Questions and Answers of Corporate Finance Core Principles

Conspicuous Consumption, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently, there are 7,600
Coldstream Corp. is comparing two different capital structures. Plan I would result in 3,700 shares of stock and $13,700 in debt. Plan II would result in 3,100 shares of stock and $30,140 in debt.
In Problem 4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Hale in ProblemCorporation is comparing two different
Hale Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding.
Castle, Inc., has no debt outstanding and a total market value of $305,000. Earnings before interest and taxes, EBIT, are projected to be $26,000 if economic conditions are normal. If there is strong
This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense
Trower Corp. has a debt–equity ratio of .75. The company is considering a new plant that will cost $130 million to build. When the company issues new equity, it incurs a flotation cost of 7
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The
Floyd Industries stock has a beta of 1.25. The company just paid a dividend of $.95, and the dividends are expected to grow at 4.5 percent per year. The expected return on the market is 11 percent,
Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $24 million, and the company paid $1.42 million in flotation costs. In addition, the equity issued had a
The Saunders Investment Bank has the following financing outstanding.What is the WACC for the company?Debt: 90,000 bonds with a coupon rate of 6 percent and a current price quote of106.4; the bonds
Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million at the end of the first year, and these savings will grow at a rate of 3 percent per year
Southern Star Company needs to raise $55 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The
Suppose your company needs $25 million to build a new assembly line. Your target debt–equity ratio is .65. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3
An all-equity firm is considering the following projects:The T-bill rate is 3.5 percent, and the expected return on the market is 11 percent.a. Which projects have a higher expected return than the
Makai Metals Corporation has 9.1 million shares of common stock outstanding and 230,000 6.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $41
Given the following information for Cleen Power Co., find the WACC. Assume the company’s tax rate is 35 percent.Debt: 7,000 6 percent coupon bonds outstanding, $1,000 par value, 20 years to
Ten Pins Manufacturing has 6.4 million shares of common stock outstanding. The current share price is $59, and the book value per share is $4. The company also hastwo bond issues outstanding. The
Fama’s Llamas has a weighted average cost of capital of 8.6 percent. The company’s cost of equity is 11.2 percent, and its cost of debt is 6.4 percent. The tax rate is 35 percent. What is
Appraisal, Inc., has a target debt–equity ratio of .45. Its cost of equity is 13 percent, and its cost of debt is 7 percent. If the tax rate is 35 percent, what is the company’s WACC?
For the firm in the previous problem, suppose the book value of the debt issue is $55 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to
Suspect Corp. issued a 30-year, 5.8 percent semiannual bond seven years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 35 percent.a. What is the pretax
J&R Renovation, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 14 years to maturity that is quoted at 95 percent of face value. The issue makes
The Hudson Corporation’s common stock has a beta of 1.13. If the risk-free rate is 4.1 percent and the expected return on the market is 11 percent, what is the company’s cost of equity
If you use the stock beta and the security market line to compute the discount rate for a project, what assumptions are you implicitly making?
You are discussing your 401(k) with Dan Ervin when he mentions that Sarah Brown, a representative from Bledsoe Financial Services, is visiting East Coast Yachts today. You decide that you should meet
Assume Stocks A and B have the following characteristics:The co-variance between the returns on the two stocks is .01.a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B.
There are two stocks in the market: Stock A and Stock B. The price of Stock A today is $67. The price of Stock A next year will be $40 if the economy is in a recession, $76 if the economy is normal,
Suppose you observe the following situation:a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A€™s beta is greater than Stock
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? SECURITY EXPECTED
Consider the following information on Stocks I and II:The market risk premium is 7.5 percent, and the risk-free rate is 3 percent. Which stock has the most systematic risk? Which one has the most
What are the portfolio weights for a portfolio that has 125 shares of Stock A that sell for $38 per share and 175 shares of Stock B that sell for $26 per share?
Consider the following quotation from a leading investment manager: “The shares of Mid- South Electric have traded close to $12 for most of the past three years. Since Mid-South’s stock has
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 STANDARD SERIES RETURN DEVIATION
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
Samuelson, Inc., has just purchased a $685,000 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
Suppose the risk-free rate is 2.1 percent and the market portfolio has an expected return of 10.6 percent. The market portfolio has a variance of .0432. Portfolio Z has a correlation coefficient
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 12 percent. The risk-free rate is 2.7 percent, and the expected
The market portfolio has an expected return of 11 percent and a standard deviation of 19 percent. The risk-free rate is 3.2 percent.a. What is the expected return on a well-diversified portfolio
You have been provided the following data on the securities of three firms, the market portfolio, and the risk-free asset:a. Fill in the missing values in the table.b. Is the stock of Firm A
Suppose the expected returns and standard deviations of Stocks A andB are E (RA) = .10, E (RB) = .14, σA = .36, and σB = .61 respectively.a. Calculate the expected return and standard deviation of
Security F has an expected return of 10 percent and a standard deviation of 44 percent per year. Security G has an expected return of 15 percent and a standard deviation of 65 percent per year.a.
Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the co-variance and correlation between the returns of the two
Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the
You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 11.7 percent. If Stock X has an expected return of 10.8
You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: ASSET INVESTMENT BETA $215,000 Stock
Consider the following information on three stocks:a. If your portfolio is invested 25 percent each in A and B and 50 percent in C, what is the portfolio expected return? The variance? The standard
A stock has a beta of 1.17 and an expected return of 12 percent. A risk-free asset currently earns 2.3 percent.a. What is the expected return on a portfolio that is equally invested in the two
Stock Y has a beta of 1.20 and an expected return of 14.1 percent. Stock Z has a beta of .78 and an expected return of 9.5 percent. If the risk-free rate is 4.3 percent and the market risk premium
Asset W has an expected return of 10.9 percent and a beta of 1.20. If the risk-free rate is 2.4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
A stock has an expected return of 11.5 percent, a beta of 1.09, and the expected return on the market is 10.8 percent. What must the risk-free rate be?
A stock has an expected return of 11.8 percent, its beta is 1.13, and the risk-free rate is 3.1 percent. What must the expected return on the market be?
A stock has an expected return of 11.3 percent, the risk-free rate is 2.8 percent, and the market risk premium is 6.9 percent. What must the beta of this stock be?
A stock has a beta of .93, the expected return on the market is 10.9 percent, and the risk-free rate is 2.7 percent. What must the expected return on this stock be?
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.17 and the total portfolio is equally as risky as the market, what must the beta be for
You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .74, 1.27, 1.09, and 1.38,
Consider the following information:a. Your portfolio is invested 35 percent each in A and C, and 30 percent in B. What is the expected return of the portfolio?b. What is the variance of this
A portfolio is invested 25 percent in Stock G, 60 percent in Stock J, and 15 percent in Stock K. The expected returns on these stocks are 8.6 percent, 10.8 percent, and 13.4 percent, respectively.
Based on the following information, calculate the expected return and standard deviation of the following stock. STATE OF PROBABILITY OF STATE OF ECONOMY RATE OF RETURN IF STATE OCCURS ECONOMY
Based on the following information, calculate the expected return and standard deviation for the two stocks. RATE OF RETURN IF STATE OCCURS STOCK A STATE OF ECONOMY PROBABILITY OF STATE OF ECONOMY
Based on the following information, calculate the expected return. RATE OF RETURN IF STATE OCCURS -.09 .15 .34 STATE OF ECONOMY PROBABILITY OF STATE OF ECONOMY Recession Normal Boom .35 .50 .15
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.4 percent and Stock Y with an expected return of 10.2 percent. If your goal is to create a
You own a portfolio that is 20 percent invested in Stock X, 35 percent invested in Stock Y, and 45 percent invested in Stock Z. The expected returns on these three stocks are 9.2 percent, 11.8
You own a portfolio that has $3,850 invested in Stock A and $6,100 invested in Stock B. If the expected returns on these stocks are 7.2 percent and 13.1 percent, respectively, what is the expected
You recently graduated from college, and your job search led you to East Coast Yachts. Since you felt the company€™s business was seaworthy, you accepted a job offer. The first day on the
Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than −4
You bought one of Mastadon Manufacturing Co.’s 5.9 percent coupon bonds one year ago for $1,015. These bonds make annual payments, mature eight years from now, and have a par value of $1,000.
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 $53.18 $.95 57.85 64.89 1.15 59.21 1.40 67.83 1.65
A stock has had returns of −23 percent, 37 percent, 19 percent, −4 percent, 21 percent, and 11 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 15 percent, 9 percent, −18 percent, and 11 percent for four of the last five years. If the average return of the stock over this period was 10.35
Over a 30-year period an asset had an arithmetic return of 11.2 percent and a geometric return of 9.7 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5
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?Table 10.2 AVERAGE STANDARD SERIES
You bought a stock three months ago for $53.26 per share. The stock paid no dividends. The current share price is $58.97. What is the APR of your investment? The EAR?
You bought a share of 3.9 percent preferred stock for $92.65 last year. The market price for your stock is now $96.20. What is your total return for last year?
You purchased a zero coupon bond one year ago for $385.27. The market interest rate is now 4.8 percent. If the bond had 20 years to maturity when you originally purchased it, what was your total
A stock has had returns of −16.43 percent, 15.81 percent, 26.34 percent, 5.98 percent, and 18.43 percent over the past five years, respectively. What was the holding period return for the stock?
Rework problems 1 and 2 assuming the ending share price is $72.Required Data Suppose a stock had an initial price of $84 per share, paid a dividend of $1.65 per share during the year, and had
You’ve observed the following returns on Yasmin Corporation’s stock over the past five years: 19 percent, −13 percent, 7 percent, 25 percent, and 16 percent.a. What was the arithmetic average
Using the following returns, calculate the average returns, the variances, and the standard deviations for X and Y. RETURNS YEAR х 23% 34% 2 12 3 14 17 4 -16 -23 19 17
What was the arithmetic average annual return on large-company stocks from 1926 through 2015:a. In nominal terms?b. In real terms?
Suppose you bought a bond with a coupon rate of 5.6 percent one year ago for $985. The bond sells for $1,015 today. The bond pays annual coupons.a. Assuming a $1,000 face value, what was your total
Suppose a stock had an initial price of $84 per share, paid a dividend of $1.65 per share during the year, and had an ending share price of $93. Compute the total percentage return?
Given that Chesapeake Energy was down by 76 percent for 2015, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Given that Nymox Pharmaceutical was up by 720 percent for 2015, why didn’t all investors hold Nymox?
Bunyan Lumber, LLC, harvests timber and delivers logs to timber mills for sale. The company was founded 70 years ago by Pete Bunyan. The current CEO is Paula Bunyan, the granddaughter of the founder.
The Cornchopper Company is considering the purchase of a new harvester. Cornchopper has hired you to determine the break-even purchase price in terms of present value of the harvester. This
First Person Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $4.8 million. The company expects a total annual operating cash flow
Consider the following project for Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of
Consider a project to supply Detroit with 32,000 tons of machine screws annually for automobile production. You will need an initial $2,350,000 investment in threading equipment to get the project
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 units per year at $147,000 net cash
Trask Products, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $8.1 million for the next 10 years. The required return for this project is 14
Young screenwriter Carl Draper has just finished his first script. It has action, drama, humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town and
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 you think it is likely that expected sales will be revised upward to 17,000 units if the first year is a success and revised downward to 3,400 units if the first year
We are examining a new project. We expect to sell 11,000 units per year at $63 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $63 ×
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $725 per set and have a variable cost of $315 per set. The company has spent $150,000 for a marketing study that
You are considering a new product launch. The project will cost $790,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 200 units per
Consider a four-year project with the following information: initial fixed asset investment = $496,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $27;

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