Questions and Answers of Essentials Corporate Finance

An investment has an installed cost of $787,350. The cash flows over the four-year life of the investment are projected to be $312,615, $304,172, $245,367, and $229,431. If the discount rate is
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
Doak Corp. is evaluating a project with the following cash flows:Year ................Cash Flow0 .......................−$32,6001 ...........................11,5202
Hanse, 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? Year Project R
A project has the following cash flows:Year ..........Cash Flow0 ................$112,0001 .................− 67,0002 .................− 57,000What is the IRR for this project? If the required
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash
Koepka Corp. has a project with the following cash flows:Year ...............Cash Flow0 .......................$35,0001 ......................− 27,0002 .........................29,000What is the
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year ...................Cash Flow0 ........................−$875,0001
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution
Winnebagel Corp. currently sells 28,000 motor homes per year at $84,000 each and 7,000 luxury motor coaches per year at $135,000 each. The company wants to introduce a new portable camper to fill out
A proposed new investment has projected sales of $635,000. Variable costs are 40 percent of sales, and fixed costs are $168,000; depreciation is $83,000. Prepare a pro forma income statement assuming
Consider the following income statement:Sales ........................$537,200Costs .........................346,800Depreciation ..............94,500EBIT...................................?Taxes
A piece of newly purchased industrial equipment costs $745,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
Consider an asset that costs $635,000 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
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 $6.8 million and will be sold for $1.46 million at the end of the
Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated straight-line to zero over
In the previous problem, suppose the project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project.
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2?
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. This cost will be depreciated straightline to zero over the project’s five-year life, at the end of which
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Previous problemKolby’s Korndogs is
Your firm is contemplating the purchase of a new $395,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $135,000 per year. Will you accept the project? What if the pretax cost savings are
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $940 per unit; variable cost = $340 per unit; fixed costs = $3.4 million; quantity = 53,000
We are evaluating a project that costs $1.68 million, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are
In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV
In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3?
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
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $144,000 in annual pretax cost savings. The
In the previous problem, suppose the required return on the project is 14 percent. What is the project’s NPV?Previous problemH. Cochran, Inc., is considering a new three-year expansion project that
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Previous problemCSM Machine Shop is
Consider a three-year project with the following information: initial fixed asset investment = $665,000; straight-line depreciation to zero over the five-year life; zero salvage value; price =
You are considering a new product launch. The project will cost $780,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $925 per set and have a variable cost of $480 per set. The company has spent $150,000 for a marketing study that
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year......................Unit Sales1 ................................71,5002
A proposed cost-saving device has an installed cost of $565,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Given that Madrigal Pharmaceuticals was up by 516 percent for 2017, why didn’t all investors hold Madrigal?
Suppose a stock had an initial price of $87 per share, paid a dividend of $2.15 per share during the year, and had an ending share price of $98. Compute the percentage total return. What was the
Given that Sears Holdings was down by 61 percent for 2017, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Rework Problem 1 assuming the ending share price is $78.Problem 1Suppose a stock had an initial price of $87 per share, paid a dividend of $2.15 per share during the year, and had an ending share
You purchased 250 shares of a particular stock at the beginning of the year at a price of $104.32. The stock paid a dividend of $2.34 per share, and the stock price at the end of the year was
Asset W has an expected return of 11.6 percent and a beta of 1.23. If the risk-free rate is 3.15 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1,041 today.a. Assuming a $1,000 face value, what was your total dollar return on this
What was the arithmetic average annual return on large-company stocks from 1926 through 2017:a. In nominal terms?b. In real terms?
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year 14% 41% -13 2 3 23 11 18 -13 4 42 5
You’ve observed the following returns on Yamauchi Corporation’s stock over the past five years: -10 percent, 24 percent, 21 percent, 11 percent, and 8 percent.a. What was the arithmetic average
For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 4.1 percent.a. What was the average real return on the stock?b. What
You purchased a zero-coupon bond one year ago for $267.35. The market interest rate is now 5.3 percent. If the bond had 25 years to maturity when you originally purchased it, what was your total
You bought a share of 4.5 percent preferred stock for $105.35 last year. The market price for your stock is now $103.18. What is your total return for last year?
You bought a stock three months ago for $51.27 per share. The stock paid no dividends. The current share price is $55.36. What is the APR of your investment? The EAR?
You find a certain stock that had returns of 15 percent, −17 percent, 23 percent, and 11 percent for four of the last five years. If the average return of the stock over this period was 10 percent,
A stock has had returns of −26 percent, 12 percent, 34 percent, −8 percent, 27 percent, and 23 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
A stock has had the following year-end prices and dividends: What are the arithmetic and geometric average returns for the stock? Price Year Dividend $64.10 $1.10 74.05 2 1.25 67.61 4 76.25 1.45
You bought one of Rocky Mountain Manufacturing Co.’s 5.7 percent coupon bonds one year ago for $1,032.15. These bonds make annual payments and mature nine years from now. Suppose you decide to sell
Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than -3.9
What are the portfolio weights for a portfolio that has 185 shares of Stock A that sell for $64 per share and 115 shares of Stock B that sell for $49 per share?
You own a portfolio that has $3,140 invested in Stock A and $4,300 invested in Stock B. If the expected returns on these stocks are 9 percent and 14 percent, respectively, what is the expected return
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.5 percent and Stock Y with an expected return of 9.5 percent. If your goal is to create a
Based on the following information, calculate the expected return. Rate of Return if Probability of State of State of Economy Economy State Occurs Recession .30 -13 .21 Boom .70
Based on the following information, calculate the expected return. Probability of State of Economy Rate of Return if State of Economy State Occurs Recession .15 -.12 Normal .60 .10 .25 .27 Boom
Based on the following information, calculate the expected returns and standard deviations for the two stocks. Rate of Return if State Occurs Probability of State of State of Economy Economy Stock A
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta $85,000 Stock A
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .35. It’s considering building a new $37 million manufacturing
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 9.6 percent, 10.9 percent, and 14.3 percent, respectively.
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
You own a stock portfolio invested 15 percent in Stock Q, 25 percent in Stock R, 40 percent in Stock S, and 20 percent in Stock T. The betas for these four stocks are .78, .87, 1.13, and 1.45,
You own a portfolio equally invested in a riskfree asset and two stocks. If one of the stocks has a beta of 1.29 and the total portfolio is equally as risky as the market, what must the beta be for
A stock has a beta of 1.14, the expected return on the market is 10.9 percent, and the risk-free rate is 3.6 percent. What must the expectedreturn on this stock be?
A stock has an expected return of 11.4 percent, the risk-free rate is 3.7 percent, and the market risk premium is 6.8 percent. What must the beta of this stock be?
A stock has an expected return of 10.9 percent, its beta is .90, and the risk-free rate is 2.8 percent. What must the expected return on the market be?
A stock has an expected return of 10.2 percent and a beta of .91, and the expected return on the market is 10.8 percent. What must the risk-free rate be?
Stock Y has a beta of 1.20 and an expected return of 11.4 percent. Stock Z has a beta of .80 and an expected return of 8 percent. If the risk-free rate is 2.5 percent and the market risk premium is
You have $250,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 13.4 percent, and Stock L, with an expected return of 10.2 percent. If your goal is to create
Stock J has a beta of 1.23 and an expected return of 13.25 percent, while Stock K has a beta of .84 and an expected return of 10.60 percent. You want a portfolio with the same risk as the market.
Consider the following information on a portfolio of three stocks: a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio?s expected return? The
You have $100,000 to invest in either Stock D, Stock F, or a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11.4 percent. If D
Suppose you observe the following situation: a. Calculate the expected return on each stock.b. Assuming the capital asset pricing model holds and Stock A?s beta is greater than Stock B?s beta by
Consider the following information on Stocks I and II: The market risk premium is 7 percent, and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more
The Pierce Co. just issued a dividend of $2.35 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells
Hoolahan Corporation’s common stock has a beta of .87. If the risk-free rate is 3.6 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?
Suppose Potter Ltd. just issued a dividend of $1.82 per share on its common stock. The company paid dividends of $1.36, $1.46, $1.53, and $1.68 per share in the last four years, respectively. If the
Sixth Fourth Bank has an issue of preferred stock with a $3.80 stated dividend that just sold for $89 per share. What is the bank’s cost of preferred stock?
You are given the following information concerning Parrothead Enterprises: Calculate the company?s WACC. Debt: 13,000 6.4 percent coupon bonds outstanding, with 15 years to maturity and a quoted
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 103 percent of face value. The issue makes semiannual
Jiminy’s Cricket Farm issued a 30-year, 6.3 percent semiannual bond eight years ago. The bond currently sells for 110 percent of its face value. The company’s tax rate is 22 percent.a. What is
For the firm in Problem 6, suppose the book value of the debt issue is $135 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book
Baron Corporation has a target capital structure of 75 percent common stock, 5 percent preferred stock, and 20 percent debt. Its cost of equity is 11.3 percent, the cost of preferred stock is 4.9
Caddie Manufacturing has a target debt-equity ratio of .45. Its cost of equity is 10.3 percent, and its pretax cost of debt is 6.4 percent. If the tax rate is 21 percent, what is the company’s
Fama’s Llamas has a WACC of 8.95 percent. The company’s cost of equity is 10.4 percent, and its pretax cost of debt is 5.3 percent. The tax rate is 21 percent. What is the company’s target
Masterson, Inc., has 4.1 million shares of common stock outstanding. The current share price is $84, and the book value per share is $11. The company also has two bond issues outstanding. The first
In Problem 11, suppose the most recent dividend was $3.95 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
Clifford, Inc., has a target debt-equity ratio of .65. Its WACC is 8.1 percent, and the tax rate is 23 percent.a. If the company’s cost of equity is 11 percent, what is its pretax cost of debt?b.
Hankins Corporation has 5.4 million shares of common stock outstanding; 290,000 shares of 5.2 percent preferred stock outstanding, par value of $100; and 125,000 5.7 percent semiannual bonds
Given the following information for Lightning Power Co., find the WACC. Assume the company?s tax rate is 21 percent. 16,000 6.2 percent coupon bonds outstanding, $1,000 par value, 25 years to
An all-equity firm is considering the following projects: The T-bill rate is 4 percent, and the expected return on the market is 12 percent.a. Which projects have a higher expected return than the
Stock in CDB Industries has a beta of 1.10. The market risk premium is 7.2 percent, and T-bills are currently yielding 4.1 percent. The most recent dividend was $2.56 per share, and dividends are
Hankins, Inc., is considering a project that will result in initial aftertax cash savings of $4.3 million at the end of the first year, and these savings will grow at a rate of 1.9 percent per year
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below. If the corporate tax rate is 24 percent, what is the aftertax cost
Gabriel Industries stock has a beta of 1.12. The company just paid a dividend of $1.15, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.4 percent, and
Dewey Corp. is expected to have an EBIT of $2.45 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $180,000, $85,000, and $185,000,

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