Questions and Answers of Financial Management Theory

Jenny Cochran, a graduate of the University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries,
The Morrit Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morrit’s annual sales are $3 million, its average tax rate is 25%, and its net profit margin on
Goodwynn & Wolf Incorporated (G&W) issued a bond 7 years ago. The bond had a 20-year maturity, a 14% coupon paid annually, a 9% call premium and was issued at par, $1,000. Today, G&W
Many companies that go public with an IPO don’t actually need additional cash to continue growing their operations. Why might such a firm decide to go public?
Bird Wing Bedding can lease an asset for 4 years with payments of $20,000 due at the beginning of the year. The firm can borrow at a 6% rate and pays a 25% federal plusstate tax rate. The lease
Comey Products has decided to acquire some new equipment having a $200,000 purchase price. The equipment will last 4 years and is in the MACRS 3-year class. (The depreciation rates for Year 1 through
Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its
A company has the following information:Earnings before interest and taxes .................... $80.00Interest expense ..................................................... $8.00Tax rate
A company’s most recent free cash flow to equity was $100 and is expected to grow at 5% thereafter. The company’s cost of equity is 10%. Its WACC is 8.72%. What is its current intrinsic value?
Elliott’s Cross Country Transportation Services has a capital structure with 25% debt at a 9% interest rate. Its beta is 1.6, the risk-free rate is 4%, and the market risk premium is 7%.
Richter Manufacturing has a 10% unlevered cost of equity. Richter forecasts the following free cash flows (FCFs), which are expected to grow at a constant 3% rate after Year 3. a. What is the
Wilde Software Development has a 12% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde?s tax rate is
Crane Rafting Corporation is considering an acquisition of Frost Ski Supplies. Frost has a pre-merger 8% unlevered cost of equity, 6% pre-tax cost of debt, and 25% tax rate. Its pre-merger forecasted
Rework Problem 24-2 using the Black-Scholes model to estimate the value of the option: The risk-free rate is 6%.Data from Problem 24-2:Karns Oil Company is deciding whether to drill for oil on a
Rework Problem 24-1 using the Black-Scholes model to estimate the value of the option. Assume the risk-free rate is 8%.Data from Problem 24-1:Kim Hotels is interested in developing a new hotel in
Rework Problem 24-5 using the Black-Scholes model to estimate the value of the option. The risk-free rate is 6%.Data from problem 24-5:Fethe's Funny Hats is considering selling trademarked curly
Alberta Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is purchased, the company's plan is to spend another $6 million today (t = 0) to build a hotel on
Karns Oil Company is deciding whether to drill for oil on a tract of land that the company owns. The company estimates that the project would cost $8 million today. Karns estimates that once drilled,
a. Several reasons have been proposed to justify mergers. Among the more prominent are (1) tax considerations, (2) risk reduction, (3) control, (4) purchase of assets at belowreplacement cost, (5)
Rework Problem 23-7. After completing parts a through d, answer the following related questions.a. Calculate Dearborn's yearly free cash flows.
Calculate Dearborn's:a. yearly free cash flows.b. WACCc. horizon value using the corporate valuation method.d. value of operations, value of equity, and maximum share price that Brock would be
Hiland Airways is planning to acquire Interstate Carriers. Interstate's cost of equity is 10%; it is financed 75% by common equity and the remainder by debt at 5%. Interstate's tax rate is 30%.
On the basis of your answers to Problems 23-1 and 23-2, if Bremer were to acquire Quantix, what would be the range of possible prices that it could bid for each share of Quantix common stock?Bremer
Bremer estimates that if it acquires Quantix, the current target capital structure of 30% debt will be maintained. Synergies will cause the free cash flows to be $3.0 million, $3.3 million, $3.6
Quantix's free cash flow (FCF0) is $2.6 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.2. What is the value of Quantix's operations? If Quantix's has $12
Define each of the following terms:a. Synergy; mergerb. Horizontal merger; vertical merger; congeneric merger; conglomerate mergerc. Friendly merger; hostile merger; defensive merger; tender offer;
Henley Corporation is a privately held company specializing in lawn care products and services. The most recent financial statements are shown below.The ratios and selected information for the
The financial statements of Can Cable Fabricators are shown below, with the actual results for 2015 and the projections for 2016. Free cash flow is expected to grow at a 5% rate after 2016. The
The balance sheet of Roop Industries is shown below. The December 31, 2015 value of operations is $651 million and there are 10 million common shares. What is the price per share? Balance Sheet,
The balance sheet of Amico Chemical is shown below. If the December 31, 2015 value of operations is $220 million, what is the December 31, 2015 value of equity? Balance Sheet, December 31, 2015
Use the financial statements from Garnet Inc. in problem 1. The 2015 financials are actuals, while 2016 shows projected financials. Garnet's WACC is 12%, and the company's free cash flows are
Below is summary information for two companies. Which company has the higher value of operations? Briefly explain. A B NOPAT $1,000,000 $1,200,000 Net investment in operating capital 370,000 700,000
CAS Limited has free cash flow of $250,000 that is expected to grow on average at a 5% rate. The company holds $600,000 of long-term debt, and $80,000 in nonoperating short-term investments. The
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2017. The weighted average cost of capital is 8%. What is the horizon, or
Prester Corp. has never paid a dividend. Its current free cash flow is $900,000 and is expected to grow at a constant rate of 5%. The weighted average cost of capital is 12%. Calculate Prester' s
Define each of the following terms:a. Assets-in-place; growth options; nonoperating assetsb. Net operating working capital; operating capital; NOPAT; free cash flow c. Value of operations;
Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located in Athabasca, Alberta, Yohe usually
Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire's financial planners are considering undertaking a 1-year project in Canada. The project's expected
After all foreign and Canadian taxes, a Canadian corporation expects to receive 2 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is
A trader observes the following market information and sees an opportunity to make an arbitrage profit.The spot rate is 82 yen per dollar, while the 1-year forward rate is 80.20 yen per dollar. The
Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in Canada and 5.3% in Germany. In the spot market, 1 euro equals $1.30.a. Is the 90-day euro forward rate at a
Neeves New Zealand Imports has agreed to purchase 16,000 cases of New Zealand wine for 3 million New Zealand dollars at today's spot rate. The firm's financial manager, Hinda Wilson, has noted the
In September 1983, it took about 245 Japanese yen to equal $1. Thirty-one years later, in September 2014, the exchange rate had fallen to 98 yen to $1. Assume the price of a Japanese manufactured
You are the vice president of International InfoXchange, headquartered in Toronto. All shareholders of the firm live in Canada. Earlier this month, you obtained a loan of five million US dollars from
A Canadian company is exporting lumber to Japan. The sales agreement calls for a payment of 7,000,000 yen to the Canadian company in 60 days. The current spot rate is 102 yen per dollar. a. Is
In the spot market 12.8 pesos can be exchanged for one Canadian dollar. A DVD costs $15 in Canada. If purchasing power parity holds, what should be the price of the same DVD in Mexico?
Assume that interest rate parity holds. In both the spot market and the 90-day forward market one Japanese yen equals 0.0098 dollar. The 90-day risk-free securities yield 4.2% in Japan. What is the
Suppose the exchange rate between US dollars and the Mexican peso is Ps 13.0 = 1 and that the exchange rate between the dollar and the British pound was £1 = $1.58. What is the cross rate between
Suppose that the exchange rate is $1.10 dollars per Swiss franc. If the franc appreciated 10% tomorrow against the dollar, how many francs would a dollar buy tomorrow?
If British pounds sell for $1.50 (Canadian) per pound, what should dollars sell for in pounds per dollar?
A computer costs $900 in Canada. The same computer costs 650 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, one yen equals $0.012. If interest
A currency trader observes that in the spot exchange market, one Canadian dollar can be exchanged for 12 Mexican pesos or for 102 Japanese yen. What is the cross rate between the yen and the peso?
Why do corporations build manufacturing plants abroad when they could build them at home?
If Canada imports more goods from abroad than it exports, foreigners will tend to have a surplus of Canadian dollars. What will this do to the value of the dollar with respect to foreign currencies?
If the Swiss franc depreciates against the Canadian dollar, can a dollar buy more or fewer Swiss francs as a result?
Use the information and data from Problem 20.5. a. Create a hedge with the futures contract for Zinn Company's planned June debt offering of $10 million. What is the implied yield on the bond
The following are data on August 2015 gold futures contracts:A mining company wishes to hedge against a decline in gold prices between now and August. The company has 2,500 oz. of gold to hedge (each
DeWalden Resources Inc. plans to issue $30,000,000 of 10-year debt in September, and the chief financial officer is concerned that interest rates will rise over the next six months until the debt is
Zinn Company plans to issue $10,000,000 of 10-year bonds in June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the
What is the implied interest rate on a Government of Canada bond ($100,000) futures contract that settled at 112.75? If interest rates increased by 1%, what would be the contract's new value?
A Government of Canada bond futures contract has a settlement price of 91.50. What is the implied annual yield?
The current price of a stock is $28. In 1 year, the price will be either $35 or $23. The annual risk-free rate is 5%. Find the price of a call option on the stock that has a strike price of $30 and
Assume that you have been given the following information on Purcell Industries:Current stock price = $25Time to maturity of option = 6 monthsVariance of stock return = 0.09d1 = 0.2239d2 =
A call option on the stock of Cranberry Glass has a market price of $12. The stock sells for $45 a share, and the option has a strike price of $35 a share. What is the exercise value of the call
Rework Problem 18-8 using a spreadsheet, and do sensitivity analysis with respect to quantity ordered.Data from Problem 18-8:Lucas Mitchell, financial manager of Inland Industrial, has been asked by
Lucas Mitchell, financial manager of Inland Industrial, has been asked by the firm's CEO to evaluate the company's inventory control techniques and to lead a discussion of the subject with the senior
Kate Hansen, the new credit manager of the Farpoint Communications, was alarmed to find that Farpoint sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered
A-1 Electrical has annual credit sales of $2.2 million. Current expenses for the collection department are $42,000, bad debt losses are 1.5%, and days' sales outstanding is 25 days. The firm is
Whitestone Corporation has a DSO of 26 days. The company averages $5,500 in credit sales each day. What is the company's average account receivable?
Williams & Sons last year reported cost of sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the
Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a
High North Apparel Ltd. estimates that because of the seasonal nature of its business, it will require an additional $1.5 million of cash for the month of December. High North has the following four
Montgomery Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Montgomery can finance the
Payne Products's sales last year were an anemic $1.6 million, but with an improved product mix it expects sales growth to be 25% this year, and Payne would like to determine the effect of various
Qbit Technology is considering changes in its working capital policies to improve its cash flow cycle. Qbit's sales last year were $3,250,000 (all on credit), and its net profit margin was 7%. Its
Sterling Enterprises has an inventory conversion period of 50 days, an average collection period of 35 days, and a payables deferral period of 25 days. Assume that cost of goods sold is 80% of
Griswall Industries sells on terms of 2/10, net 30. Total sales for the year are $1,460,000. Thirty percent of the customers pay on the 10th day and take discounts; the other 70% pay, on average, 40
Jade Rabbit Imports obtains merchandise under the credit terms of 1/20, net 30, but routinely takes 50 days to pay its bills. Given that the retailer is an important customer, suppliers allow the
What is the nominal and effective cost of trade credit under the credit terms of 3/20, net 40?
Define each of the following terms:a. Working capital; net working capital; net operating working capitalb. Inventory conversion period; receivables collection period; payables deferral period; cash
Memtech Ltd. needs to raise $15 million to construct production facilities for a new type of USB memory device. The firm's straight nonconvertible debentures currently yield 8%. Its stock sells for
The table below provides market data from October 1, 2014, Solve for the unknown variables. The "Premium" column refers to the percentage extra an investor would pay for the stock if it purchased the
Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock
Complete the following table. Assume a bond with a $1,000 par value, 10-year maturity that pays interest annually. Number of warrants Price per warrant Bond with warrant Straight bond coupon rate
Fisher Investments recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $50 a share. What is the convertible issue's conversion ratio?
Newhouse Enterprises recently issued two types of bonds. The first issue consisted of 15-year straight debt with a 7% annual coupon. The second issue consisted of 15-year bonds with a 5% annual
Two companies, Shipton Ltd. and Falco Corporation, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $100,000. Shipton
Precision Graphics Ltd. (PGL) is looking at modernizing its facilities. As part of that process, PGL has decided to acquire new high-speed colour laser photocopiers. It has the option of buying the
Misty River Minerals must install $5.6 million of new machinery in its Ontario mine. It can Buy obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the
Define each of the following terms:a. Lessee; lessorb. Operating lease; financial lease; sale-and-leaseback; combination lease; synthetic lease; SPEc. Off-balance sheet financing; capitalizingd. lAS
South Tel Technologies is considering whether or not to refund a $90 million, 8% annual coupon, 30-year bond issue that was sold 5 years ago. South Tel's investment banks have indicated that the
Jan Volk, financial manager of Green Sea Services (GSS), has been asked by her boss to review GSS's outstanding debt issues for possible bond refunding. Five years ago, GSS issued $40,000,000 of 9%,
Rework Problem 14A-2, Bond Refunding Part a, using a spreadsheet model, and answer the following question: At what interest rate on the new debt is the NPV of the refunding no longer positive?Data
Edelman Gem Company, a small jewellery manufacturer, has been successful and has New Stock Issue enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and
East Jet Airlines is an all-equity firm with a book value of $100,000,000 and 16,000,000 shares outstanding. Its stock currently trades at $9 per share, and EPS is $0.50. East Jet wishes to issue
Elie's Concrete Co. (ECC) currently has sales of $30 million and a net profit margin of 5%. Management is contemplating expansion, which would lead to sales growth of 8% but would also require
J. Bourne Security Products (JBSP) is a successful company, but it needs $200,000 in additional funding to grow. JBSP and an angel investor agree the business is worth $800,000 and the angel has
Security Brokers Inc. completed a firm commitment underwriting for Beedles Inc. The terms were as follows:Price to public
Before entering into a formal agreement, investment banks carefully investigate the companies whose securities they underwrite; this is especially true of the issues of firms going public for the

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