Questions and Answers of Corporate Finance Principles And Practice

Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company’s unlevered equity is 13.1 percent and the pretax cost of the firm’s debt is 6.4 percent. Sales revenue
Calculator Graphics, Inc. (CGI), has a target payout ratio of .30. Last year’s earnings per share were $10, and in accordance with the target, CGI paid dividends of $3 per share last year. However,
Bruin Industries just issued $365,000 of perpetual 6 percent debt and used the proceeds to repurchase stock. The company expects to generate $151,000 of earnings before interest and taxes in
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .40, but the industry target debt-equity ratio is
On Tuesday, December 8, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Tuesday, January 16, to shareholders of record as of Tuesday, January 2. When is
Last month, Central Virginia Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was “temporarily suspending
Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It
The company with the common equity accounts shown here has declared a stock dividend of 15 percent when the market value of its stock is $64 per share. What effects on the equity accounts will the
You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $3.45 per share in one year. In two years, the company will pay a liquidating dividend of $62 per share. The
In the previous problem, suppose you want only $1,500 total in dividends the first year. What will your homemade dividend be in two years?Data from previous problemYou own 1,000 shares of stock in
The Sharpe Co. just paid a dividend of $2.30 per share of stock.Its target payout ratio is 40 percent. The company expects to have earnings per share of $6.95 one year from now.a. If the adjustment
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies.Gecko pays no dividend, whereas Gordon has an expected dividend yield
Why is underpricing not a great concern with bond offerings?
In 1980, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approximately one month and then sold them. The investment rule he
The Chen Company has 70,000 shares of stock that each sells for $55. Suppose the company issues 9,000 shares of new stock at the following prices: $55, $30, and $20. What is the effect of each of the
A company’s stock currently sells for $93 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit $20 and three rights.a. What is the
Cheung Corp.’s stock is currently selling at $43 per share. There are 1.3 million shares outstanding. The firm is planning to raise $2.9 million to finance a new project.What are the ex-rights
Kaleidescope Entertainment is considering buying a machine that costs $625,000. The machine will be depreciated over five years by the straight-line method and will be worthless after five years. The
Montclair Manufacturing is considering leasing some equipment. The annual lease payment would be $420,000 per year for six years. The appropriate interest rate is 6 percent and the company is in the
Wolfson Corporation has decided to purchase a new machine that costs $2.1 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax
An asset costs $825,000 and will be depreciated in a straightline manner over its three-year life. It will have no salvage value. The corporate tax rate is 22 percent and the appropriate interest
Automobiles are often leased, and several terms are unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $49,500. This is the base
Return to the case of the diagnostic scanner discussed in Problems 1 through 6. Suppose the entire $4.3 million purchase price of the scanner is borrowed. The rate on the loan is 8 percent and the
High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model
Suppose Mr. Optimist holds a one-year call option on TIX common stock.It is a European call option and can be exercised at $150. Assume that the expiration date has arrived. What is the value of the
Ms. Pessimist believes that BMI will fall from its current $160 per-share price. She buys a put. Her put option contract gives her the right to sell a share of BMI stock at $150 one year from now. If
Suppose shares of stock in Smolira Corp. are selling for $110. A call option on Smolira with one year to maturity and a $110 strike price sells for $15. A put with the same terms sells for $5.
Consider Private Equipment Company (PEC). On April 19, the PEC April 49 call option had a closing value of $4. The stock itself was selling at $50. On April 19, the option had 199 days to expiration
Exoff Oil Corporation is considering the purchase of an oil field in a remote part of Alaska. The seller has listed the property for $10,000 and is eager to sell immediately. Initial drilling costs
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.35 million. Over the past five years, the price of land in the area has increased 7 percent per
Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend-paying common stock, with a strike price of $55 and one year until expiration. Currently, the
Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,940 per ounce, the
Stock options are not always restricted to the highest-ranking executives. Starbucks, the coffee chain, has pushed options down to the lowest-level employees. To quote its founder, Howard Schultz,
Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $350,000, his 3-year contract states that his compensation will
Utility companies often face a decision to build new plants that burn coal, oil, or both. If the prices of both coal and oil are highly volatile, how valuable is the decision to build a plant that
Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now, the company will know whether
There is a European put option on a stock that expires in two months. The stock price is $76 and the standard deviation of the stock returns is 60 percent. The option has a strike price of $80 and
In the previous problem, assume that the exercise style on the option is American rather than European. What is the price of the option now?
The stock price of RW Company is $20. Suppose this company can issue subordinated debentures at 10 percent. It also can issue convertible bonds at 6 percent with a conversion value of $800. The
Muscles Fitness Center, Inc., issued convertible bonds with a conversion price of $70. The bonds are available for immediate conversion. The current price of the company’s common stock is $67 per
You own a callable, convertible bond with a conversion ratio of 23.17 and a par value of $1,000. The stock is currently selling for $54 per share. The issuer of the bond has announced a call at a
General Modems has five-year warrants that currently trade in the open market. Each warrant gives its owner the right to purchase one share of common stock for an exercise price of $65.a. Suppose the
Vital Silence Corp. has just issued a 30-year callable, convertible bond with a coupon rate of 5 percent and annual coupon payments. The bond has a conversion price of $78. The company’s stock is
Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 800,000 shares of stock. The company currently has 4.8 million shares of stock and convertible bonds with a face value
Through Fire, Inc., an all-equity firm, has 12 shares of stock outstanding.Yesterday, the firm’s assets consisted of 13 ounces of platinum, currently worth $1,030 per ounce. Today, the company
The capital structure of Ricketti Enterprises, Inc., consists of 25 million shares of common stock and 1.7 million warrants. Each warrant gives its owner the right to purchase one share of common
You have been hired to value a new 25-year callable, convertible bond. The bond has a 4.9 percent coupon rate, payable annually. The conversion price is $135 and the stock currently sells for $36.47.
Tracy Wang owns a mortgage banking company. On March 1, she made a commitment to lend a total of $1 million to various homeowners on May 1. The loans are 20-year mortgages carrying a 12 percent
Margaret Boswell is another mortgage banker. Her firm faces problems similar to those facing Tracy’s firm. However, she tackles the problems through the use of advance commitments, a strategy that
The Physical Bank of New York has the following market value balance sheet:The bank has $1,000 million of assets and $900 million of liabilities. Its equity is the difference between the two: $100
Refer to Table 25.2 in the text to answer this question. Suppose today is December 4, 2020, and your firm produces breakfast cereal and needs 180,000 bushels of corn in March 2021 for an upcoming
What is the duration of a bond with three years to maturity and a coupon of 5.3 percent paid annually if the bond sells at par?
ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit rating in the debt
Ted and Alice Hansel have a son who will begin college 12 years from today. School expenses of $55,000 will need to be paid at the beginning of each of the four years that their son plans to attend
You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000 and the 1-year and 11-year spot interest rates are 6 percent
Suppose you have $5,000 on deposit. One day, you write a check for $1,000 to pay for books and you deposit $2,000. What are your disbursement, collection, and net floats?After you write the $1,000
Instead of eliminating the float, suppose Lambo can reduce it to one day. What is the maximum Lambo should be willing to pay for this? If Lambo can reduce the float from three days to one day, then
In our example concerning the Atlantic Corporation’s proposed lockbox system, suppose Pacific Bank wants a $20,000 fixed fee (paid annually) in addition to the 25 cents per check. Is the system
Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. Therefore, it is considering using a lockbox system offered by
A mail-order firm processes 5,800 checks per day. Of these, 60 percent are for $49 and 40 percent are for $84. The $49 checks are delayed two days on average; the $84 checks are delayed three days on
Suppose a company is considering a switch from all cash to net 30, but the quantity sold is not expected to change. What is the NPV of the switch? Explain.In this case, Q′ − Q is zero, so the NPV
Thiewes Shoes begins each period with 100 pairs of hiking boots in stock. This stock is depleted each period and reordered. If the carrying cost per pair of boots per year is $3, what are the total
Suppose on April 2, 2021, Torrance, Inc., had 28 million shares outstanding and the company’s stock price closed the day before at $49.25 per share on the New York Stock Exchange. Further suppose
Suppose Firm A acquires Firm B, creating a new firm, Firm AB. Firm A’s and Firm B’s financial positions at the date of the acquisition are shown in Table 29.7.The book value of Firm B on the date
Suppose that 15 years ago Bill Evans started the Samurai Machinery (SM) Corp., which purchased plant and equipment costing $80,000. These have been the only assets of SM and the company has no debts.
U.S. Composite Corporation is attempting to increase its line of credit with First National State Bank. The director of credit management of First National State Bank uses the Z-score model to
The B.O. Drug Company is to be liquidated. Its liquidating value is $2.7 million. Bonds worth $1.5 million are secured by a mortgage on the B.O. Drug Company corporate headquarters building, which is
Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting
Suppose B.O. Drug Co. decides to reorganize under Chapter 11. Generally, senior claims are honored in full before various other claims receive anything. Assume that the going concern value of B.O.
Suppose the exchange rates for the British pound and Swiss franc are:The cross-rate is three francs per pound. Is this consistent? Explain how to go about making some money. The cross-rate should be
Suppose you have $1,000. Based on the rates in Figure 31.1, how many Japanese yen can you get? Alternatively, if a Porsche costs €100,000 (recall that € is the symbol for the euro), how many
Suppose the Japanese exchange rate is currently 105 yen per dollar. The inflation rate in Japan over the next three years will run, say, 2 percent per year, whereas the U.S. inflation rate will be 6
Suppose the exchange rate for Japanese yen, S0, is currently ¥120 = $1. If the interest rate in the United States is R US = 10 percent and the interest rate in Japan is R J = 5 percent, then what
Suppose your company imports computer motherboards from Singapore.The exchange rate is given in Figure 31.1. You have just placed an order for 30,000 motherboards at a cost to you of 146.50 Singapore
Suppose the spot exchange rate for the Hungarian forint is HUF 308.27. The inflation rate in the United States is 2.6 percent per year and is 4.5 percent in Hungary. What do you predict the exchange
Here is a quick check of your understanding of sources and uses: If accounts payable go up by $100, does this indicate a source or a use? What if accounts receivable go up by $100?Accounts payable
You have collected the following information for the Slowpay Company:Credit sales for the year just ended were $50,000 and cost of goods sold was $30,000. How long does it take Slowpay to collect on
Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change.a. Receivables average
All of Fun Toys’ cash inflows come from the sale of toys. Cash budgeting for Fun Toys starts with a sales forecast for the next year by quarter:Fun Toys’ fiscal year starts on July 1. Fun Toys’
The Bandon Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses
The Midland Company refines and trades gold. At the end of the year, it sold 2,500 ounces of gold for $1 million. The company had acquired the gold for $900,000 at the beginning of the year. The
The Midland Company is attempting to choose between two new products. Both products will provide additional cash flows over a four-year period and will initially cost $10,000. The cash flows from the
The Midland Company is considering expanding operations overseas. It is evaluating Europe and Japan as possible sites. Europe is considered to be relatively safe, whereas operating in Japan is seen
Critics have charged that compensation to top managers in the United States is too high and should be cut back. For example, focusing on large corporations, Larry Culp of General Electric was one of
The Cooney Corporation has fixed assets with a book value of $700 and an appraised market value of about $1,000. Net working capital is $400 on the books, but approximately $600 would be realized if
In July 2020, Kraft Heinz announced that it was writing off $2.9 billion due to the loss in value of several of its well-known brands, including Oscar Meyer and Maxwell House. We would argue that
Consider the following 2022 data for Atlantic Company, Inc., and Pacific Depot, Inc. (in billions except for price per share):1. Determine the profit margin, ROE, market capitalization, enterprise
Suppose a firm were to pay off some of its suppliers and short-term creditors.What would happen to the current ratio? Suppose a firm buys some inventory. What happens in this case? What happens if a
Suppose Hoffman grows at exactly the sustainable growth rate of 21.34 percent. What will the pro forma statements look like?At a 21.34 percent growth rate, sales will rise from $500 to $606.7. The
The most recent financial statements for Anderson Co. are shown here:Assets and costs are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent
Here is a variation on the receivables collection period. How long, on average, does it take for Prufrock Corporation to pay its bills? To answer, we need to calculate the accounts payable turnover
Suppose you find that a particular company generates $.40 in annual sales for every dollar in total assets. How often does this company turn over its total assets?The total asset turnover here is .40
The Sandar Co. has a debt-equity ratio of .5, a profit margin of 3 percent, a dividend payout ratio of 40 percent, and a capital intensity ratio of 1.What is its sustainable growth rate? If Sandar
The most recent financial statements for Hu, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales; debt and equity are not. No dividends are paid. Next year’s
Dahlia 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 16 percent to $320 million. Current assets, fixed
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
The Iron River Company has an ROE of 11.05 percent and a payout ratio of 25 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its
Diane Badame, a financial analyst at Kaufman & Broad, a leading real estate firm, is thinking about recommending that Kaufman & Broad invest in a piece of land that costs $85,000.She is
Professional Artworks, Inc., is a firm that speculates in modern paintings. The manager is thinking of buying an original Picasso for $400,000 with the intention of selling it at the end of one year.
Suh-Pyng Ku has put $500 in a savings account at the First National Bank of Kent. The account earns 7 percent, compounded annually. How much will she have at the end of three years? The answer

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