Questions and Answers of Corporate Finance Core Principles

What does the historical relationship between volatility and return tell us about investors’ attitude toward risk?
What are the components of a stock’s realized return?
Why do investors demand a higher return when investing in riskier securities?
How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of large,
What is the difference between common and independent risk?
How does diversification help with independent risk?
Why is the risk of a portfolio usually less than the average risk of the stocks in the portfolio?
You observe a portfolio for five years and determine that its average return is 12% and the standard deviation of its returns is 20%. Can you be 95% confident that this portfolio will not lose more
What information do you need to compute the expected return of a portfolio?
What do the weights in a portfolio tell us?
How important are our personal preferences in valuing an investment decision?
The local electronics store is offering a promotion “one year: same as cash,” meaning that you can buy a TV now, and wait a year to pay (with no interest). So, if you take home a $1000 TV today,
If your bank pays you 1.5% interest and you deposit $500 today, what will your balance be in five years?
Why do firms disclose financial information?
What financial statements can be found in a firm’s annual report? What checks exist to ensure the accuracy of these statements?
What four financial statements can be found in a firm’s filing with its provincial securities commission? What checks exist to ensure the accuracy of these statements?
Repeat the analysis for Tim Hortons (www.timhortons.com). In addition to the EDGAR site, check www.sedar.com for Canadian filings.
How can you use the statement of financial position to assess the health of the firm?
What do a firm’s earnings measure?
Use Google Finance (www.google.com/finance) to find the statement of financial position data for Qualcomm as of the end of September 2012.a. How much did Qualcomm have in cash and short-term
How are the statement of financial position and the income statement related?
How did accounting fraud contribute to the collapse of Enron?
What is a firm’s enterprise value?
How can a financial manager use the DuPont Identity to assess the firm’s ROE?
Suppose that in 2015, Global launched an aggressive marketing campaign that boosted sales by 15%. However, its operating margin fell from 5.57% to 4.50%. Suppose that the company had no other income,
You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):a. What is each company€™s accounts receivable days?b. What is each
Find online the annual 10-K report for Green Mountain Coffee Roasters (GMCR) for 2012.a. Compute Green Mountain’s net profit margin, total asset turnover, and equity multiplier.b. Verify the
What makes an investment decision a good one?
When costs and benefits are in different units or goods, how can we compare them?
If canola trades in a competitive market, would a canola oil producer that has a use for the canola value it differently than another investor would?
Why are market prices useful to a financial manager?
How do investors’ profit motives keep competitive market prices correct?
What is the relation between the Law of One Price and the Principle of No Arbitrage?
How do we determine whether a decision increases the value of the firm?
How is an interest rate like a price?
Can we directly compare dollar amounts received at different points in time?
Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, BlackBerry (BB) trades on both the TSX and NASDAQ. If its price in Toronto is 10
You are purchasing a new TV at Visions Electronics and the salesperson is trying to convince you to buy a five-year extended warranty. The cost of the warranty to you today will be $399. However, if
You are considering a savings bond that will pay $100 in 10 years. If the interest rate is 2%, what should you pay today for the bond?
Your bank pays 2.5% interest per year. You put $1000 in the bank today and $500 more in the bank in one year. How much will you have in the bank in 2 years?
How do you calculate the future value of a cash flow stream?
What is the rate of return on an investment or the interest rate on a loan and how do you calculate the rate?
How do you solve for the number of periods for an investment or loan?
How do you calculate the future value of a growing annuity?
You figure that the total cost of university will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of 4 years of university
Assume that the Canada Pension Plan promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will come 45 years from now). If your discount rate is 7%,
Why is the EAR for 6% APR , with semi-annual compounding, higher than 6%?
Do the relevant calculations so you can indicate which you prefer: a bank account that pays 5% per year (EAR ) for three years ora. an account that pays 2.5% every 6 months for 3 years?b. an account
How is the principal repaid in an amortizing loan?
What is the difference between a nominal and real interest rate?
You have been accepted into university. The university guarantees that your tuition will not increase for the four years you attend. The first $10,000 tuition payment is due in six months. After
In the early 1980s, inflation was in the double digits and the yield curve sloped sharply downward. What did the yield curve say about investors’ expectations about future inflation rates?
What do we mean when we refer to the “opportunity cost” of capital?
You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2356, and you have made every payment on time. The
You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18.5
In what ways might you as a financial manager make use of the information in interest rate changes and the yield curve?
How do you think financial managers will prepare the companies for future credit market crises?
How is yield to maturity related to the concept of rate of return?
Find online the annual 10-K report for Green Mountain Coffee Roasters (GMCR) for 2012, filed in September 2012.a. Which auditing firm certified these financial statements?b. Which officers of Green
What are the advantages and disadvantages of organizing a business as a corporation?
Explain the difference between a real estate corporation and a REIT.
You are a shareholder in a corporation. The corporation earns $2.00 per share before taxes. Once it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The corporate tax
What types of jobs would a financial manager have in a corporation?
Repeat Problem 6 except assume the corporation is now a REIT and you own units in the trust.
What is the importance of a stock market to a financial manager?
What are the three main roles financial institutions play?
You are the CEO of a company and are considering a new project that, if accepted, would add $1 million to the value of the company’s equity. If you decide to proceed with the project, you realize
Suppose your local supermarket manager decides that, to increase profit, milk held in the store’s storage room will no longer be refrigerated. Milk on the display shelf will still be refrigerated.
You have recently been hired by Keafer Manufacturing to work in its newly established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a
The Thakor Corporation€™s purchases from suppliers in a quarter are equal to 75 percent of the next quarter€™s forecasted sales. The payables period is 60 days. Wages, taxes, and
Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants to add East
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
Herbert International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 35,000 solaris, debt in the amount of 12,000 solaris, and equity of 23,000
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be Fr 21 million. The cash flows from the project would be Fr 6.1 million per
Lakonishok Equipment has an investment opportunity in Europe. The project costs €12.2 million and is expected to produce cash flows of €2.7 million in Year 1, €2.9 million in Year 2, and €3.5
Suppose the spot exchange rate for the Hungarian forint is HUF 243. 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
Suppose the spot and three-month forward rates for the yen are ¥119.32 and ¥119.18, respectively.a. Is the yen expected to get stronger or weaker?b. Estimate the difference between the inflation
Exchange Rates The exchange rate for the Australian dollar is currently A$1.15. This exchange rate is expected to rise by 10 percent over the next year.a. Is the Australian dollar expected to get
Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast growth, and the future looks like clear sailing. However, the fast growth
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:Stock
You observe that the inflation rate in the United States is 2.5 percent per year and that T-bills currently yield 3.3 percent annually. What do you estimate the inflation rate to be ina. Australia,
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.95 and Kr 7.03, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate
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 147.80
Suppose the current exchange rate for the Polish złoty is zł 3.37. The expected exchange rate in three years is zł 3.64. What is the difference in the annual inflation rates for the United
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .38 percent per month. The interest rate in Great Britain is .39 percent per
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 1.4 percent. What must the six month risk-free
Suppose the Japanese yen exchange rate is ¥115 = $1, and the British pound exchange rate is £1 = $1.54.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥175 =
Take a look back at Figure 20.1 to answer the following questions:a. If you have $100, how many euros can you get?b. How much is one euro worth?c. If you have five million euros, how many dollars do
Suppose the spot exchange rate for the Canadian dollar is Can$1.09 and the six-month forward rate is Can$1.13.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP
Larissa Warren and Dan Ervin have been discussing the future of East Coast Yachts. The company has been experiencing fast growth, and the future looks like clear sailing. However, the fast growth
Cullen 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
Moullierat Mfg. is considering a rights offer. The company has determined that the ex-rights price will be $64. The current price is $73 per share, and there are 10 million shares outstanding. The
Daley Corp.’s stock is currently selling at $27 per share. There are 1.3 million shares outstanding. The firm is planning to raise $2.4 million to finance a new project. What are the ex-rights
A company’s stock currently sells for $86 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit $7 and three rights.a. What is the
In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $71 per share? Assume the PE ratio remains constant. What is the NPV of this
Kessel, Inc., wishes to expand its facilities. The company currently has 3.4 million shares outstanding and no debt. The stock sells for $51 per share, but the book value per share is $18.Net income
Fehr, Inc., has 135,000 shares of stock outstanding. Each share is worth $63, so the company’s market value of equity is $8,505,000. Suppose the firm issues 33,750 new shares at the following
The West lands Co. has just gone public. Under a firm commitment agreement, the company received $21.39 for each of the 12 million shares sold. The initial offering price was $23 per share, and 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?In the previous problemThe Hagelin Corporation
The Hagelin Corporation needs to raise $50 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

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