Questions and Answers of Essentials Corporate Finance

In the previous problem, instead of a perpetual growth rate in adjusted cash flow from assets, you decide to calculate the terminal value of the company with the price-sales ratio. You believe
You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3.25 million this year. Depreciation, the increase in net working capital, and capital spending
Minion, Inc., has no debt outstanding and a total market value of $211,875. Earnings before interest and taxes, EBIT, are projected to be $14,300 if economic conditions are normal. If there is strong
Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent.Problem 1a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is
Trapper 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 320,000 shares of stock outstanding.
Honeycutt Co. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt.
FCOJ, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 7,400 shares outstanding
Pagemaster Enterprises is considering a change from its current capital structure. The company currently has an all-equity capital structure and is considering a capital structure with 25 percent
Brown Industries has a debt-equity ratio of 1.5. Its WACC is 9.6 percent, and its cost of debt is 5.7 percent. There is no corporate tax.a. What is the company’s cost of equity capital?b. What
Irving Corp. has no debt but can borrow at 6.4 percent. The firm’s WACC is currently 10.9 percent, and there is no corporate tax.a. What is the company’s cost of equity?b. If the firm converts
Hayward Co. has a 22 percent tax rate. Its total interest payment for the year just ended was $14.3 million. What is the interest tax shield? How do you interpret this amount?
Horford Co. has no debt. Its cost of capital is 8.9 percent. Suppose the company converts to a debt-equity ratio of 1.0. The interest rate on the debt is 5.7 percent. Ignoring taxes, what is the
Calvert Corporation expects an EBIT of $22,300 every year forever. The company currently has no debt, and its cost of equity is 15 percent.a. What is the current value of the company?b. Suppose the
Union Local School District has bonds outstanding with a coupon rate of 3.2 percent paid semiannually and 16 years to maturity. The yield to maturity on these bonds is 3.7 percent and the bonds have
Sunset Corp. currently has an EPS of $3.85, and the benchmark PE for the company is 19. Earnings are expected to grow at 6 percent per year.a. What is your estimate of the current stock price?b. What
Using the dividend yield, calculate the closing price for Walt Disney on this day. The actual closing price for Walt Disney was $108.85. Why is your closing price different? The Value Line Investment
According to the 2018 Value Line Investment Survey, the growth rate in dividends for Abbott Laboratories for the previous five years has been negative 11.5 percent. If investors feel this growth rate
According to the 2018 Value Line Investment Survey, the growth rate in dividends for Ralph Lauren for the next five years will be .5 percent. If investors feel this growth rate will continue, what is
According to the 2018 Value Line Investment Survey, the growth rate in dividends for IBM for the next five years is expected to be 5 percent. Suppose IBM meets this growth rate in dividends for the
Find the quote for Duke Energy. Assume that the dividend is constant. What was the highest dividend yield over the past year? What was the lowest dividend yield over the past year? You?ve collected
Dropshot Corporation stock currently sells for $68.98 per share. The market requires a return of 10.3 percent on the firm’s stock. If the company maintains a constant 4.9 percent growth rate in
Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $16.30, but management expects to reduce the payout by 3.5 percent per year, indefinitely. If you require a
Biarritz Corp. is growing quickly. Dividends are expected to grow at a rate of 25 percent for the next three years, with the growth rate falling off to a constant 4.5 percent thereafter. If the
Synovec Corporation is expected to pay the following dividends over the next four years: $7, $13, $18, and $3.25. Afterward, the company pledges to maintain a constant 5 percent growth rate in
Bon Chance, Inc., has an odd dividend policy. The company has just paid a dividend of $3 per share and has announced that it will increase the dividend by $5 per share for each of the next four
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will
TwitterMe, Inc., is a new company and currently has negative earnings. The company’s sales are $1.45 million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 3.9,
The Blooming Flower Co. has earnings of $3.68 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
Cape Corp. will pay a dividend of $2.64 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. If you want a return of 12 percent, how much will
E-Eyes.com has a new issue of preferred stock it calls 20/20 preferred. The stock will pay a $20 dividend per year, but the first dividend will not be paid until 20 years from today. If you require a
The stock price of Alps Co. is $67. Investors require a return of 10.5 percent on similar stocks. If the company plans to pay a dividend of $4.25 next year, what growth rate is expected for the
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only
Smiling Elephant, Inc., has an issue of preferred stock outstanding that pays a $2.85 dividend every year, in perpetuity. If this issue currently sells for $77.32 per share, what is the required
Burkhardt Corp. pays a constant $15.25 dividend on its stock. The company will maintain this dividend for the next nine years and will then cease paying dividends forever. If the required return on
Redan, Inc., is expected to maintain a constant 4.3 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.6 percent, what is the required return on the
Poulter Corporation will pay a dividend of $3.25 per share next year. The company pledges to increase its dividend by 5.1 percent per year, indefinitely. If you require a return of 11 percent on your
For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?Previous problemThe next dividend payment by Hoffman, Inc., will be $2.65 per share. The
The next dividend payment by Hoffman, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $43.15 per share,
Fowler, Inc., just paid a dividend of $2.55 per share on its stock. The dividends are expected to grow at a constant rate of 3.9 percent per year, indefinitely. If investors require a return of 10.4
The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding
Bond P is a premium bond with a coupon rate of 8.2 percent. Bond D is a discount bond with a coupon rate of 5.9 percent. Both bonds make annual payments and have a YTM of 7 percent, a par value of
What is the coupon rate for the Williams Co. bond? To calculate the number of years until maturity, assume that it is currently January 15, 2019. All of the bonds have a $2,000 par value and pay
What price would you expect to pay for the Kenny Corp. bond? What is the bond?s current yield? To calculate the number of years until maturity, assume that it is currently January 15, 2019. All of
What is the yield to maturity for the bond issued by Xenon, Inc.? To calculate the number of years until maturity, assume that it is currently January 15, 2019. All of the bonds have a $2,000 par
Find the Treasury bond that matures in May 2025. What is the coupon rate for this bond? To calculate the number of years until maturity, assume that it is currently May 2019. All of the bonds have a
In the table, find the Treasury bond that matures in May 2036. What is the asked price of this bond in dollars? If the bid-ask spread for this bond is .0628, what is the bid price in dollars? To
In the table, find the Treasury bond that matures in May 2027. What is your yield to maturity if you buy this bond? To calculate the number of years until maturity, assume that it is currently May
Suppose your company needs to raise $40 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 5.7 percent, and you’re evaluating two
Suppose the following bond quote for IOU Corporation appears in the financial page of today?s newspaper. Assume the bond has a face value of $1,000, and the current date is April 15, 2019. What is
You purchase a bond with a coupon rate of 5.2 percent, semiannual coupons, and a clean price of $993. If the next coupon payment is due in two months, what is the invoice price?
You purchase a bond with an invoice price of $1,043. The bond has a coupon rate of 4.7 percent, semiannual coupons, and a $1,000 par value, and there are five months to the next coupon date. What is
Both Bond Bill and Bond Ted have 5.8 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 5 years to maturity, whereas Bond Ted has 25 years to maturity. If interest
Bond X is a premium bond making semiannual payments. The bond has a coupon rate of 7.5 percent, a YTM of 6 percent, and 13 years to maturity. Bond Y is a discount bond making semiannual payments.
Lion Corp. has a $2,000 par value bond outstanding with a coupon rate of 3.8 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 4.9 percent. What is the dollar
You find a zero coupon bond with a par value of $10,000 and 13 years to maturity. If the yield to maturity on this bond is 4.7 percent, what is the price of the bond? Assume semiannual compounding
Locate the Treasury bond in Figure 6.3 maturing in May 2037. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread for a $1,000
Locate the Treasury issue in Figure 6.3 maturing in February 2029. What is its coupon rate? What is the dollar bid price for a $1,000 par value bond? What was the previous day?s asked price for a
BDJ Co. wants to issue new 25-year bonds for some much-needed expansion projects. The company currently has 4.8 percent coupon bonds on the market that sell for $1,028, make semiannual payments, have
Bart Software has 5.7 percent coupon bonds on the market with 22 years to maturity. The bonds make semiannual payments and currently sell for 97 percent of par. What is the current yield? The YTM?
Bond J has a coupon rate of 4 percent. Bond K has a coupon rate of 14 percent. Both bonds have 17 years to maturity, a par value of $1,000, and a YTM of 8 percent, and both make semiannual payments.
Say you own an asset that had a total return last year of 12.1 percent. If the inflation rate last year was 3.4 percent, what was your real return?
An investment offers a total return of 12 percent over the coming year. Alex Hamilton thinks the total real return on this investment will be only 9 percent. What does Alex believe the inflation rate
Suppose the real rate is 1.8 percent and the inflation rate is 3.7 percent. What rate would you expect to see on a Treasury bill?
If Treasury bills are currently paying 4.7 percent and the inflation rate is 1.9 percent, what is the approximate real rate of interest? The exact real rate?
Henley Corporation has bonds on the market with 10.5 years to maturity, a YTM of 5.7 percent, a par value of $1,000, and a current price of $945. The bonds make semiannual payments. What must the
Parkway Void Co. issued 15-year bonds two years ago at a coupon rate of 5.4 percent. The bonds make semiannual payments. If these bonds currently sell for 106 percent of par value, what is the YTM?
Dufner Co. issued 15-year bonds one year ago at a coupon rate of 4.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.3 percent, what is the current dollar price assuming a
Big Canyon Enterprises has bonds on the market making annual payments, with 12 years to maturity, a par value of $1,000, and a price of $1,030. At this price, the bonds yield 6.14 percent. What must
The Petit Chef Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments and have a par value of $1,000. If the bonds currently sell for
Vulcan, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments and have a par value of $1,000. If the YTM on these bonds is 8.4 percent,
An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as
You are looking at a one-year loan of $15,000. The interest rate is quoted as 12 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street-sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $18,000 for one year. The interest rate is 14.6
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $19,000 every year instead of equal annual payments.Problem 55 Prepare an amortization schedule for a
Prepare an amortization schedule for a three-year loan of $57,000. The interest rate is 8 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
If today is Year 0, what is the future value of the following cash flows five years from now? What is the future value 10 years from now? Assume an interest rate of 6.1 percent per year.Year
A local finance company quotes an interest rate of 16.7 percent on one-year loans. So, if you borrow $25,000, the interest for the year will be $4,175. Because you must repay a total of $29,175 in
Given an interest rate of 6.35 percent per year, what is the value at Year 7 of a perpetual stream of $7,000 payments that begin at Year 20?
A 10-year annuity pays $1,725 per month, and payments are made at the end of each month. If the interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded
What is the present value of $2,625 per year, at a discount rate of 6.9 percent, if the first payment is received six years from now and the last payment is received 20 years from now?
A 6-year annuity of twelve $7,375 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 9 percent compounded semiannually, what
Mary is going to receive a 30-year annuity of $9,500. Nancy is going to receive a perpetuity of $9,500. If the appropriate discount rate is 5.4 percent, how much more is Nancy’s cash flow worth?
Suppose you are going to receive $7,800 per year for five years. The appropriate discount rate is 7.5 percent.a. What is the present value of the payments if they are in the form of an ordinary
You have arranged for a loan on your new car that will require the first payment today. The loan is for $28,500, and the monthly payments are $525. If the loan will be paid off over the next 60
You are planning your retirement in 10 years. You currently have $50,000 in a bond account and $250,000 in a stock account. You plan to add $9,000 per year at the end of each of the next 10 years to
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $3,500,000 purchase price. The monthly payment on this loan will
The contract signed in February 2018 by Jimmy Garoppolo that we discussed at the beginning of the chapter was actually paid as a $35 million signing bonus to be paid immediately and a $7.6 million
In March 2018, the Buffalo Bills signed Star Lotulelei to a contract reportedly worth $50 million. Lotulelei’s salary (including bonuses) was to be paid as $17.1 million in 2018, $8.9 million in
You want to borrow $75,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,475, but no more. Assuming monthly compounding, what is the highest rate you can
You’re prepared to make monthly payments of $250, beginning at the end of this month, into an account that pays 8 percent interest compounded monthly. How many payments will you have made when your
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 10-year annuity of $5,200 per year at the current interest rate of 10 percent per
You’re trying to choose between two different investments, both of which have up-front costs of $30,000. Investment G returns $65,000 in six years. Investment H returns $98,000 in nine years. Which
Peter Lynchpin wants to sell you an investment contract that pays equal $22,500 amounts at the end of each year for the next 20 years. If you require an effective annual return of 8 percent on this
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $6,100 per month for the next two years, or you can
You have an investment that will pay you 1.38 percent per month. How much will you have per dollar invested in one year? In two years?
You are saving to buy a $255,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 4.8 percent. How long will it take your initial $95,000 investment
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of .9 percent per year, compounded monthly for the first six months, increasing thereafter to
You want to buy a new sports car from Muscle Motors for $68,500. The contract is in the form of a 60-month annuity due at an APR of 4.5 percent. What will your monthly payment be?
First Simple Bank pays 6.3 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to

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