Questions and Answers of Financial Management Theory

How do you think each of the following items would affect a company's ability to attract new capital and the flotation costs involved in doing so?a. A decision of a privately held company to go
Define each of the following terms:a. Going public; new issue market; initial public offering (IPO)b. Public offering; private placementc. Venture capitalists; roadshow; spreadd. Securities
J. Clark Inc. (JCI), a manufacturer and distributor of sports equipment, has grown until it has become a stable, mature company. Now JCI is planning its first distribution to shareholders. (See the
Landry Corporation is reviewing its capital budget for the upcoming year. It has paid a $2.00 dividend per share (DPS) for the past several years, and its shareholders expect the dividend to remain
In 2015, Sytek Environmental paid dividends totalling $2.6 million on net income of $9.8 million. 2015 was a normal year, and for the past 10 years, earnings have grown at a constant rate of 8%.
Peninsula Technology Corporation (PTC) has an all-common-equity capital structure. It has 200,000 shares of $2 par value common stock outstanding. When PTC's founder, who was also its research
Burnaby Packers is considering three independent projects, each of which requires a $3 million investment. These projects have different levels of risk and therefore different costs of capital. Their
Industrial Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar heating system. To meet this demand, management plans to expand production capacity by 40% with a $15
Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure,
Flex Logic System (FLS) is considering a change in its capital structure. FLS currently has $20 million in debt carrying a rate of 8%, and its stock price is $20 per share with 4 million shares
Willard Pest Control (WPC) currently has a capital structure, based on market values, of 50% debt. The debt consists of 8% perpetual bonds selling at par. The company's EBIT is $7.25 million, and
Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $28.80 per set, and this year's sales are expected to be 450,000 units. Variable production costs for the
Fikse Gardening Supplies has no debt outstanding, and its financial position is given by the following data:Assets (book =
An unlevered firm has a value of $600 million. An otherwise identical but levered firm has $120 million in debt. If the corporate tax rate is 30%, what is the value of the levered firm using the MM
An unlevered firm has a value of $800 million. An otherwise identical but levered firm has $60 million in debt. Under the MM zero-tax model, what is the value of the levered firm?
Gourmet Foods To Go has the following financial information:Debt:....................................................$0Book Equity: ....................................$4,000,000Tax
J. Kirk Ltd. has fixed operating costs of $4,800,000 and variable costs of $75 per unit. If it sells the product for $95 per unit, what is the break-even quantity?
Nicola Company (NC) must decide between two mutually exclusive investment projects. Each project costs $25,000 and has an expected life of 3 years. Annual net cash flows from each project begin 1
Green Day Packers (GOP) purchased a computer for its back office operations in 2011 (assume 45% CCA) for $5,000. Because of expanding operations, GOP purchased two additional computers in 2013 for
Taylor Corporation currently uses an injection-moulding machine that was purchased 2 years ago. The CCA rate on this machine is 30%. Currently, it can be sold for $2,500. If this old machine is not
Central Drug Mart (COM) is a drugstore chain operating in Ontario and Quebec. The company is contemplating a home delivery service for its prescription drug sales to customers who are unable to pick
Campbell Company is evaluating the proposed acquisition of a new milling machine. The machine's base price is $120,000, and it would cost another $9,500 to modify it for special use. The machine
Assume the following information for Project X:Initial investment:
A company has purchased a piece of equipment for $10,000 that has a 5-year useful life and no salvage value. The company's tax rate is 30% and its cost of capital is 10%. a. What is the
Marine Technologies has identified a project that will lower annual operating costs by $10,000 per year for 5 years. The equipment costs $30,000, installation and training is $5,000, and there is an
Zepplin Aerospace is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information: Projected sales
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $17 million, and production and sales will require an initial $5 million investment in net
Johnson Industries is considering an expansion project. The necessary equipment could be purchased for $9 million, and the project would also require an initial $3 million investment in net operating
The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $31,000, and it is expected to generate net after-tax operating cash flows, of $8,300 per year. The truck has
The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost
Contec Systems has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $2.5 million and realizes
DHT International is considering two mutually exclusive investments. The projects' expected net cash flows are as follows:a. Construct NPV profiles for Projects A and B.b. If you were told that each
Your company is considering two mutually exclusive projects, J and K, whose costs and cash flows are shown below:The projects are equally risky, and their cost of capital is 12%. You must make a
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck
Refer to Problem 10-1. What is the project's discounted payback period?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a
Refer to Problem 10-1. What is the project's payback period?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of
Refer to Problem 10-1. What is the project's PI?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of
Refer to Problem 10-1. What is the project's IRR?Data from Problem 10-1:A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of
Suppose a firm is considering two mutually exclusive projects. One has a life of 6 years and the other a life of 10 years. Would the failure to employ equivalent annual annuity analysis bias an NPV
A summary of the balance sheet of Travellers Inn Inc. (Til), a company that was formed by merging a number of regional motel chains and that hopes to rival Holiday Inn on the North American scene,
Your boss has asked you to estimate your company's WACC. You have assembled the following information:Current liabilities consist of short-term par value bank debt at 3% to finance seasonal assets.
Suppose a company will issue new 10-year debt with a par value of $1,000 and a coupon rate of 7.5%, paid annually. The tax rate is 30%. If the flotation cost is 2% of the issue proceeds, what is the
The earnings, dividends, and stock price of Motortech Inc. are expected to grow at 4% per year in the future. Motortech's common stock sells for $38 per share, its last dividend was $2.80, and the
A company's 6% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $821.97. The company's tax rate is 30%. What is the firm's component cost of debt
Ridgeway Motors has a target capital structure of 30% debt and 70% equity. The yield to maturity on the company's outstanding bonds is 8%, and the company's tax rate is 30%. Ridgeway's CFO has
Burnwood Tech plans to issue some $25 par preferred stock with a 6% dividend. The stock is selling on the market for $27.00, and Burnwood must pay flotation costs of 4% of the market price. What is
JR Oil Rigs' currently outstanding 13% coupon bonds have a yield to maturity of 9.5%. JR believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax
Calculate the after-tax cost of debt under each of the following conditions:a. Interest rate, 6%; tax rate, 0%.b. Interest rate, 6%; tax rate, 26%.c. Interest rate, 6%; tax rate, 30%.
a. Describe briefly the legal rights and privileges of common shareholders.b. 1. Write out a formula that can be used to value any stock, regardless of its dividend pattern.2.
Assume that today is December 31, 2015, and the following information applies to Pacific Sky Airline:After-tax operating profit [EBIT(1-T), also called NO PAT] for 2016 is expected to be $500
The risk-free rate of return, rRF, is 5%; the required rate of return on the market, rM, is 8%; and Schuler Company's stock has a beta coefficient of 1.5. a. If the dividend expected during the
Simpkins Ltd. is expanding rapidly, and it currently needs to retain all of its earnings; hence it does not pay any dividends. However, investors expect Simpkins to begin paying dividends, with the
The beta coefficient for Stock C is bC = 0.4, whereas that for Stock D is bD = - 0.3. (Stock D's beta is negative, indicating that its rate of return rises whenever returns on most other stocks
Rosendale Clothiers has decided to make significant reinvestments in its operations. As a result it will be suspending dividend payments for 2 years. It anticipates paying a dividend again in year 3
What must be a company's dividend growth rate for its stock to have an expected value of $13.25, assuming its most recently paid dividend was $0.50 and the stock's required return is 10%?
What will be the nominal rate of return on a preferred stock with a $25 par value, a stated dividend of 7% of par, and a current market price of (a) $16, (b) $21, (c) $25, and (d)
A stock is trading at $28 per share. The stock is expected to have a year-end dividend of $0.84 per share, which is expected to grow at some constant rate g throughout time. The stock's required rate
A stock's most recent dividend was $1.80. The dividend is expected to grow by 6% and investors require an 11% return for holding the shares. a. What is the value of the stock? b. What
A company currently pays a dividend of $2 per share, D0 = $2. It is estimated that the company's dividend will grow at a rate of 14% per year for the next 2 years, then the dividend will grow at a
Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of the year (i.e., D1 = $1.50). The dividend is expected to grow at a constant rate of 6% a year. The required rate of
Rident Corp. just paid a dividend of $1.50 a share (i.e., D0 = $1.50). The dividend is expected to grow 5% a year for the next 3 years, and then 10% a year thereafter. What is the expected dividend
Start with the partial model in the file Ch07 P15 Build a Model.xls on the textbook's website. The file contains hypothetical data for working this problem. Goodman Industries's and Landry
You have observed the following returns over time:Assume that the risk-free rate is 4%, the market risk premium is 5%, the beta for Stock X is 1.50, and the beta for StockY is 0.46:a. What are the
You are given the following information on five stocks:The risk-free rate is 4% and the market risk premium is 5%.a. Which stocks are (a) undervalued, (b) overvalued, and (c) correctly valued?b. What
Stocks A and B have the following historical returns:a. Calculate the average rate of return for each stock during the 5-year period.b. Assume that someone held a portfolio consisting of 50% of Stock
You plan to invest in a hedge fund that has total capital of $200 million invested in five stocks:The risk-free rate is 4%, and you believe that the following probability distribution for future
Assume that the risk-free rate is 2%, the market risk premium is 5%, and the beta of two stocks A and Bare 1.4 and 0.8, respectively.a. Calculate both stocks' required rates of return.b. What would
Suppose you hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.20. Now, suppose you have decided to sell one of
Based on the information in Problem 7-7, if a portfolio is made up of 40% of stock A and 60% of stock B:a. Calculate the portfolio's expected rate of return.b. Calculate the portfolio's standard
The following table shows the annual returns over time for two stocks.Calculate each stock's expected return, standard deviation, and coefficient of variation. Probability A B -10% 0.10 -3% 0.20 2
The market and Stock J have the following probability distributions:a. Calculate the expected rates of return for the market and Stock J.b. Calculate the standard deviations for the market and Stock
A stock's return has the following distribution:Calculate the stock's expected return, standard deviation, and coefficient of variation. Probability of This Demand Occurring Rate of Return if This
Assume that the risk-free rate is 6% and that the expected return on the market is 11%. What is the required rate of return on a stock that has a beta of 0.6?
A 20-year, 8% semiannual coupon bond with a par value of $1,000 may be called in 5 years at a call price of $1,040. The bond sells for $1,100. (Assume that the bond has just been issued.)a. What is
Suppose that you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real
Arnot International's bonds have a current market price of $1,150. The bonds have a 7% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5
Suppose Level10 Systems sold an issue of bonds with a 15-year maturity, a $1,000 par value, a 6% coupon rate, and semiannual interest payments. a. Six years after the bonds were issued, the
Castle Company's pension fund projected that a significant number of its employees would take advantage of a retirement program the company plans to offer in 10 years. Anticipating the need to fund
The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 x (t - 1), where t = number of years to
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 6.5%. One bond, Bond C, has a 10% coupon (paid
A bond trader purchased each of the following bonds at a yield to maturity of 9%. Immediately after she purchased the bonds, interest rates fell to 8%. What is the percentage change in the price of
A bond that matures in 6 years sells for $1,090. The bond has a face value of $1,000 and Current Yield with a yield to maturity of 5.2328%. The bond pays coupons semiannually. What is the bond's
You just purchased a bond that matures in 12 years. The bond has a face value of $1,000 and has an 6% annual coupon. The bond has a current yield of 6.4%. What is the bond's yield to maturity?
The Brownstone Corporation bonds have 10 years remaining to maturity. Interest is paid annually; the bonds have a $1,000 par value; and the coupon interest rate is 9%.a. What is the yield to maturity
Digicomp's bonds will mature in 8 years. The bonds have a face value of $1,000 and a 7% coupon rate, paid semiannually. The price of the bonds is $1,110. The bonds are callable in 3 years at a call
The real risk-free rate is 2%, and inflation is expected to be 2.5% for the next 2 years. A 2-year government security yields 4.9%. What is the maturity risk premium for the 2-year security?
Temex bonds have 7 years remaining to maturity. Interest is paid annually, the bonds have for a $1,000 par value, and the coupon interest rate is 8%. The bonds sell at a price of $930. What is their
Assume that your aunt sold her house on December 31 and that she took a mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10%, but it
The Bookbinder Company has made $150,000 before taxes during each of the past 15 years, and it expects to make $150,000 a year before taxes in the future. However, in 2015 the firm incurred a loss of
Define each of the following terms:a. Bond; Government of Canada bond; corporate bond; foreign bondb. Par value; maturity date; coupon payment; coupon interest ratec. Floating-rate bond; zero coupon
Assume that you have recently been hired as Simmons's assistant and that your first major task is to help her develop the forecast. She has asked you to begin by answering the following set of
Start with the partial model in the file Ch 05 Build a Model.xlsx from the textbook's website. Cumberland Industries' financial planners must forecast the company's financial results for the corning
Based on the information in Problem 5-6, assume that Booth has just completed a review of its net operating working capital policies and found that it can reduce its DSO to 60 and achieve an
Refer to Problem 5-1. Return to the assumption that the company had $5 million in assets at the end of 2015, but now assume that the company pays no dividends. Under these assumptions, what would be
Refer to Problem 5-1. What would be the additional funds needed if the company's year-end 2015 assets had been $7 million? Assume that all other numbers, including sales, are the same as in Problem
Start with the partial model in the file Ch 04 Build a Model.xlsx from the textbook's website. Answer the following questions, using a spreadsheet model to do the calculations. a. Find the
A father is planning a savings program to put his daughter through university. She is 13, Annuity she plans to enroll in 5 years, and she should graduate after 4 years. Currently, the annual Payments
You wish to accumulate $1 million by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 6% interest, compounded
Jenny Lin, manager of Boutique Clothing, wants to sell on credit, giving customers 3 months in which to pay. However, Jenny will have to borrow from her bank to carry the accounts receivable. The
a. It is now January 1. You plan to make five deposits of $100 each, one every 6 months, with the first payment being made today. If the bank pays a nominal interest rate of 8% but uses semiannual

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