Questions and Answers of Corporate Finance Principles And Practice

You bought one of Cobalt Co.’s 4.9 percent coupon bonds one year ago for $1,008.50. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today when
A stock has had returns of 6 percent, 29 percent, 13 percent, −3 percent, 22 percent, and −17 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 18 percent, −23 percent, 16 percent, and 9 percent for four of the last five years. If the average return of the stock over this period was 10.5
A stock has had returns of 12.79, 9.21, 14.68, 21.83, and −10.34 percent over the past five years, respectively. What was the holding period return for the stock?
In Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent.a. What was the average real return on the company’s
Suppose you bought a bond with a 6 percent coupon rate one year ago for $1,010. The bond sells for $1,025 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment
Full Boat Manufacturing has projected sales of $95 million next year. Costs are expected to be $52 million and net investment is expected to be $9 million. Each of these values is expected to grow at
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company
Pagemaster Enterprises, the company examined in Example 9.4, has 1,000,000 shares of stock outstanding. The stock is selling at $10. What is the required return on the stock?The payout ratio is the
Pagemaster Enterprises just reported earnings of $2 million. The firm plans to retain 40 percent of its earnings in all years going forward. We also could say that 60 percent of earnings will be paid
Elixir Drug Company is expected to enjoy rapid growth from the introduction of its new back-rub ointment. The dividend for a share of Elixir’s stock a year from today is expected to be $1.15.
Suppose an investor is considering the purchase of a share of the Utah Mining Company. The stock will pay a $3 dividend a year from today. This dividend is expected to grow at 10 percent per year (g
Hampshire Products will pay a dividend of $4 per share a year from now. Financial analysts believe that dividends will rise at 6 percent per year for the foreseeable future. What is the dividend per
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 720. Paul plans to raise the annual fee by 5 percent every
The YTM on a bond is the interest rate you earn on your investment 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 rate of 9 percent. Bond D has a coupon rate of 5 percent and is currently selling at a discount. Both bonds make annual payments, have a par value of $1,000, a
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, it makes semiannual coupon payments, and the
You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 5.3 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in
If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate?First of all, the nominal rate is
Locate the Treasury bond in Figure 8.5 maturing in July 2026. What is its coupon rate? What is its bid price? What was the previous day’s asked price?The bond’s coupon rate is 1.875, or 1.875
Both a default-free, two-year government bond and a two-year corporate bond pay a 7 percent coupon. However, the government bond sells at par (or $l,000) and the corporate bond sells at $982.16. What
Suppose taxable bonds are currently yielding 8 percent, while at the same time, munis of comparable risk and maturity are yielding 6 percent. Which is more attractive to an investor in a 35 percent
Imagine that a long-term municipal bond selling at par is yielding 4.21 percent while a long-term Treasury bond selling at par yields 6.07 percent.2 Further suppose an investor is in the 24 percent
Suppose the Eight-Inch Nails (EIN) Company issues a $1,000 face value, five-year zero coupon bond. The initial price is set at $508.35. What is the yield to maturity using semiannual compounding?The
You’re looking at two bonds identical in every way except for their coupons and, of course, their prices. Both have 12 years to maturity. The first bond has a 10 percent coupon rate and sells for
A bond has a quoted price of $1,080.42. It has a face value of $1,000, a semiannual coupon of $30, and a maturity of five years. What is its current yield? What is its yield to maturity? Which is
In practice, bonds issued in the United States usually make coupon payments twice a year. So, if an ordinary bond has a coupon rate of 14 percent, the owner will receive a total of $140 per year, but
M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $8.9 million. The company expects a total annual operating cash flow of
Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 20 units per year at $195,000 net
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $6.9 million for the next 10 years. The discount rate for this project is 13 percent.
The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success.For $175,000 the manager can conduct a focus
Ang Electronics, Inc., has developed a new mesh network. If successful, the present value of the payoff (when the product is brought to market) is $29 million. If the mesh network fails, the present
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. What is the new NPV?Data From Previous Problem:You have been hired as a consultant for Pristine
What is the value today of a 15-year annuity that pays $950 a year? The annuity’s first payment occurs 6 years from today. The discount rate is 7 percent for Years 1 through 5 and 10 percent
Use the sustainable growth rate equations from the previous problem to answer the following questions. Simone, Inc., had total assets of $430,000 and equity of $260,000 at the beginning of the year.
Based on the results in Problem 27, show that the internal and sustainable growth rates can be calculated as shown in Equations 3.25 and 3.26.Problem 27EFN We define the following variables
Algernon, a small proprietorship owned by an unmarried individual, has a taxable income of $80,000. What is its tax bill? Its average tax rate? Its marginal tax rate?From Table 2.3, we see that the
In a previous example, Mark Young received $50,000 a year for 20 years from the state lottery. In that example, he was to receive the first payment in one year. Let us now assume that the first
Stuart Gabriel, a second-year MBA student, has been offered a job at $80,000 a year. He anticipates his salary will increase by 9 percent a year until his retirement in 40 years. Given a discount
Suppose a stock begins the year with a price of $25 per share and ends with a price of $35 per share. During the year, it paid a $2 dividend per share. What are its dividend yield, capital gains
Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing
Suppose the returns on common stock over a four-year period are .1370, .3580, .4514, and −.0888, respectively. The average, or mean, return over these four years is: R 1370 + .3580 +
Suppose the returns on common stocks are (in decimals) .1370, .3580, .4514, and −.0888, respectively. As we calculated in Example 10.2, the average return is .2144. The variance of this sample is
Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2020? Why do you think they were so high during this period? What
Calculate the geometric average return for S&P 500 large-cap stocks for a five-year period using the numbers given here.First, convert percentages to decimal returns, add 1, and then calculate
The Sharpe ratio is the average equity risk premium over a period of time divided by the standard deviation. From 1926 to 2020 the average risk premium (relative to Treasury bills)for large-company
Take a look back at Figure 10.4. There we showed the value of a $1 investment after 95 years. Use the value for the large-company stock investment to check the geometric average in Table 10.3.Table
Stock in JRJ Corporation sells for $20 per share and features cumulative voting. There are 10,000 shares outstanding. If three directors are up for election, how much does it cost to ensure yourself
World-Wide Enterprises (WWE) is a large conglomerate thinking of entering the widget business, where it plans to finance projects with a debt-value ratio of 25 percent (or a debt-equity ratio of
Bicksler Enterprises is considering a $10 million project that will last five years, with straight-line depreciation of $2 million per year. The cash revenues less cash expenses per year are $3.5
C. F. Lee, Inc., is considering a scale-enhancing project. The market value of the firm’s debt is $100 million and the market value of the firm’s equity is $200 million. The debt is considered
In September 2020, Australia’s Regional Express Ltd. announced that it had leased six Boeing 737-800 aircraft to fly the Sydney-Melbourne route.What do you suppose happens to the plane at the end
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The
Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 12.2 percent. Information about those factors is presented in the following
Suppose the stock of the Quatram Company, a publisher of college textbooks, has a beta of 1.3. The firm is 100 percent equity financed. Quatram is considering a number of capital budgeting projects
Suppose Alpha Air Freight is an all-equity firm with a beta of 1.21. The market risk premium is 9.5 percent and the risk-free rate is 5 percent. We can determine the expected return on the common
Consider a tree-growing company, Rapid Cedars, Inc., that is currently all equity and has a beta of .8. The firm has decided to move to a capital structure of one part debt to two parts equity.
The Weinstein Corporation has a target capital structure of 80 percent equity and 20 percent debt. The flotation costs for equity issues are 20 percent of the amount raised; the flotation costs for
Shinedown Company needs to raise $95 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 company
Ginger Industries stock has a beta of 1.08. The company just paid a dividend of $.85, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.3 percent, and
Happy Times, Inc., wants to expand its party stores into the Southeast.In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s
A call provision permits a company to repurchase or call an entire bond issue at some price during a predetermined period. Common sense tells us that a call provision has positive value to the
Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong
Suppose the market value of the J. J. Sprint Company is $1,000. The company currently has no debt and each of J. J. Sprint’s 100 shares of stock sells for $10. A company such as J. J. Sprint with
Propositions I and II Luteran Motors, an all-equity firm, has expected earnings of $10 million per year in perpetuity. The firm pays all of its earnings out as dividends, so the $10 million also may
In the previous question, suppose the corporate tax rate is 22 percent. What is EBIT in this case? What is the WACC? Explain.Data From previous QuestionMM Sugar Skull Corp. uses no debt. The weighted
In September 2020, Australia’s Regional Express Ltd. announced that it had leased six Boeing 737-800 aircraft to fly the Sydney-Melbourne route.Why wouldn’t Regional Express Ltd. purchase the
In September 2020, Australia’s Regional Express Ltd. announced that it had leased six Boeing 737-800 aircraft to fly the Sydney-Melbourne route.Why would the lessors be willing to buy planes from
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
The Water Products Company has a corporate tax rate, TC, of 21 percent and expected earnings before interest and taxes (EBIT) of $1 million each year. Its entire earnings after taxes are paid out as
Divided Airlines is currently an unlevered firm. The company expects to generate $126.6 in earnings before interest and taxes (EBIT) in perpetuity. The corporate tax rate is 21 percent, implying
Navarro Corp. has no debt but can borrow at 5.9 percent. The firm’s WACC is currently 9.20 percent and the tax rate is 21 percent.a. What is the company’s cost of equity?b. If the company
Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $16 million before interest per year in perpetuity, with each company
Tool Manufacturing has an expected EBIT of $57,000 in perpetuity and a tax rate of 21 percent. The firm has $134,000 in outstanding debt at an interest rate of 5.35 percent and its unlevered cost of
Tempest Corporation expects an EBIT of $37,700 every year forever. The company currently has no debt and its cost of equity is 11 percent. The tax rate is 22 percent.a. What is the current value of
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 16,000 shares of stock outstanding, currently worth $35
Joylin, Inc., has equity with a market value of $15.4 million and debt with a market value of $5.9 million. Treasury bills that mature in one year yield 4 percent per year and the expected return on
In Problem 2, suppose instead that you assume the company has a market-to-book ratio of 1.0 before recapitalization and the stock price changes according to MM. How would this affect your answer?Data
The Knight Corporation plans to be in business for one more year. It forecasts a cash flow of either $100 or $50 in the coming year, each occurring with 50 percent probability. The firm has no other
Ms. Pagell is an owner-entrepreneur running a computer services firm worth $1 million. She currently owns 100 percent of the firm. Because of the need to expand, she must raise another $2 million.
Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week,
Edwards Construction currently has debt outstanding with a market value of $87,000 and a cost of 11 percent. The company has EBIT of $9,570 that is expected to continue in perpetuity. Assume there
Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies’ economists agree
Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between
The J. Lowes Corporation, which currently manufactures staples, is considering a $1 million investment in a project in the aircraft adhesives industry. The corporation estimates unlevered aftertax
Pompeii Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 40 percent and makes interest payments of $42,000 at the end of each
If Smolinski, Inc., were an all-equity company, it would have a beta of 1.05. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 11 percent and Treasury
The CFO of Kendrick Enterprises is evaluating a 10-year, 5.8 percent loan with gross proceeds of $5.3 million. The interest payments on the loan will be made annually. Flotation costs are estimated
Williams, Inc., has compiled the following information on its financing costs:The company is in the 21 percent tax bracket and has a target debt-equity ratio of 60 percent. The target short-term
National Electric Company (NEC) is considering a $41 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that
Longhorn, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and the tax rate is 21 percent. The required return on the firm’s levered
Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $145 million. The
First and Goal Corporation’s stock returns have a covariance with the market portfolio of .0487. The standard deviation of the returns on the market portfolio is 20 percent and the expected market
Estefan Industries has a new project available that requires an initial investment of $4.9 million. The project will provide unlevered cash flows of $925,000 per year for the next 20 years. The
Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $20.5 million in perpetuity. The current required return on the firm’s equity is 10.5 percent and the firm

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