Questions and Answers of Essentials Corporate Finance

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
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
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
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
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
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 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
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
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
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
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
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 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
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
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
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
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
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
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
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
For initial public offerings of common stock, 2017 was a relatively slow year, with only about $21.2 billion raised by the process. Relatively few of the 119 firms involved paid cash dividends. Why
The company with the common equity accounts shown here has declared a stock dividend of 15 percent when the market value of its stock is $74 per share. What effects on the equity accounts will the
The market value balance sheet for Oracle Manufacturing is shown here. The company has declared a stock dividend of 25 percent. The stock goes ex dividend tomorrow (the chronology for a stock
In the previous problem, suppose the company has announced it is going to repurchase $22,800 worth of stock. What effect will this transaction have on the equity of the company? How many shares will
The balance sheet for Fourth Corp. is shown here in market value terms. There are 12,000 shares of stock outstanding.The company has declared a dividend of $1.90 per share. The stock goes ex dividend
Roll Corporation (RC) currently has 385,000 shares of stock outstanding that sell for $108 per share. Assuming no market imperfections or tax effects exist, what will the share price be
The owners’ equity accounts for Octagon International are shown here: a. If the company’s stock currently sells for $39 per share and a 10 percent stock dividend is declared, how many new
Samuel, Inc., has declared a $7.25 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld when the dividend
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .40, but the industry target debt-equity ratio is
Bruin Industries just issued $325,000 of perpetual 7 percent debt and used the proceeds to repurchase stock. The company expects to generate $146,000 of earnings before interest and taxes in
Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company’s unlevered equity is 12.1 percent and the pretax cost of the firm’s debt is 6.3 percent. Sales revenue
Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $23.5 million in perpetuity. The current required return on the firm’s equity is 11 percent and the firm
Fitzgerald Industries has a new project available that requires an initial investment of $4.6 million. The project will provide unlevered cash flows of $835,000 per year for the next 20 years. The
First and Ten Corporation’s stock returns have a covariance with the market portfolio of .0415. The standard deviation of the returns on the market portfolio is 20 percent and the expected market
Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $125 million. The
National Electric Company (NEC) is considering a $53 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that
Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.9 percent and the risk-free rate is 3.5 percent. The company is currently considering a project that will cost
Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 6.3 percent loan with gross proceeds of $4.6 million. The interest payments on the loan will be made annually. Flotation costs are
North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.05 if both were all equity financed. The market value information for each
If Wild Widgets, Inc., were an all-equity company, it would have a beta of .95. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 11 percent and
Pompeii Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 40 percent and makes interest payments of $42,000 at the end of each
What is the main difference between the FTE approach and the other two approaches?
Knotts, Inc., an all-equity firm, is considering an investment of $1.2 million that will be depreciated according to the straight-line method over its 4-year life. The project is expected to generate
Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The
What is the main difference between the WACC and APV methods?
How is the APV of a project calculated?
Cede & Co. expects its EBIT to be $163,000 every year forever. The company can borrow at 8 percent. The company currently has no debt and its cost of equity is 15 percent. If the tax rate is 23
Morrow Corp. has EBIT of $775,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent and the corporate tax rate is 24 percent. The
Sam McKenzie is the founder and CEO of McKenzie Restaurants, Inc., a regional company. Sam is considering opening several new restaurants. Sally Thornton, the company’s CFO, has been put in charge
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,
Charisma, Inc., has debt outstanding with a face value of $4.5 million. The value of the firm if it were entirely financed by equity would be $18.3 million. The company also has 340,000 shares of
Edwards Construction currently has debt outstanding with a market value of $95,000 and a cost of 9 percent. The company has EBIT of $8,550 that is expected to continue in perpetuity. Assume there are
Refer to the observed capital structures given in Table 17.3 of the text. What do you notice about the types of industries with respect to their average debt-equity ratios? Are certain types of
Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between
Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It
Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The
Byrd Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 365,000 shares of stock outstanding.
Kolby Corp. is comparing two different capital structures. Plan I would result in 3,500 shares of stock and $37,440 in debt. Plan II would result in 2,800 shares of stock and $66,560 in debt. The
FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently there are 5,000 shares outstanding
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $540,000 in stock. XYZ uses both stock and perpetual debt; its stock is
Gunnar Corp. uses no debt. The weighted average cost of capital is 8.6 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT?
In the previous question, suppose the corporate tax rate is 23 percent. What is EBIT in this case? What is the WACC? Explain. Data From Previous Question.Gunnar Corp. uses no debt. The weighted
Shadow Corp. has no debt but can borrow at 5.8 percent. The firm’s WACC is currently 9.1 percent and the tax rate is 22 percent. a. What is the company’s cost of equity? b. If the
In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision? Data From Problem 14Cede & Co.
Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $18 million before interest per year in perpetuity, with each company
Tool Manufacturing has an expected EBIT of $63,000 in perpetuity and a tax rate of 21 percent. The firm has $115,000 in outstanding debt at an interest rate of 7 percent and its unlevered cost of
Hunter Corporation expects an EBIT of $31,480 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 21 percent. a. What is the current
The Bellwood Company is financed entirely with equity. The company is considering a loan of $3.1 million. The loan will be repaid in equal installments over the next two years and has an interest
Harris, Inc., has equity with a market value of $18.5 million and debt with a market value of $7.3 million. Treasury bills that mature in one year yield 4 percent per year and the expected return on
The Veblen Company and the Knight Company are identical in every respect except that Veblen is unlevered. The market value of Knight Company’s 6 percent bonds is $1.6 million. Financial information
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm
Taco Salad Manufacturing, Inc., plans to announce that it will issue $1.6 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6
Dickson, Inc., has a debt-equity ratio of 2.3. The firm’s weighted average cost of capital is 10 percent and its pretax cost of debt is 6 percent. The tax rate is 24 percent. a. What is
In a world of corporate taxes only, show that the WACC can be written as WACC = R0 × [1 − TC(B/V)].
Sunrise, Inc., has no debt outstanding and a total market value of $245,000. Earnings before interest and taxes, EBIT, are projected to be $19,000 if economic conditions are normal. If there is
Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,175. One-year interest rates are 9 percent. There
New Business Ventures, Inc., has an outstanding perpetual bond with a 9 percent coupon rate that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds
Edgehill, Inc., has 325,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 6 percent paid semiannually, and 13 years to maturity. The current YTM on the bonds is 5.6
Away Corp. has interest-bearing debt with a market value of $55 million. The company also has 1.6 million shares that sell for $43 per share.What is the debt-equity ratio for this company based on
Highway 65, Inc., is going to elect 12 board members next month. Betty Brown owns 11.6 percent of the total shares outstanding. How confident can she be of having one of her candidate friends elected
The shareholders of Solar Power Corp. need to elect four new directors to the board. There are 14.3 million shares of common stock outstanding and the current share price is $15.25. If the company
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 19,600 shares outstanding. If the election is conducted under cumulative
The shareholders of the Mango Company need to elect seven new directors. There are 850,000 shares outstanding currently trading at $61 per share. You would like to serve on the board of directors;
Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .40. It’s considering building a new $60 million manufacturing
Breckenridge Corp. has a debt-equity ratio of .65. The company is considering a new plant that will cost $137 million to build. When the company issues new equity, it incurs a flotation cost of 8
This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense
Floyd Industries stock has a beta of 1.15. The company just paid a dividend of $.75 and the dividends are expected to grow at 4.5 percent per year. The expected return on the market is 11 percent
Macfarlane, Inc., recently issued new securities to finance a new TV show. The project cost $30 million and the company paid $1.9 million in flotation costs. In addition, the equity issued had a
The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 40,000 bonds with a coupon rate of 4.9 percent and a current price quote of 106.5;
Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.85 million at the end of the first year, and these savings will grow at a rate of 3 percent per year
Southern Alliance Company needs to raise $75 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The
Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .65. The flotation cost for new equity is 6 percent and the flotation cost for debt is 2 percent.
Titan Mining Corporation has 6.4 million shares of common stock outstanding and 175,000 6.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $53
Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 17,000 4.9 percent coupon bonds outstanding, $2,000 par value, 20
Kose, Inc., has a target debt-equity ratio of .38. Its WACC is 10.1 percent and the tax rate is 25 percent. a. If the company’s cost of equity is 12 percent, what is its pretax cost of
In the previous problem, suppose the company’s stock has a beta of 1.10. The risk-free rate is 2.9 percent and the market risk premium is 7 percent. Assume that the overall cost of debt is the
Hero Manufacturing has 7.6 million shares of common stock outstanding. The current share price is $67 and the book value per share is $4. The company also has two bond issues outstanding, both with
Fama’s Llamas has a weighted average cost of capital of 9.1 percent. The company’s cost of equity is 11 percent and its cost of debt is 6.4 percent. The tax rate is 21 percent. What is the

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