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Corporate Finance With Connect Access Card 10th Edition Stephen Ross ,Randolph Westerfield ,Jeffrey Jaffe - Solutions

Sources and Use s Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:COUNTRY KETTLES, INC.Balance Sheet 2011 2012 Assets Cash $ 48,180 $ 45,815 Accounts receivable 100,155
Cash Budgeting The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent with the first-quarter sales projection at$225 million. In addition to this basic trend, the seasonal adjustments for the four quarters are 0, 2$16, 2$8, and $21 million,
Calculating the Cash Budge t Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Q1 Q2 Q3 Q4 Sales $105 $90 $122 $140 Sales for the first quarter of the year after this one are projected at $120 million.Accounts receivable at the beginning of the year were $34
Cash Management Policy Rework Problem 13 assuming the following:a. Wildcat maintains a minimum cash balance of $20 million.b. Wildcat maintains a minimum cash balance of $10 million.Based on your answers in (a) and (b), do you think the firm can boost its profit by changing its cash management
Heidi Pedersen, the treasurer for Wood Products, Inc., has just been asked by Justin Wood, the president, to prepare a memo detailing the company’s ending cash balance for the next three months. Below, you will see the relevant estimates for this period.July August September Credit sales
Use the numbers given to complete the cash budget and short-term financial plan.You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for
Rework the cash budget and short-term financial plan assuming Keafer changes to a minimum cash balance of $90,000.You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard
Rework the sales budget assuming an 11 percent growth rate in sales and a 5 percent growth rate in sales. Assume a $135,000 target cash balance.You have recently been hired by Keafer Manufacturing to work in its established treasury department. Keafer Manufacturing is a small company that produces
Assuming the company maintains its target cash balance at $135,000, what sales growth rate would result in a zero need for short-term financing? To answer this question, you may need to set up a spreadsheet and use the “Solver” function.You have recently been hired by Keafer Manufacturing to
Financial Distress Define financial distress using the stock-based and flow-based approaches.
Financial Distress What are some benefits of financial distress?
Liquidation versus Reorganization What is the difference between liquidation and reorganization?
Bankruptcy Ethics Several firms have entered bankruptcy, or threatened to enter bankruptcy, at least in part as a means of reducing labor costs. Whether this move is ethical, or proper, is hotly debated. Is this an ethical use of bankruptcy?
Bankruptcy versus Private Workouts Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?
Chapter 7 When the Beacon Computer Company filed for bankruptcy under Chapter 7 of the U.S. bankruptcy code, it had the following balance sheet information:Liquidating Value Claims Trade credit $ 4,800 Secured mortgage notes 8,000 Senior debentures 10,000 Junior debentures 15,000 Total assets
Chapter 11 When the Master Printing Company filed for bankruptcy, it filed under Chapter 11 of the U.S. bankruptcy code. Key information is shown here:Assets Claims Mortgage bonds $19,000 Senior debentures 9,500 Junior debentures 7,500 Going concern value $27,000 Book equity −9,000 As a trustee,
Exchange Rate Risk If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is there any value in hedging your currency exposure?
Using the Cross-Rate Use the information in Figure 31.1 to answer the following questions:a. Which would you rather have, $100 or £100? Why?b. Which would you rather have, 100 Swiss francs (SF) or £100? Why?c. What is the cross-rate for Swiss francs in terms of British pounds? For British pounds
Forward Exchange Rates Use the information in Figure 31.1 to answer the following questions:a. What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a premium or a discount? Explain.b. What is the three-month forward rate for British pounds in U.S.
Cross-Rates and Arbitrage Suppose the Japanese yen exchange rate is ¥85 5 $1, and the British pound exchange rate is £ 1 5 $1.53.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥131.4 5 £ 1.Is there an arbitrage opportunity here? If there is, explain how to take
Interest Rates and Arbitrage 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 .21 percent per month. The interest rate in Great Britain is .57 percent per month. The spot exchange rate is £ .64, and the three-month
Exchange Rate Risk 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 141.30 Singapore dollars each. You will pay for the shipment when it arrives in 90 days. You can
Exchange Rates and Arbitrage Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.61 and Kr 5.72, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate in Norway is 5 percent.a. Is there an arbitrage opportunity here? If so,
Expected Spot Rates Suppose the spot exchange rate for the Hungarian forint is HUF 206.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 rate will be in one year?In two years? In five years? What relationship are you
Capital Budgeting 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 million in Year 3.The current spot exchange rate is $1.09/€ and the current
Capital Budgeting You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25 million. The cash flows from the project would be SF 6.9 million per year for the next five years. The dollar required return is 12 percent per year,
Translation Exposure In the previous problem, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet look like?
What will happen to the company’s profits if the dollar strengthens? What if the dollar weakens?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants to add East
Ignoring taxes, what are East Coast Yacht’s projected gains or losses from this proposed arrangement at the current exchange rate of $1.34/€? What will happen to profits if the exchange rate changes to $1.25/€? At what exchange rate will the company break even?Larissa Warren, the owner of
How can the company hedge its exchange rate risk? What are the implications for this approach?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants to add East Coast
Taking all factors into account, should the company pursue international sales further?Why or why not?Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company’s yachts in Europe. Jarek Jachowicz, the dealer, wants to add East
Bond Features What are the main features of a corporate bond that would be listed in the indenture?
Preferred Stock and Debt What are the differences between preferred stock and debt?
Preferred Stock Preferred stock doesn’t offer a corporate tax shield on the dividends paid. Why do we still observe some firms issuing preferred stock?
Preferred Stock and Bond Yields The yields on nonconvertible preferred stock are lower than the yields on corporate bonds. Why is there a difference? Which investors are the primary holders of preferred stock? Why?
Corporate Financing What are the main differences between corporate debt and equity? Why do some firms try to issue equity in the guise of debt?
Proxy What is a proxy?
Preferred Stock Do you think preferred stock is more like debt or equity? Why?
Long-Term Financing As was mentioned in the chapter, new equity issues are generally only a small portion of all new issues. At the same time, companies continue to issue new debt. Why do companies tend to issue little new equity but continue to issue new debt?
Internal versus External Financing What is the difference between internal financing and external financing?
Internal versus External Financing What factors influence a firm’s choice of external versus internal equity financing?
Classes of Stock Several publicly traded companies have issued more than one class of stock. Why might a company issue more than one class of stock?
Callable Bonds Do you agree or disagree with the following statement: In an efficient market, callable and noncallable bonds will be priced in such a way that there will be no advantage or disadvantage to the call provision. Why?
Bond Prices If interest rates fall, will the price of noncallable bonds move up higher than that of callable bonds? Why or why not?
Sinking Funds Sinking funds have both positive and negative characteristics for bondholders. Why?
Corporate Voting The shareholders of the Stackhouse Company need to elect seven new directors. There are 850,000 shares outstanding currently trading at$43 per share. You would like to serve on the board of directors; unfortunately no one else will be voting for you. How much will it cost you to be
Cumulative Voting An election is being held to fill three seats on the board of directors of a firm in which you hold stock. The company has 7,600 shares outstanding. If the election is conducted under cumulative voting and you own 300 shares, how many more shares must you buy to be assured of
Cumulative Voting The shareholders of Motive Power Corp. need to elect three new directors to the board. There are 13,000,000 shares of common stock outstanding, and the current share price is $10.50. If the company uses cumulative voting procedures, how much will it cost to guarantee yourself one
Corporate Voting Candle box Inc. is going to elect six board members next month.Betty Brown owns 17.4 percent of the total shares outstanding. How confident can she be of having one of her candidate friends elected under the cumulative voting rule? Will her friend be elected for certain if the
Valuing Callable Bonds KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 8 percent and 30 years to maturity. The current market interest rates on these bonds are 7 percent. In one year, the interest rate on the bonds will be either 10 percent or 6 percent with equal probability.
Valuing Callable Bonds New Business Ventures, Inc., has an outstanding perpetual bond with a 10 percent coupon rate that can be called in one year. The bond makes annual coupon payments. The call premium is set at $150 over par value. There is a 60 percent chance that the interest rate in one year
Valuing Callable Bonds Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at $1,175. One-year interest rates are 9 percent. There is a 60 percent probability that long-term interest rates one year from today will be 10 percent, and a
Valuing Callable Bonds Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 7 percent, payable annually. The one-year interest rate is 7 percent. Next year, there is a 35 percent probability that interest rates will increase to 9 percent, and there is a
Bond Refunding An outstanding issue of Public Express Airlines debentures has a call provision attached. The total principal value of the bonds is $250 million, and the bonds have an annual coupon rate of 9 percent. The company is considering refunding the bond issue. Refunding means that the
Bond Refunding Charles River Associates is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond issue will be made with a lower coupon rate. The proceeds from the new bond issue
Valuing the Call Feature Consider the prices of the following three Treasury issues as of February 24, 2012:6.500 May 16 106.31250 106.37500 −13 5.28 8.250 May 16 103.43750 103.5000 −3 5.24 12.000 May 16 134.78125 134.96875 −15 5.32 The bond in the middle is callable in February 2013. What is
Treasury Bonds The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004:9.125 May 09 100.09375 100.12500 . . . −2.15 Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?
Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable?Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?
Covariance Briefly explain why the covariance of a security with the rest of a welldiversified portfolio is a more appropriate measure of the risk of the security than the security’s variance.
Risk A broker has advised you not to invest in oil industry stocks because they have high standard deviations. Is the broker’s advice sound for a risk-averse investor like yourself? Why or why not?
Security Selection Is the following statement true or false? A risky security cannot have an expected return that is less than the risk-free rate because no risk-averse investor would be willing to hold this asset in equilibrium. Explain.
Determining Portfolio Weights What are the portfolio weights for a portfolio that has 135 shares of Stock A that sell for $47 per share and 105 shares of Stock B that sell for $41 per share?
Portfolio Expected Return You own a portfolio that has $2,100 invested in Stock A and $3,200 invested in Stock B . If the expected returns on these stocks are 11 percent and 14 percent, respectively, what is the expected return on the portfolio?
Portfolio Expected Return 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 11 percent, 17 percent, and 14 percent, respectively. What is the expected return on the portfolio?
Portfolio Expected Return You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 9 percent. If your goal is to create a portfolio with an expected return of 12.9 percent, how much money will you invest
Calculating Returns and Standard Deviations Based on the following information, calculate the expected return and standard deviation for the two stocks:State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession .20 .06 2.20 Normal .55 .07 .13 Boom .25
Calculating Returns and Standard Deviations Based on the following information, calculate the expected return and standard deviation:State of Economy Probability of State of Economy Rate of Return if State Occurs Depression .10 2.105 Recession .25 .059 Normal .45 .130 Boom .20 .211
Calculating Expected Returns A portfolio is invested 10 percent in Stock G , 65 percent in Stock J , and 25 percent in Stock K . The expected returns on these stocks are 9 percent, 11 percent, and 14 percent, respectively. What is the portfolio’s expected return? How do you interpret your answer?
Returns and Standard Deviations Consider the following information:State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .65 .07 .15 .33 Bust .35 .13 .03 −.06a. What is the expected return on an equally weighted portfolio of these three
Returns and Standard Deviation s Consider the following information:State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .20 .24 .45 .33 Good .35 .09 .10 .15 Poor .30 .03 −.10 −.05 Bust .15 −.05 −.25 −.09a. Your portfolio is invested
Calculating Portfolio Betas You own a stock portfolio invested 10 percent in Stock Q , 35 percent in Stock R , 20 percent in Stock S , and 35 percent in Stock T .The betas for these four stocks are .75, 1.90, 1.38, and 1.16, respectively. What is the portfolio beta?
Using CAPM A stock has a beta of 1.15, the expected return on the market is 11 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?
Using CAPM A stock has an expected return of 10.2 percent, the risk-free rate is 4 percent, and the market risk premium is 7 percent. What must the beta of this stock be?
Using CAPM A stock has an expected return of 13.4 percent, its beta is 1.60, and the risk-free rate is 5.5 percent. What must the expected return on the market be?
Using CAPM A stock has an expected return of 13.1 percent, a beta of 1.28, and the expected return on the market is 11 percent. What must the risk-free rate be?
Using CAPM A stock has a beta of 1.13 and an expected return of 12.1 percent.A risk-free asset currently earns 5 percent.a. What is the expected return on a portfolio that is equally invested in the two assets?b. If a portfolio of the two assets has a beta of .50, what are the portfolio weights?c.
Using the SML Asset W has an expected return of 12.3 percent and a beta of 1.3.If the risk-free rate is 4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the relationship between portfolio expected return and portfolio beta by plotting the expected
Reward-to-Risk Ratios Stock Y has a beta of 1.35 and an expected return of 14 percent. Stock Z has a beta of .80 and an expected return of 11.5 percent. If the risk-free rate is 4.5 percent and the market risk premium is 7.3 percent, are these stocks correctly priced?
Reward-to-Risk Ratios In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?
Portfolio Returns and Deviation s Consider the following information about three stocks:State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Stock C Boom .30 .20 .25 .60 Normal .45 .15 .11 .05 Bust .25 .01 −.15 −.50a. If your portfolio is invested 40
Analyzing a Portfoli o You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table:Asset Investment Beta Stock A $180,000 .85 Stock B $290,000 1.40 Stock C 1.45 Risk-free asset
Analyzing a Portfolio You have $100,000 to invest in a portfolio containing Stock X , Stock Y , and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11.22 percent and that has only 96 percent of the risk of the overall market.
Covariance and Correlatio n Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the covariance and correlation between the returns of the two stocks?State of
Covariance and Correlatio n Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks?State of Economy Probability of State of Economy Return on Stock J
Portfolio Standard Deviation Security F has an expected return of 10 percent and a standard deviation of 43 percent per year. Security G has an expected return of 15 percent and a standard deviation of 62 percent per year.a. What is the expected return on a portfolio composed of 30 percent of
Portfolio Standard Deviation Suppose the expected returns and standard deviations of Stocks A and B are E( R A ) 5 .09, E( R B ) 5 .15, s A 5 .36, and s B 5 .62.a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the
Correlation and Bet a You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset:Security Expected Return Standard Deviation Correlation* Beta Firm A .10 .31 (i) .85 Firm B .14 (ii) .50 1.40 Firm C .16 .65 .35 (iii)The market
Beta and CAPM A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent.The risk-free rate is 4 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model
Beta and CAPM Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0382.Portfolio Z has a correlation coefficient with the market of .28 and a variance of.3285. According to the capital asset pricing
Systematic versus Unsystematic Ris k Consider the following information about Stocks I and II:State of Economy Probability of State of Economy Rate of Return if State Occurs Stock I Stock II Recession .15 .11 −.25 Normal .55 .18 .11 Irrational exuberance .30 .08 .31 The market risk premium is 7.5
SML Suppose you observe the following situation:Security Beta Expected Return Pete Corp. 1.35 12.28%Repete Co. .80 8.54 Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?
Covariance and Portfolio Standard Deviatio n There are three securities in the market. The following chart shows their possible payoffs:State Probability of Outcome Return on Security 1 Return on Security 2 Return on Security 3 1 .15 .20 .20 .05 2 .35 .15 .10 .10 3 .35 .10 .15 .15 4 .15 .05 .05
SML Suppose you observe the following situation:State of Economy Probability of State Return if State Occurs Stock A Stock B Bust .15 −.10 −.08 Normal .60 .09 .08 Boom .25 .32 .26a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A ’s
Standard Deviation and Beta There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $75. The price of Stock A next year will be$64 if the economy is in a recession, $87 if the economy is normal, and $97 if the economy is expanding. The probabilities of recession,
Minimum Variance Portfoli o Assume Stocks A and B have the following characteristics:Stock Expected Return (%) Standard Deviation (%)A 9 33 B 15 62 The covariance between the returns on the two stocks is .001.a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B .Find the
Bankruptcy Costs What are the direct and indirect costs of bankruptcy? Briefly explain each.
Stockholder Incentives Do you agree or disagree with the following statement? A firm’s stockholders will never want the firm to invest in projects with negative net present values. Why?www.mhhe.com/rwj 554 Part IV Capital Structure and Dividend Policy Questions and Problems
Firm Value Janetta Corp. has an EBIT rate of $975,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $1.9
Agency Costs 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, the company’s EBIT will be$550,000 per year; if he works a 50-hour week, the
Capital Structure Decisions Due to large losses incurred in the past several years, a firm has $2 billion in tax loss carryforwards. This means that the next $2 billion of the firm’s income will be free from corporate income taxes. Security analysts estimate that it will take many years for the

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