Questions and Answers of Essentials Corporate Finance

The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow
In the previous two questions, how would it affect your thinking to know that insiders still owned 56 percent of the company’s Class A stock and all of the company’s Class B stock?
In the previous question, how would it affect your thinking to know that the company was incorporated in 2004,had only $118 million in revenues in 2014, with net income of only $2.1 million?
The Shake Shack IPO was underpriced by about 119 percent. Should Shake Shack be upset at JP Morgan and Morgan Stanley over the underpricing?
Why is underpricing not a great concern with bond offerings? Use the following information to answer the next three questions. In January 2015, hamburger joint Shake Shack went public. Assisted by
Rob wishes to buy a European put option on BioLabs, Inc., a nondividend- paying common stock, with a strike price of $75 and six months until expiration. The company’s common stock is currently
Refer to the observed capital structures given in Table 15.3 of the text. What do you notice about the types of industries with respect to their average debt–equity ratios? Are certain types of
In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? If a firm issues equity to repurchase some of its debt, the
You have been at your job with East Coast Yachts for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your discussion with Sarah Brown, the Bledsoe
You want to calculate the WACC for auto parts retailer AutoZone (AZO). Complete the following steps to construct a spreadsheet that can be updated.a. Using an input for the ticker symbol, create
Based on the following information, calculate the expected return and standard deviation for the two stocks. RATE OF RETURN IF STATE OCCURS PROBABILITY OF STATE OF ECONOMY STATE OF ECONOMY STOCK A
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?
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 2015? Why do you think they were so high during this period? What
Dahlia Simmons, CFO of Ulrich Enterprises, is analyzing a new project to sell solar-powered batteries for cell phones. Dahlia has estimated the following probability distributions for the variables
In the previous problem, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if
After extensive research and development, Goodweek Tires, Inc., has recently developed a new tire, the SuperTread, and must decide whether to make the investment necessary to produce and market it.
In practice, the use of the dividend discount model is refined from the method we presented in the textbook. Many analysts will estimate the dividend for the next five years and then estimate 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 and the current date is April 15, 2016. What is
This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this:
Find the EAR in each of the following cases: APR NUMBER OF TIMES COMPOUNDED EAR 9.8% Quarterly 12.4 Monthly 7.6 Daily 8.4 Infinite
Solve for the unknown number of years in each of the following: PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE $ 625 6% $ 1,284 810 9 4,341 18,400 7 234,162 21,500 10 215,000
Solve for the unknown interest rate in each of the following: PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE $ 217 3 293 432 10 1,053 41,000 16 162,181 54,382 19 483,500
For each of the following, compute the present value: PRESENT VALUE YEARS INTEREST RATE FUTURE VALUE 7% $ 15,451 13 51,557 16 14 886,073 24 11 550,164
Compute the future value of $3,550 compounded annually for:a. 10 years at 6 percent.b. 10 years at 8 percent.c. 20 years at 6 percent.d. Why is the interest earned in part (c) not twice the amount
Using Excel to find the marginal tax rate can be accomplished with the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax
Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352 million for
What impact did the announcement have on BlueSky’s suppliers?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
Heidi Pedersen, the treasurer for Wood Products, Inc., has been asked by Justin Wood, the president, to prepare a memo detailing the company’s ending cash balance for the next three months. Below,
For this Master It! assignment, refer to the Goodweek Tires, Inc., case at the end of this chapter. For your convenience, we have entered the relevant values such as the price and variable costs in
What were the highest and lowest historical interest rates for commercial paper? Go to www.stlouisfed.org, find the “FRED® data” link, then the “Interest Rates” link. What were the highest
Chevron sells commercial paper to interested institutional investors. Go to the Chevron Web site at www.chevron.com to find information on Chevron’s commercial paper. What is the credit rating for
Find the two most recent balance sheets for 3M at the “Investor Relations” link on the Web site www.mmm.com. For each account in the balance sheet, show the change during the most recent year and
Using the information you gathered in the previous problem, calculate the operating cycle for each company. What are the similarities or differences? Is this what you would expect from companies in
Go to www.reuters.com. You will need to find the most recent annual income statement and the two most recent balance sheets for McKesson (MCK) and Newmont Mining (NEM). MCK is involved in
What was the largest IPO? Go to www.hoovers.com and find out. In what country was the company located? What was the largest IPO in the United States?
Go to www.hoovers.com and find the most recent secondary stock offering. At what price was the stock offered for sale to the public? How does this offer price compare to the market price of the stock
Go to www.hoovers.com and find the most recent IPO. Now go to the SEC Web site at www.sec.gov and look up the company’s filings with the SEC. What is the name of the filing the company made to sell
How many times has Procter & Gamble stock split? Go to P&G’s Web page at www.pg.com and find the history of the company’s stock splits. When did Procter & Gamble stock first split?
Go to www.earnings.com and find the stock splits. How many stock splits are listed? How many are reverse splits? What is the largest split and the largest reverse split in terms of shares? Pick a
Go to www.earnings.com and find the list of dividends. How many companies went “ex” today? What is the largest declared dividend? For the stocks going “ex” today, what is the longest time
Dividend reinvestment plans (DRIPs) permit shareholders to automatically reinvest cash dividends in the company. To find out more about DRIPs, go to www.fool.com and answer the following questions
Go to finance.yahoo.com and find the stock screener. Use the Java stock screener to answer the following questions. How many companies have debt-toequity ratios greater than 2? Greater than 5?
Go to www.nasdbondinfo.com and look up the outstanding bonds for Nike. Record the most recent price and YTM of each bond issue. Now go to www.sec.gov and find the most recent 10Q or 10K report filed
Go to finance.yahoo.com and look up the information for Allegheny Technologies (ATI), a metal manufacturing company in the S&P 500. You want to estimate the cost of equity for the company.
Go to the St. Louis Federal Reserve Web site at www.stlouisfed.org and find the ?FRED?? link and the ?Interest Rates? link. You will find a list of links for different historical interest rates.
Using the online calculator from the previous problem, find the IRR for a project with cash flows of −$500, $1,200, and −$400. What is going on here?Data From Web 1You have a project that has an
The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site www.stlouisfed.org. Find your way to the “FRED” data, then “Interest Rates.” You will find
You can find current bond prices at www.finra.org. You want to find the bond prices and yields for bonds issued by Georgia Pacific. Enter the ticker symbol “GP” to do a search. What is the
The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site www.stlouisfed.org. Find the link for “FRED®” (Federal Reserve Economic Data). You will find a
Finding the time necessary until you pay off a loan is simple if you make equal payments each month. However, when paying off credit cards many individuals only make the minimum monthly payment,
Taxes can greatly affect the future value of your investment. The Financial Calculators Web site at www.fincalc.com has a financial calculator that adjusts your return for taxes. Go to this page and
Use the Return Rate calculator at www.moneychimp.com to solve the following problem. You still want to buy the Lamborghini Murcielago, but you have $60,000 to invest and want to buy the car in 15
Go to www.moneychimp.com and find the “Compound Interest” calculator. You want to buy a Lamborghini Murciélago. Assume the price of the car is $330,000 and you have $35,000. If you can earn an
Go to www.dinkytown.net and find the “Cool Million” calculator. You want to be a millionaire. You can earn 11.5 percent per year. Using your current age, at what age will you become a millionaire
Go to www.dinkytown.net and find the “Savings Calculator” calculator. If you currently have $10,000 and invest this money at 9 percent, how much will you have in 30 years? Assume you will not
Start with the partial model in the file Ch16 P18 Build a Model.xlsx on the textbook?s Web site. Rusty Spears, CEO of Rusty?s Renovations, a custom building and repair company, is preparing
Web site, which contains Henley Corporation?s most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the questions
Web site, which contains the 2019 financial statements of Zieber Corporation. Forecast Zieber’s 2020 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 6%. (2)
Website. Webmasters.com has developed a powerful new server that would be used for corporations’ Internet activities. It would cost $10 million at Year 0 to buy the equipment necessary to
The stock of Gao Computing sells for $50, and last year’s dividend was $3.13. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. A flotation cost of 10%
The following data apply to Jacobus and Associates (millions of dollars):Cash ................................... $ 400Fixed assets ................... $ 4,300Sales ..............................
Argent Corporation has $60 million in current liabilities, $150 million in total liabilities, and $210 million in total common equity; Argent has no preferred stock. Argent’s total debt is $120
Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbook?s Web site. a. Using the financial statements shown here for Lan & Chen Technologies, calculate net operating
Begin with the partial model in the file Ch02 P20 Build a Model.xlsx on the textbook?s Web site. a. Britton String Corp. manufactures specialty strings for musical instruments and tennis racquets.
Last year Cole Furnaces had $4 million in operating income (EBIT). The company had a net depreciation expense of $1 million and an interest expense of $1 million; its combined federal and state
A mail-order firm processes 5,850 checks per month. Of these, 70 percent are for $50 and 30 percent are for $75. The $50 checks are delayed two days on average; the $75 checks are delayed three days
Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following: The total collection time will be reduced by three days if the
It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. The company’s management is considering a lockbox system to reduce the firm’s collection
No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $2.7 million in collections a day and requires a $425,000 compensating balance. No More Books is contemplating
The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 4 days past due. If annual credit sales are $9.25 million, what is the company’s balance sheet amount in
Fogle Manufacturing uses 2,590 switch assemblies per week and then reorders another 2,590. If the relevant carrying cost per switch assembly is $5.75 and the fixed order cost is $740, is the
In Problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same. Data From Problem 15Patton Corp. currently has an all-cash credit
Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90- day forward market. a. Is the dollar selling at a premium or a discount relative to
Suppose the spot exchange rate for the Canadian dollar is Can$1.27 and the six-month forward rate is Can$1.31. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming
Suppose the Japanese yen exchange rate is ¥107 = $1 and the British pound exchange rate is £1 = $1.43. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is
Use Figure 31.1 to answer the following questions. Suppose interest rate parity holds, and the current sixmonth risk-free rate in the United States is 2.3 percent. What must the six-month risk-free
The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .19 percent per month. The interest rate in Great Britain is .57
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
Suppose the current exchange rate for the Polish zloty is Z 3.39. The expected exchange rate in three years is Z 3.57. What is the difference in the annual inflation rates for the United States and
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 7.87 and Kr 7.97, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate
You observe that the inflation rate in the United States is 1.93 percent per year and that T-bills currently yield 2.45 percent annually. What do you estimate the inflation rate to be in: a.
Suppose the spot and three-month forward rates for the yen are ¥107.83 and ¥107.43, respectively. a. Is the yen expected to get stronger or weaker? b. What would you estimate is the
Suppose the spot exchange rate for the Hungarian forint is HUF 258. The inflation rate in the United States is 2.8 percent per year and is 3.7 percent in Hungary. What do you predict the exchange
Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of €3.6 million in Year 1, €4.1 million in Year 2, and €5.1
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25.5 million. The cash flows from the project would be SF 7.1 million
Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 51,000 solaris, debt in the amount of 16,000 solaris, and equity of 35,000
Blitz Corp. has a book value of equity of $17,010. Long-term debt is $8,400. Net working capital, other than cash, is $2,150. Fixed assets are $22,430 and current liabilities are $2,260. How much
The Gruber Company has projected the following quarterly sales amounts for the coming year: a. Accounts receivable at the beginning of the year are $215. The company has a 45-day collection
Consider the following financial statement information for the Hop Corporation: Calculate the operating and cash cycles. How do you interpret your answer? Item Inventory Accounts receivable
Rossdale Products has projected the following sales for the coming year: Sales in the year following this one are projected to be 15 percent greater in each quarter. a. Calculate payments
The Glasgow 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 are
The following is the sales budget for Shleifer, Inc., for the first quarter of 2019: Credit sales are collected as follows: 65 percent in the month of the sale. 20 percent in the month
Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2019: The company predicts that 5 percent of its credit sales will never be collected, 35 percent of
The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent, with the firstquarter sales projection at $165 million. In addition to this basic trend, the
Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here. a. How are the current assets of each firm financed? b. Which
In a typical month, the Musica Corporation receives 140 checks totaling $89,500. These are delayed four days on average. What is the average daily float?
Each business day, on average, a company writes checks totaling $13,200 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
Purple Feet Wine, Inc., receives an average of $14,700 in checks per day. The delay in clearing is typically three days. The current interest rate is .018 percent per day. a. What is the
Your neighbor goes to the post office once a month and picks up two checks, one for $9,200 and one for $2,400. The larger check takes four days to clear after it is deposited; the smaller one takes

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