Questions and Answers of Essentials Corporate Finance

Your firm has an average receipt size of $127. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 4,950 checks per
No More Pencils, Inc., disburses checks every two weeks that average $52,800 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank
You place an order for 380 units of inventory at a unit price of $130. The supplier offers terms of 1/10, net 30. a. How long do you have to pay before the account is overdue? If you take the
Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 1/15, net 30. Based on experience, 75 percent of all customers will take the discount. a. What is the
Marshall, Inc., has weekly credit sales of $33,100 and the average collection period is 27 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable
A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to
Dawkins, Inc., has an average collection period of 33 days. Its average daily investment in receivables is $64,900. What are annual credit sales? What is the receivables turnover?
Essence of Skunk Fragrances, Ltd., sells 5,750 units of its perfume collection each year at a price per unit of $445. All sales are on credit with terms of 1/10, net 40. The discount is taken by 35
Royal, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if the company should proceed or not.
The Trektronics store begins each week with 675 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $67.75 per year and the fixed order cost is $310,
The Tradition Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if the company should proceed or not.
Patton Corp. currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you
In Problem 14, what is the break-even quantity for the new credit policy? Data From Problem 14The Tradition Corporation is considering a change in its cash-only policy. The new terms would be
In Problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 2,750 units and all other values remain
Holmes, Inc., has offered $215 million cash for all of the common stock in Watson Corporation. Based on recent market information, Watson is worth $193 million as an independent operation. If the
Consider the following premerger information about Firm X and Firm Y: Assume that Firm X acquires Firm Y by issuing long-term debt to purchase all the shares outstanding at a merger premium of
Assume that the following balance sheets are stated at book value. Suppose that Jurion Co. purchases James, Inc. Then suppose the fair market value of James?s fixed assets is $24,500 versus the
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 for accounting purposes. The market
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow by $1.15 million
Consider the following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $13 for each share of B’s stock. Both A and B
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual
Harrods PLC has a market value of £310 million and 11 million shares outstanding. Selfridge Department Store has a market value of £121 million and 6 million shares outstanding. Harrods is
When the Master Printing Company filed for bankruptcy, it filed under Chapter 11 of the U.S. bankruptcy code. Key information is shown here: As a trustee, what reorganization plan would you
Fair-to-Midland Manufacturing, Inc. (FMM), has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s
Jon Fulkerson also has received a credit application from Seether, LLC, a private company. An abbreviated portion of the financial information provided by the company is shown below: What is the
Ted and Alice Hansel have a son who will begin college 10 years from today. School expenses of $45,000 will need to be paid at the beginning of each of the four years that their son plans to attend
Suppose the company in Problem 1 has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also calculate the
What is the duration of a bond with two years to maturity if the bond has a coupon rate of 4.2 percent paid semiannually and the market interest rate is 4.9 percent?
In April 2017, consulting firm Booz Allen Hamilton announced it had signed an interest rate swap. The interest rate swap effectively converted $150 million of variable rate debt at LIBOR for payments
You have been hired to value a new 20- year callable, convertible bond. The bond has a 4.9 percent coupon rate, payable annually. The conversion price is $125 and the stock currently sells for
The capital structure of Ricketti Enterprises, Inc., consists of 27 million shares of common stock and 1.8 million warrants. Each warrant gives its owner the right to purchase one share of common
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 $890 per ounce. Today, the company
A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $58 per share. The current market price of the stock is $63. What is the minimum value of the
Denise Home Products, Inc., recently issued $2 million worth of 3 percent convertible debentures. Each convertible bond has a face value of $1,000. Each convertible bond can be converted into 21.5
Eckely, Inc., recently issued bonds with a conversion ratio of 13.8. If the stock price at the time of the bond issue was $49.12, what was the conversion premium?
A convertible bond with a par value of $1,000 has a conversion price of $42.18. What is the conversion ratio of the bond?
A convertible bond with a par value of $1,000 has a conversion ratio of 16.4. What is the conversion price?
Muscles Fitness Center, Inc., issued convertible bonds with a conversion price of $75. 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. The stock is currently selling for $54 per share. The issuer of the bond has announced a call at a call price of 110. What are
General Modems has 5-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
Vital Silence Corp. has just issued a 30-year callable, convertible bond with an annual coupon rate of 5 percent. The bond has a conversion price of $89. The company’s stock is selling for $26 per
Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 750,000 shares of stock. The company currently has 4.8 million shares of stock and convertible bonds with a face value
You are long 10 gold futures contracts, established at an initial settle price of $1,310 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at
You are short 25 gasoline futures contracts, established at an initial settle price of $2.01 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline
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? Data From Previous ProblemWet for the Summer, Inc.,
Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent. Assume the stock price is constant under all scenarios. Data From Problem 1a. Calculate earnings per
What is the difference between internal financing and external financing?
Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: a. What is the systematic risk of the
What is the historical real return on long-term government bonds? On long-term corporate bonds?
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
Sardano and Sons is a large, publicly held company that is considering leasing a warehouse. One of the company’s divisions specializes in manufacturing steel, and this particular warehouse is the
Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current
J&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next
Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $1.95 per gallon. Gasoline is currently selling on the wholesale market at $1.76 per
Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $425,000, his 3-year contract states that his compensation will
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 35,000 at-the-money European call options on the company’s stock, which
Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $198 million,
Handler Corp. has a zero coupon bond that matures in five years with a face value of $40,000. The current value of the company’s assets is $38,000 and the standard deviation of its return on
Murtaugh Industries has a zero coupon bond issue that matures in two years with a face value of $90,000. The current value of the company’s assets is $59,000 and the standard deviation of the
An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two
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 $1,380 per ounce, the
Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend-paying common stock, with a strike price of $60 and six months until expiration. The company’s common stock is currently
Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a nondividend-paying common stock, with a strike price of $60 and one year until expiration. Currently, the
A company has a single zero coupon bond outstanding that matures in 10 years with a face value of $8 million. The current value of the company’s assets is $7.1 million and the standard deviation
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $15,000 that matures in one year. The current market value of the firm’s assets is $16,900. The standard
Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,200 and Project B has an NPV of $1,600. As a result of taking Project A, the
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm’s assets is $11,200. The standard deviation of
A call option has an exercise price of $70 and matures in six months. The current stock price is $73, and the riskfree rate is 5 percent per year, compounded continuously. What is the price of the
A stock is currently priced at $77. The stock will either increase or decrease by 16 percent over the next year. There is a call option on the stock with a strike price of $75 and one year until
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.1 million. Over the past five years, the price of land in the area has increased 11 percent per
A put option and a call option with an exercise price of $105 and three months to expiration sell for $4.89 and $5.32, respectively. If the risk-free rate is 4.8 percent per year, compounded
A put option that expires in six months with an exercise price of $65 sells for $5.12. The stock is currently priced at $66 and the risk-free rate is 3.6 percent per year, compounded continuously.
A stock is currently selling for $52 per share. A call option with an exercise price of $50 sells for $3.40 and expires in three months. If the risk-free rate of interest is 2.6 percent per year,
The price of Profile, Inc., stock will be either $55 or $75 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the
The price of Ervin Corp. stock will be either $63 or $77 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent. a. Suppose the current
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83. a. Are the call options in the money? What is the intrinsic value of an
You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production, and distribution of lighting equipment and specialty products
T-bills currently yield 3.4 percent. Stock in Danotos Manufacturing is currently selling for $74 per share. There is no possibility that the stock will be worth less than $71 per share in one
Automobiles are often leased, and there are several terms unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $38,000. This is the
An asset costs $640,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee can borrow at 9
Wolfson Corporation has decided to purchase a new machine that costs $2.4 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax
An asset costs $780,000 and will be depreciated in a straight-line manner over its 3-year life. It will have no salvage value. The corporate tax rate is 22 percent and the appropriate interest rate
Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $1.5 million security deposit at the inception of the
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to
What do you suppose happens to the plane at the end of the lease period?
Why would Cargo Aircraft Management be willing to buy planes from Boeing and then lease the planes to Northern Air Cargo? How is this different from lending money to Northern Air Cargo to buy the
Suppose it is estimated that the equipment will have an aftertax residual value of $700,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat now?The Wildcat Oil
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to
Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carryforwards, so Quartz’s effective tax
Witten Entertainment is considering buying a machine that costs $545,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5.2 million and
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5.2 million and
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5.2 million and
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5.2 million and
Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5.2 million and
Barrett Mfg. is considering a rights offer. The company has determined that the ex-rights price will be $53. The current price is $58 per share and there are 9.2 million shares outstanding. The
Valley 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
A company’s stock currently sells for $87 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

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