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essentials corporate finance
Corporate Finance 12th edition Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan - Solutions
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 have no debt outstanding. a. What will the earnings per share, EPS, of Firm A be after the
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 aftertax cash flow by $445,000 indefinitely. The current market value of Flash-in-the-Pan is $7.8
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 contemplating acquiring Selfridge. Harrods’s CFO concludes that the combined firm with synergy will be
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 accept? Assets Claims Mortgage bonds $27,000 Senior debentures 12,100 Junior debentures 8,500 Going
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 financial statements: The stock price of FMM is $31 per share and there are 7,800 shares
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 Z-score for this company? Total assets $78,000 EBIT 8,600 Net working capital Book value of equity
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 college. What is the duration of this liability to the couple if they can borrow and lend at the
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 percentage changes in ROE for economic expansion and recession, assuming no taxes. b. Repeat
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 at 1.963 percent. Why would Booz Allen Hamilton use a swap agreement? In other words, why didn’t
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 $36.45. The stock price is expected to grow at 12 percent per year. The bond is callable at $1,150; but
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 stock for an exercise price of $27. The current stock price is $32 and each warrant is worth $7.
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 issued Ms. Wu a warrant for its fair value of $890. The warrant gives Ms. Wu the right to buy a single
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 warrant?
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 shares of common stock anytime before maturity. The stock price is $32.15 and the market value of
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 share. The current market price of the convertible bonds is $975. The convertible bonds’ straight
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 your options here? What should you do?
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 the stock is currently trading for $62 per share. What is the lower limit on the price of the
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 share. The owner of the bond will be forced to convert if the bond’s conversion value is ever
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 of $40 million outstanding. The convertible bonds have a conversion price of $36 and the stock is
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 $1,317, $1,313, $1,306, and $1,312, respectively. Compute the cash flows at the end of each trading
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 settles at $2.03, $1.98, $2.02, and $2.07, respectively. Compute the cash flows at the end of each
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., manufactures filters for swimming pools. The company is deciding whether to implement a new
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 share, EPS, under each of the three economic scenarios before any debt is issued. Also calculate the
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 stock return? b. Suppose unexpected bad news about the firm was announced that causes the stock
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 the new technology is accepted in the market. If the demand for the new filters is high, the present
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 only facility in the area that suits the firm’s operations. The current price of steel is $3,700
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 market price of crude oil is $60 per barrel and the land is believed to contain 495,000 barrels of
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 year. This building would cost $65 million to construct. Due to low demand for office space in the
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 gallon and has a standard deviation of 58 percent. If the risk-free rate is 6 percent per year, what is
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 include 25,000 at-the-money European call options on the company’s stock that expire in three
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 is currently trading at $45 per share. The stock pays no dividends. The options will expire in five
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, but if the project is a failure, the firm will be worth only $120 million. The current value of the
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 assets is 50 percent per year. The risk-free rate is 6 percent per year, compounded continuously. a.
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 return on assets is 60 percent per year. a. Assume the risk-free rate is 5 percent per year,
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 options should have the same time to expiration. Suppose Marie wishes to purchase a collar on Riggs,
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 firm would go bankrupt. The current price of gold is $1,280 per ounce. The firm’s chief financial
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 selling for $57 per share and Rob expects that the stock price will either rise to $67 or fall to $48
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 company’s stock sells for $62 per share. Ken knows that, in one year, the company’s stock will
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 of the return on the firm’s assets is 39 percent per year. The risk-free rate is 6 percent per
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 deviation of the return on the firm’s assets is 53 percent per year and the annual risk-free rate is 5
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 standard deviation of the return on the firm’s assets will increase to 55 percent per year. If
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 the return on the firm’s assets is 38 percent per year and the annual risk-free rate is 5 percent
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 call if the standard deviation of the stock is 0 percent per year?
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 expiration. If the risk-free rate is 8 percent, what is the risk-neutral value of the call option?
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 year, with an annual standard deviation of 30 percent. A buyer has recently approached you and wants
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 continuously, what is the current stock price?
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. What is the price of a call option with the same exercise price?
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, compounded continuously, what is the price of a put option with the same exercise price?
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 current price of the stock is $66. What is the value of the call option if the exercise price is $40 per
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 price of the stock is $68. What is the value of the call option if the exercise price is $60 per
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 RWJ Corp. call option? b. Are the put 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 worldwide. Because of recent events, Mal Clissold, the company president, is concerned about the
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 year. a. What is the value of a call option with a $70 exercise price? What is the intrinsic
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 base capitalized cost. Other costs that may be added to the capitalized cost price include 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 percent. The corporate tax rate is 21 percent for both companies. a. How does the fact that the
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 rate is 24 percent. The Sur Bank has offered Wolfson a 4-year loan for $2.4 million. The repayment
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 is 7 percent. a. What set of lease payments will make the lessee and the lessor equally well
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 lease. If the lease payment is still $2.05 million, is it advantageous for Wildcat to lease 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 stay competitive; it will provide $2.7 million in annual pretax cost savings. The system costs $9.4
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 planes?
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 Company is trying to decide whether to lease or buy a new computer assisted drilling system for its 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 stay competitive; it will provide $2.7 million in annual pretax cost savings. The system costs $9.4
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 rate is zero. Quartz plans to lease equipment from New Leasing Company. The term of the lease is
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 can lease the machine with year-end payments of $140,000. The company can issue bonds at an interest
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 would be depreciated straight-line to zero over four years. Because of radiation contamination, it
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 would be depreciated straight-line to zero over four years. Because of radiation contamination, it
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 would be depreciated straight-line to zero over four years. Because of radiation contamination, it
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 would be depreciated straight-line to zero over four years. Because of radiation contamination, it
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 for the production of the microphone for the keyboard. Because of the required sensitivity of the
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 would be depreciated straight-line to zero over four years. Because of radiation contamination, it
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 rights offer would raise a total of $45 million. What is the subscription price?
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 stock price, the value of a right, and the appropriate subscription prices under the following
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 the ex-rights stock price? b. What is the price of one right? c. When will the price drop
Cheer, Inc., wishes to expand its facilities. The company currently has 6.8 million shares outstanding and no debt. The stock sells for $65 per share, but the book value per share is $20. Net income for Teardrop is currently $11.5 million. The new facility will cost $30 million and will increase
The Heath Company has 60,000 shares of stock that each sells for $45. Suppose the company issues 9,000 shares of new stock at the following prices: $45, $25, and $15. What is the effect of each of the alternative offering prices on the existing price per share?
Crawford, Inc., has 155,000 shares of stock outstanding. Each share is worth $77, so the company’s market value of equity is $11,935,000. Suppose the firm issues 30,000 new shares at the following prices: $77, $70, and $65. What will the effect be of each of these alternative offering prices on
Bellevue Co. has just gone public. Under a firm commitment agreement, the company received $36.27 for each of the 7.5 million shares sold. The initial offering price was $39 per share and the stock rose to $43.82 per share in the first few minutes of trading. The company paid $2.25 million in
In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $1.9 millon, how many shares need to be sold? Data From Previous Problem The Scandrick Corporation needs to raise $65 million to finance its expansion into new markets. The company
The Scandrick Corporation needs to raise $65 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $35 per share and the company’s underwriters charge a spread of 7 percent, how
The Speith Co. and the Reed Co. have both announced IPOs at $30 per share. One of these is undervalued by $13 and the other is overvalued by $4, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed and only
Jekyll Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $73 to $68.95 ($73 is the
The Clifford Corporation has announced a rights offer to raise $26 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $5,000 per page. The stock currently sells for $34 per share and there
Hyde, Inc., is proposing a rights offering. Presently, there are 585,000 shares outstanding at $87 each. There will be 95,000 new shares offered at $78 each. a. What is the new market value of the company? b. How many rights are associated with one of the new shares? c. What is the
After completing its capital spending for the year, Carlson Manufacturing has $1,000 of extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 7 percent or paying the cash out to investors who would invest in the bonds themselves. a. If the
National Business Machine Co. (NBM) has $4.9 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years.
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 of 3.9 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 35
The Sharpe Co. just paid a dividend of $1.80 per share of stock. Its target payout ratio is 40 percent. The company expects to have earnings per share of $5.41 one year from now. a. If the adjustment rate is .3 as defined in the Lintner model, what is the dividend one year from now? b. If
Optimized Co. has a current period cash flow of $1.1 million and pays no dividends. The present value of the company’s future cash flows is $16.5 million. The company is entirely financed with equity and has 525,000 shares outstanding. Assume the dividend tax rate is zero. a. What is the
The net income of Zippy Corporation is $135,000. The company has 30,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1.985 million. The appropriate discount rate for the company is 12 percent and the dividend tax rate is zero. a.
Flychucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $6,675 would be spent. Current earnings are $2.80 per share and the stock currently sells for $67 per share. There are 1,500 shares outstanding. Ignore taxes and other imperfections in answering parts
You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $2.90 per share in one year. In two years, the company will pay a liquidating dividend of $59 per share. The required return on the company’s stock is 14 percent. What is the current share price of your stock
The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. The company currently has 260,000 outstanding shares selling at $107 each. The firm is contemplating the declaration of a $4 dividend at the end of the fiscal year that just began. Assume there are no
In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 55 cent per share cash dividend on the new (postsplit) shares represents an increase of 10 percent over last year’s dividend on the presplit stock. What effect does this have on the equity
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