Questions and Answers of Essentials Corporate Finance

Consider the following information:a. Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio?b. What is the variance of this
Consider the following information:a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B
A portfolio is invested 20 percent in Stock G, 35 percent in Stock J, and 45 percent in Stock K. The expected returns on these stocks are 8.5 percent, 11 percent, and 16.4 percent, respectively. What
Based on the following information, calculate the expected return and standard deviation for the two stocks. Rate of Return if State Occurs Stock B Probability of State of Economy State of Economy
Based on the following information, calculate the expected return. Rate of Return if State Occurs State of Economy Probability of State of Economy .25 Recession Normal -.09 .45 .11 .30 Boom .30
Based on the following information, calculate the expected return. Rate of Return Probability of State State of if State Occurs of Economy Economy Recession .35 -.09 Boom .65 .21
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 13 percent and Stock Y with an expected return of 10 percent. If your goal is to create a
You own a portfolio that is 25 percent invested in Stock X, 40 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 10 percent, 13 percent, and 15 percent,
You own a portfolio that has $1,500 invested in Stock A and $2,600 invested in Stock B. If the expected returns on these stocks are 10 percent and 16 percent, respectively, what is the expected
What are the portfolio weights for a portfolio that has 110 shares of Stock A that sell for $79 per share and 85 shares of Stock B that sell for $62 per share?
1. What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?2. Notice that, for every dollar you invest, S&S Air also invests a dollar.
You bought one of Rocky Mountain Manufacturing Co.’s 8 percent coupon bonds one year ago for $1,045.30. These bonds make annual payments and mature nine years from now. Suppose you decide to sell
A stock has had the following year-end prices and dividends:What are the arithmetic and geometric returns for the stock? Price Year Dividend $64.18 $0.57 71.05 76.85 0.62 4 63.12 0.68 72.81 0.77
A stock has had returns of −18 percent, 28 percent, 12 percent, −9 percent, 34 percent, and 26 percent over the last six years. What are the arithmetic and geometric returns for the stock?
You find a certain stock that had returns of 12 percent, −21 percent, 27 percent, and 18 percent for four of the last five years. If the average return of the stock over this period was 10 percent,
You bought a stock three months ago for $73.82 per share. The stock paid no dividends. The current share price is $76.09. What is the APR of your investment? The EAR?
You bought a share of 5.5 percent preferred stock for $92.18 last year. The market price for your stock is now $94.17. What is your total return for last year?
You purchased a zero-coupon bond one year ago for $275.83. The market interest rate is now 9 percent. If the bond had 15 years to maturity when you originally purchased it, what was your total return
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 2008? Why do you think they were so high during this period? What
You’ve observed the following returns on Staverosky Corporation’s stock over the past five years: −24 percent, 13 percent, 29 percent, 2 percent, and 21 percent.a. What was the arithmetic
Refer to Table 10.1 in the text and look at the period from 1973 through 1978.a. Calculate the arithmetic average returns for large-company stocks and T-bills over this time period.b. Calculate the
What was the arithmetic average annual return on large company stocks from 1926 through 2008:1. In nominal terms?2. In real terms?
Production of the implants will require $1,500,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $730 per set and have a variable cost of $360 per set. The company has spent $150,000 for a marketing study that
You are considering a new product launch. The project will cost $950,000, have a four-year life, and have no salvage value; depreciation is straight line to zero. Sales are projected at 220 units per
Consider a three-year project with the following information: Initial fixed asset investment = $840,000; straight-line depreciation to zero over the five-year life; zero salvage value; price =
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $485,000 is estimated to result in $184,000 in annual pretax cost savings. The
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $120,000 for a marketing survey to determine the viability of the product. It is
Suppose you bought a 7 percent coupon bond one year ago for $893. The bond sells for $918 today.1. Assuming a $1,000 face value, what was your total dollar return on this investment over the past
You purchased 250 shares of a particular stock at the beginning of the year at a price of $75.13. The stock paid a dividend of $0.85 per share, and the stock price at the end of the year was $81.64.
Rework Problem 1 assuming the ending share price is $71.Data From Problem 1Suppose a stock had an initial price of $83 per share, paid a dividend of $1.40 per share during the year, and had an ending
Suppose a stock had an initial price of $83 per share, paid a dividend of $1.40 per share during the year, and had an ending share price of $96. Compute the percentage total return. What was the
Given that Fannie Mae was down by 98 percent for 2008, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Given that Emergent BioSolutions was up by 461 percent for 2008, why didn’t all investors hold Emergent BioSolutions?
1. What is the payback period of the project?2. What is the profitability index of the project?3. What is the IRR of the project?4. What is the NPV of the project?5. How sensitive is the NPV to
Your firm is contemplating the purchase of a new $520,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $40,000 at
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $625,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its
Herrera Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $25,500, and the company expects to sell 1,400 per year. The company
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,750,000 at the end of the project. If
Consider an asset that costs $780,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
A piece of newly purchased industrial equipment costs $960,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
Consider the following income statement:Fill in the missing numbers and then calculate the OCF. What is the depreciation tax shield? Sales $643,800 Costs 345,300 Depreciation 96,000 EBIT Taxes (35%)
A proposed new investment has projected sales of $825,000. Variable costs are 55 percent of sales, and fixed costs are $187,150; depreciation is $91,000. Prepare a pro forma income statement assuming
Winnebagel Corp. currently sells 28,000 motor homes per year at $73,000 each and 7,000 luxury motor coaches per year at $115,000 each. The company wants to introduce a new portable camper to fill out
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7 million in anticipation of using it as a warehouse and distribution
An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as
You are looking at a one-year loan of $10,000. The interest rate is quoted as 10 percent plus two points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $15,000 for one year. The interest rate is 16
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $20,000 every year instead of equal annual payments.Data From Problem 55Prepare an amortization schedule for a
Prepare an amortization schedule for a three-year loan of $60,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
If today is Year 0, what is the future value of the following cash flows five years from now? What is the future value 10 years from now? Assume an interest rate of 7.8 percent per year. Year Cash
A local finance company quotes a 17 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $3,400. Because you must repay a total of $23,400 in one
Given an interest rate of 6.35 percent per year, what is the value at year t = 7 of a perpetual stream of $3,100 payments that begin at year t = 20? Year Cash Flow $1,900 2,300 4,500 5,100 1 3 4
You have your choice of two investment accounts. Investment A is a 10-year annuity that features end-of-month $1,680 payments and has an interest rate of 8 percent compounded monthly. Investment B is
A 10-year annuity pays $2,500 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded
What is the present value of $1,625 per year, at a discount rate of 7 percent, if the first payment is received 6 years from now and the last payment is received 20 years from now? Year Cash Flow
A 5-year annuity of 10 $7,800 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 9 percent compounded semiannually, what is
Mary is going to receive a 30-year annuity of $8,500. Nancy is going to receive a perpetuity of $8,500. If the appropriate interest rate is 8 percent, how much more is Nancy’s cash flow worth? Year
Suppose you are going to receive $12,000 per year for five years. The appropriate interest rate is 9 percent.a. What is the present value of the payments if they are in the form of an ordinary
You have arranged for a loan on your new car that will require the first payment today. The loan is for $34,000, and the monthly payments are $645. If the loan will be paid off over the next 60
You are planning your retirement in 10 years. You currently have $160,000 in a bond account and $600,000 in a stock account. You plan to add $8,000 per year at the end of each of the next 10 years to
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $3,200,000 purchase price. The monthly payment on this loan will
A project has the following cash flows:What is the IRR for this project? If the required return is 6 percent, should the firm accept the project? What is the NPV of this project? What is the NPV of
Inc., has the following two mutually exclusive projects available.What is the crossover rate for these two projects? What is the NPV of each project at the crossover rate? Project R Year Project S
Lifeline Corp. is evaluating a project with the following cash flows:The company uses a 10 percent interest rate on all of its projects. Calculate the MIRR of the project using all three methods.
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent.a. Calculate
An investment has an installed cost of $561,382. The cash flows over the four-year life of the investment are projected to be $190,584, $234,318, $182,674, and $150,313. If the discount rate is
J. Marcel Enterprises has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Cash Flow Year
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:a. If the company requires a 10 percent return on its investments, should it accept this project?
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Framing Hanley, LLC, has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company
What is the IRR of the following set of cash flows? Cash Flow Year -$32,000 13,200 2 18,500 3 10,600
A project that provides annual cash flows of $2,150 for nine years costs $8,900 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate
A firm evaluates all of its projects by applying the IRR rule. If the required return is 13 percent, should the firm accept the following project? Year Cash Flow -$145,000 71,000 68,000 3 52,000
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $17 million, which will be depreciated straight-line
What is the payback period for the following set of cash flows? Cash Flow Year -$4,500 1 1,300 2,400 3 1,100 4 800
In a previous chapter, we discussed the yield to maturity (YTM) of a bond. In what ways are the IRR and the YTM similar? How are they different?
Using the dividend yield, calculate the closing price for Tootsie Roll on this day. The actual closing 2009 price for Tootsie Roll was $21.02. Why is your closing price different? The Value Line
According to the 2009 Value Line Investment Survey, the growth rate in dividends for IBM for the next five years is expected to be 19.5 percent. Suppose IBM meets this growth rate in dividends for
Gontier Corporation stock currently sells for $64.13 per share. The market requires an 11 percent return on the firm’s stock. If the company maintains a constant 5.5 percent growth rate in
Antiques 'R' Us is a mature manufacturing firm. The company just paid a $10.50 dividend, but management expects to reduce the payout by 4.5 percent per year, indefinitely. If you require a 10 percent
Apocalyptica Corporation is expected to pay the following dividends over the next four years: $5, $16, $21, and $2.80. Afterwards, the company pledges to maintain a constant 5 percent growth rate in
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
Alexander Corp. will pay a dividend of $2.60 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a 15 percent rate of return, how
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a
The stock price of Jenkins Co. is $53. Investors require a 12 percent rate of return on similar stocks. If the company plans to pay a dividend of $3.15 next year, what growth rate is expected for the
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only
Gesto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $79.85 per share, what is the required return?
Bowman Corp. pays a constant $13 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this
Suppose you know that a company’s stock currently sells for $65 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided
Bruer, Inc., is expected to maintain a constant 5.8 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the
Ziggs Corporation will pay a $3.85 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a 12 percent return on your
The next dividend payment by Mosby, Inc., will be $2.45 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share,
Patience, Inc., just paid a dividend of $2.35 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent
Is it possible for a company to pay dividends when it has a negative net income for the year? Could this happen for longer periods?
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 an 8 percent coupon. Bond D is a 4 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6 percent, and have five years to

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