why is managerial ownership not always value improving?
What is the negative effect of increasing the sensitivity of managerial pay to firm performance?
What are shareholders’ options to confront managers who they believe are damaging shareholder value?
Describe and explain a proxy contest.
Should insider trading be illegal?
What is the role of takeovers in corporate governance?
What is a whistle-blower?
How is it possible for an entity with low cash flow interest in a company to exercise control?
Describe the main requirements of the Sarbanes-Oxley Act of 2002.
What is insider trading, and how can it harm investors?
How does shareholder protection vary across countries?
How can a minority owner in a business gain a controlling interest?
What is a say-on-pay vote?
Why would a grey director be compromised as a monitor?
Why is governance important in a corporation?
What are the steps in the takeover process?
Explain why risk-diversification benefits and earnings growth are not good justifications for a takeover intended to increase shareholder wealth.
On average, what happens to the acquirer share price on the announcement of a takeover?
On average, what happens to the target share price on the announcement of a takeover?
What is the difference between a horizontal and a vertical merger?
What are merger waves?
Why do you think shareholders from target companies enjoy an average gain when acquired, while acquiring shareholders on average often do not gain anything?
What are the two primary mechanisms under which ownership and control of a public corporation can change?
Suppose Netflix is considering the purchase of special software to facilitate its move into video-on-demand services. In total, the firm will purchase $48 million in new software. This software will
Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of
What discount rate should be used for the incremental lease cash flows to compare a true tax lease to borrowing?
Assume that in the original Ityesi example in Table 22.3 , all sales actually occur in Canada and are projected to be 75 million CAD per year for four years. Keeping other costs the same, calculate
You are a Canadian investor who is trying to calculate the present value of a 5 million EUR cash inflow that will occur one year in the future. The spot exchange rate is S 5 1.25 CAD/EUR and the
How can firms hedge exchange rate risk?
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 4000 kilograms of
If international markets are segmented, how does that change the way the financial manager approaches valuation problems?
How does exchange rate risk affect our approach to valuation?
When do these two methods give the same NPV of the foreign project?
What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 RUB per CAD. If the forward exchange rate is 28.5 RUB per CAD, and the current Canadian risk-free
What is the intuition behind the calculation of duration?
How can insurance add value to a firm?
What is the difference between a firm’s cash cycle and operating cycle?
How does working capital affect a firm’s value?
Why is trade credit important?
What factors determine how a firm should manage its payables?
What is meant by “stretching the accounts payable”?
What do the terms “COD” and “CBD” mean?
What are the trade-offs involved in reducing inventory?
What are the different ways you can invest your firm’s cash?
Describe “just-in-time” inventory management.
List three reasons why a firm holds cash.
Use the financial statements supplied below for International Motor Corporation (IMC) to answer the following questions. a. Calculate the cash conversion cycle for IMC for both 2013 and 2014.
What are the objectives of short-term financial planning?
What are seasonalities, and what role do they play in short-term financial planning?
Why is it important to distinguish between permanent and temporary shortfalls?
Describe the different approaches a firm could take in preparing for cash flow shortfalls.
What is the difference between evergreen credit and a revolving line of credit?
What is the difference between direct paper and dealer paper?
What will a short-term financial plan enable a financial manager to do?
It is April, and Hans Anderson is planting his barley crop near Plunkett, Saskatchewan. He is concerned about losing his farm if his operations result in a loss at the end of the season. He expects
How is an exchange rate used?
You have just landed in London with 500 CAD in your wallet. Stopping at the foreign exchange booth, you see that pounds are being quoted at 1.95 CAD/GBP. For how many pounds can you exchange your 500
Under the assumption that KXS’s market share will be 0.25% higher in each subsequent year (for e.g. 2014 will be 10.25%, 2015 will be 10.50%, and so on), you determine that the plant will require
What role does minimum required cash play in working capital?
How does the pro forma balance sheet help the financial manager forecast net new financing?
What is the purpose of long-term forecasting?
ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 3, 2006. It takes three business days after a purchase for the new owners of a share of stock
What is the difference between an annuity and a perpetuity?
What are some advantages of a spinoff as opposed to selling the division and distributing the cash?
What possible signals does a firm give when it cuts its dividend?

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