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foundations financial management
Foundations of Financial Management 10th Canadian edition Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta - Solutions
How does a merger ARB benefit from a possible merger? What is the danger in being a merger ARB? Explain.
Wright Aerospace is considering the acquisition of Columbus Shipping Corporation.The book value of the Columbus Shipping Corporation is $30 million, and Wright Aerospace is willing to pay $90 million in cash and preferred stock. No upward adjustment of asset values is anticipated. Wright Aerospace
Why has the United States been traditionally concerned about corporate concentration arising from merger activity, whereas Canada's concern has been much more with foreign ownership?
Ontario Corporation, a holding company, has investments in three other firms. Values are expressed in millions of dollars.The Ontario Corporation has voting control of the three other corporations with the following investment interests in each: 25 percent of the equity in Eastern Corporation, 20
Weese R. Grains of Canada has sold 5,000 tonnes of wheat to Pete's Apasta Company of Italy at 110 euros per tonne and payable in one year. The current spot rate is 1.3805 (C$/euro) and the 1-year forward is 1.3676. The financial analyst at Weese R. suggests that the spot rate in one year will be
In the previous problem, if Canada had somehow managed no inflation since 1974, what should the exchange rate be in 2014, using the purchasing power parity theory?Data from previous problemFrom the base price level of 100 in 1974, Swiss and Canadian price levels in 2014 stood at 200 and 421,
Compare the use of leverage in a holding company to the concept of operating and financial leverage explained in Chapter 5. Does a holding company have any tax complications related to dividends?
Assume the following financial data for the Wolf Corporation and Lamb Enterprises.a. If all the shares of the Wolf Corporation are exchanged for shares of the Lamb Enterprises on a share-for-share basis, what will post merger EPS be for Lamb Enterprises? Use an approach similar to Table 20-4.Table
Briefly discuss three significant features of the merger movement of the past few decades.
The Charles Corporation desires to expand. It is considering a cash purchase of Atlas Enterprises for $2,000,000. The Atlas Corporation has a $600,000 tax loss carry-forward that could be used immediately by the Charles Corporation, which is paying taxes at the rate of 25 percent. Atlas will
It was 5:30 Friday afternoon, January 22, 2016. Bill Hall, the chairman and CEO of National Brands Inc. was clearing up the last of the papers on his desk and was looking forward to a relaxing weekend. It had been a good week. The company's annual results were in, and they showed that 2015 had been
Baffin College has an endowment that pays one lucky student $7,500 a year forever; of course, it is a different student each year. Long-term yields are 10 percent.a. How much is currently required to fund the endowment?b. If the endowment will not commence until five years from today, how much is
Allie Reynolds, the chief financial officer of Healthy Products Inc. has been asked to do an evaluation of Fibre Cereal Inc. by the president, Gail Martinez. Healthy Products was planning a joint venture with Fibre Cereal (privately traded) and Gail and Allie needed a better feel for what Fibre's
John Churchill, instead of taking a job with a large company on graduation, had started his own chain of muffin shops. The menu featured different varieties of freshly baked muffins, along with coffee and cookies. It also included a soup and sandwich luncheon special, and some fancy pies and
Pabst Dental Supplies is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of occurrence are given.a. What is the expected value of unit sales for the new product?b. What is the standard deviation of unit sales? Possible market reaction Sales in
The Phillips Toy Company was considering the advisability of adding a new product line. Ike Barnes, a marketing major who had joined the company right out of business school three years previously, was in charge of new product development. Barnes knew that since the founding of the company inl997,
Sam Sung is evaluating a new advertising program that could increase electronic sales. Possible outcomes and probabilities of the outcomes are shown below. Compute the coefficient of variation. Additional Possible outcomes sales in units Probabilities Ineffective campaign Normal response...
Five investment alternatives have the following returns and standard deviations of returns.Rank the five alternatives from lowest risk to highest risk using the coefficient of variation. Alternative Returns: Expected value Standard deviation $1,000 $200 3,000 300 3,000 5,000 400 700 D 10,000 900
In the previous problem, if you were to choose between Alternative Band Conly, would you need to use the coefficient of variation? Why?Previous ProblemFive investment alternatives have the following returns and standard deviations of returns.Rank the five alternatives from lowest risk to highest
Why use certainty equivalents in a capital budgeting analysis?
Why must one be careful when using sensitivity analysis?
Another five investment alternatives have the following returns and standard deviations ofreturns.Rank the five alternatives from lowest risk to highest risk using the coefficient of variation. Alternative Returns: Expected value Standard deviation $1,200 $300 A 800 600 5,000 1,000 450 D 430 60,000
Digital Technology wishes to determine its coefficient of variation as a company over time. The firm projects the following data (in millions of dollars).a. Compute the coefficient of variation (V) for each time period.b. Does the risk (V) appear to be increasing over a period of time? If so, why
Why might an analyst set up a decision tree in attempting to make a decision?
Tom Fears is highly risk adverse while Sonny Outlook actually enjoys taking a risk.a. Which of the four investments should Tom choose and why?b. Which of the four investments should Sonny choose and why? Returns: Expected value deviation $ 7,000 5,000 Standard Investments Buy stocks . Buy bonds Buy
Tomcat Oil Company was set up to take large risks and is willing to take the largest risk possible. HiC Construction Company is more typical of the average corporation and is risk averse.a. Which of the following four projects should Tomcat Oil Company choose and why?b. Which of the following four
Possible outcomes for three investment alternatives and their probabilities of occurrence are given below.Rank the three alternatives in terms of risk. Alternative 2 Alternative 3 Alternative 1 Outcomes Probability Outcomes Probability Outcomes Probability $ 50 $ 90 $ 80 .3 .4 Failure .2 .4 160
From a corporate perspective is unique risk (σ) or beta risk (β) the more important consideration? Does it matter?
Mary Beth Clothes is considering opening an additional suburban outlet. An aftertax cash flow of $100 per day (expected value) is projected for each of the two locations being evaluated. Which of these sites would you select based on the distribution of these cash flows (use the coefficient of
Westurn Dynamite Company is evaluating two new methods of blowing up buildings for commercial purposes over the next five years. Method 1 (implosion) is relatively low in risk for this business and will carry a 10 percent discount rate. Method 2 (explosion) is less expensive to perform, but it is
Larry's Athletic Lounge is considering an expansion program to increase the sophistication of the exercise equipment. The equipment will cost $20,000 and has an estimated life of five years. Larry is not sure how many members the new equipment will attract, but he estimates that his increased
Canadian Metal, Mining, and Petroleum Company are analyzing two projects for possible investment. Only one investment will be made. The first project is an oildrilling project in Alberta at a cost of $500 million that will produce $100 million per year in Years 5 through 10 and $200 million per
Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows:a. Find the expected value of the cash
Referring to the previous problem, Mr. Backster is likely to hold the apartment complex of his choice for about 10 years and will use this period for decision-making purposes. Either apartment can be purchased for $100,000. Mr. Backster uses a risk adjusted discount rate approach when evaluating
Wardrobe Clothing Manufacturers is preparing a strategy for the fall season. One strategy is to go to a highly imaginative, new, four-gold-button sports coat. The all-wool product would be available for males and females. A second option would be to produce a traditional blue blazer line. The
Astrid has the following two investments in her portfolio:a. Which investment is riskier by itself and in a portfolio sense? b. What is the expected return of the portfolio?c. With a correlation coefficient of +0.30, what is the standard deviation of the portfolio?d. What is the beta of the
Assume a corporation has earnings before amortization and taxes (EBAT) of $100,000 and amortization of $50,000, and it has a 34 percent tax rate. Compute its cash flow.
As she headed toward her boss's office, Emily Hamilton, chief operating officer for the Aerocomp Corporation-a computer services firm that specialized in airborne support-wished she could remember more of her training in financial theory that she had been exposed to in college. Emily had just
a. In the previous problem, how much would cash flow be if there was only $10,000 in amortization? All other factors are the same.b. How much cash flow is lost due to the reduced amortization between problems 1 and 2a?
As the three division managers of Galaxy Systems Inc. entered the central headquarters meeting room, each felt under pressure. They were there to meet with Marlene Davidson, the senior vice-president of finance. Marlene, a CA who had spent seven years with KPMG before being recruited by Galaxy
Assume a firm has EBAT of $200,000, and no amortization. It is in a 25 percent tax bracket.a. Compute its cash flow.b. Assume it has $200,000 in amortization. Recompute its cash flow.c. How large a cash flow benefit did the amortization provide.
Blink 281 Corporation is considering an investment that will cost $120,000 and last for five years. The investment will be amortized on a straight-line basis over that period. Earnings generated by the investment before amortization and taxes over this period are as follows:Year
AI Quick, president of a Toronto Stock Exchange-listed firm , is very short-term oriented and interested in the immediate consequences of his decisions. Assume Mr. Quick is considering a project that will provide an increase of $2 million in cash flow because of favourable tax consequences but
Pluto Corporation is considering an investment that will cost $210,000 and last for three years. The investment will be amortized on a straight-line basis over that period. Earnings generated by the investment before amortization and taxes over this period are as follows:Year
What is the NPV profile? What three points (characteristics) should be determined to create the profile?
Assume a $50,000 investment and the following cash flows for two alternatives:Which of the alternatives would you select under the payback method? Year Investment B Investment A $10,000 $20,000 25,000 11,000 15,000 3 13,000 4 16,000 30,000 1,
What else, besides the forecast IRR and NPV, might top management consider in making capital budgeting decisions?
Referring to the previous problem, if the inflow in the fifth year for Investment A were $30,000,000 instead of $30,000, would your answer change under the payback method? Previous Problem Year Investment A Investment B $10,000 $20,000 2 11,000 25,000 3 13,000 15,000 4 16,000 30,000 1,
Generally, what effect does the CCA system have on the timing of CCA tax shield benefits?
Again referring to problem 7, analyze the two investment alternatives under the net present value method using a 15 percent discount rate. Would your answer change? Previous Problem Year Investment A Investment B $10,000 $20,000 2 11,000 25,000 3 13,000 15,000 4 16,000 30,000 1,
What is the ITC? How does it affect the capital budgeting decision?
The Short-Line Railroad is considering a $100,000 investment in either of two companies. The cash flows are as follows:a. Using the payback method, what decision should be made?b. Explain why the answer in part a can be misleading. Electric Co. Year Water Works $70,000 $15,000 1 15,000 15,000
How would you modify your capital budgeting analysis (NPV methodology) to account for expected inflation?
Britney Javelin Company is considering two investments, both of which cost $15,000. The cash flows are as follows:a. Which of the two projects should be chosen based on the payback method?b. Which of the two projects should be chosen based on the NPV method? Assume a cost of capital of 7
What implications does an efficient market (Chapter 14) have for NPV calculations?
A firm buys a new piece of equipment for $24,907 and will receive a cash flow of $4,500 per year for eight years. What is the IRR?
Hand Salsa buys a new piece of equipment for $11,778 and will receive a cash flow of $2,000 per year for 10 years. What is the IRR?
King's Department Store is considering the purchase of a new machine at a cost of $13,869. The machine will provide $3,000 per year in cash flow for six years. King's has a cost of capital is 12 percent. Using the IRR method, evaluate this project and indicate whether it should be undertaken.
Elgin Restaurant Supplies is analyzing the purchase of manufacturing equipment that will cost $20,000. The annual cash inflows are as follows.Year ..............Cash flow1 ..................$10,0002 ......................9,0003 ......................6,500a. Determine the IRR.b. With a cost of
Twelve Inch Toes Corp. will invest $175,000 in a project that will not begin to produce returns until the third year. From the end of the third year until the end of the tenth year (8 periods), the annual cash flow will be $43,000. If the cost of capital is 11 percent, should this project be
DeBarry Corporation makes an investment of $50,000 which yields the following cash flows:Year ............Cash flow1 ..................$10,0002 ....................10,0003 ....................16,0004 ....................18,0005 ....................20,000a. What is the present value with a 9 percent
The Green Goddess Company is considering the purchase of a new machine that would increase the speed of manufacturing tires and save money. The net cost of the new machine is $45,000. The annual cash flows have the following projections.Year ................Cash flow1
You are asked to evaluate the following two projects for Boring Corporation using the NPV method combined with the PI approach, which project would you select? Use a discount rate of 10 percent. Project Y (slow-motion replays of commercials) ($30,000 investment) Project X (DVDS of the weather
Turner Video will invest $48,500 in a project. The firm's discount rate (cost of capital) is 9 percent. The investment will provide the following inflows:1 .............$10,0002 ...............12,0003 ...............16,0004 ...............20,0005 ...............24,000The IRR is 14 percent.a. If
The Last Century Corporation uses the MIRR. The firm has a cost of capital of 7 percent. The project being analyzed has a $25,000 initial investment and is expected to produce the following cash flows:Year .......Cash flow1 ............ $12,0002 .............. 10,0003
Murchie's is considering diversification by way of acquisition to reduce its reliance on its volatile core business. Mad Max, the CEO, has asked for your calculation of a discount rate to be used to analyze the potential acquisition targets. The following information has been assembled.Long-term
Trois-Rivieres Manufacturing has 10,000 bonds (face value of $1,000 each) with a 10 percent coupon maturing in 8 years. Its preferred (100,000 shares) have a face value of $25 and pay a 7.5 percent dividend, and it has 600,000 common shares outstanding. Retained earnings are reported at
Island Capital has the following capital structure:Bonds ........................ ......................$20,000,000Perpetuals (preferred shares)...............4,000,000Common shares ............... .................20,000,000Retained earnings ............ . . . .. .. ....
A Dozen Monkeys Ltd. has the following right-hand side of its balance sheet:Debt: 8% coupon, 12 years to maturity...........$8,000,000Preferred shares: 5% dividend ............ ............1,000,000Common shares: 750,000 outstanding.............1,500,000Retained earnings
Eaton International Corporation has the following capital structure:a. If the firm has $19.5 million in retained earnings, at what size capital structure will the firm run out of retained earnings?b. The 7.1 percent cost of debt referred to above applied only to the first $14 million of debt.
Western Electric Utility Company faces increasing needs for capital. Fortunately it has an A credit rating. The corporate tax rate is 39 percent. Western's treasurer is trying to determine the corporation's current weighted average cost of capital to assess the profitability of capital budgeting
McNabb Construction Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Reid, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital.The company currently has an
Valvano Publishing Company is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Washburn, the vice-president of finance, has given you the following information and asked you to compute the weighted average cost of capital.The company currently has
Given the following information, calculate the weighted average cost of capital for Puppet Corporation.Percent of capital structure:Debt..............................................55%Preferred stock ..............................5Common equity ...........................40Additional
Given the following information, calculate the weighted average cost of capital for Hadley Corporation. Line up the calculations in the order shown in Table 11-1.Percent of capital structure:Preferred stock .......................................10%Common equity ...... . .. .. .. ........ .. . .. .
Given the following information, calculate the weighted average cost of capital for Genex Corporation. Line up the calculations in the order shown in Table 11-1.Percent of capital structure:Debt.......................................................35%Preferred stock ...... . .. .. ... ......... .
As an alternative to the capital structure shown in the previous problem for Tyler Oil Company, an outside consultant has suggested the following modifications.Debt. ................. . .................................60%Preferred stock .... .. ........ . .. .. .. . ....... .5Common
The Tyler Oil Company's capital structure is as follows:Debt..........................................................35%Preferred stock .... .. ........ . . . .. .. . ....... .15Common equity........................................50The aftertax cost of debt is 7 percent; the cost of preferred
What is the justification for using market value weightings rather than book value weightings?
What limitations are there in using the dividend valuation model to determine the cost of equity capital?
Ellington Electronics wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $1.50 per share, and the current price of its common stock is $30 per share. The expected growth rate is 8 percent.a. Compute the cost of retained earnings
The treasurer of Sutton Security Systems is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Based on the following facts, is she
Identify other variables (ratios) besides the debt-to-equity ratio that influence a company's cost of capital.
Schuss Inc. can sell preferred shares for $60 with an estimated flotation cost of $3.00. The preferred stock is anticipated to pay $7 per share in dividends.a. Compute the cost of preferred stock for Schuss Inc.b. Do we need to make a tax adjustment for the issuing firm?
The Meredith Company issued $100 par value preferred shares 10 years ago. The shares provided an 8 percent yield at the time of issue. Each preferred share is now selling for $75. What is the current yield or cost of preferred stock? (Disregard flotation costs.)
Shaw Communications is planning to issue debt that will mature in the year 2039. In many respects the issue is similar to currently outstanding debt of the corporation. Using Table 11-2 in the chapter, identifyTable 11.2a. The yield to maturity on similarly outstanding debt for the firm, in terms
Orbit Corp. has the following balance sheet:Today's market is subject to different supply and demand factors and underlying economic events than when Orbit's capital structure was put in place. This has been translated into the following current yields, which are demanded by the marketplace for a
For Russell Container Company, described in the previous problem, assume the yield on the bonds goes up by one percentage point and that the tax rate is now 34 percent.a. What is the new aftertax cost of debt?b. Has the aftertax cost of debt gone up or down from the previous problem? Explain
Huron Ltd. has the following capital structure:16% Debentures, due in 14 years.....................$30,000,000Preferreds (8% dividend, 40,000 shares)..............3,000,000Common shares: 3,600,000 outstanding .............7,200,000Retained earnings .........................
Russell Container Company has a $1,000 par value bond outstanding with 20 years to maturity. The bond carries an annual interest payment of $95, and is currently selling for $920. Russell is in a 25 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely
Austen Sensibles Ltd. has the following capital structure, which it expects to maintain into the foreseeable future:Debt. ......... . ......................35%Preferreds ......... . .............10%Common stock ........ . ... ...35%Retained earnings ........... .20%Current yields on similar risk
Octopus Transit has a $1,000 par value bond outstanding with 10 years to maturity. The bond carries an annual interest payment of $75, payable semiannually, and is currently selling for $1,092. Octopus is in a 35 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond
The risk-free rate is projected to be 5 percent for the upcoming year. Investor expectations concerning the market portfolio reveal expected excess returns of 8 percent during the same period. You have been closely following Y Ltd.'s stock with a beta of 1.2.a. What would beY's anticipated return
Why do you think the CAPM is or is not useful to the financial manager?
Waste Disposal Systems has an aftertax cost of debt of 6 percent. With a tax rate of 33 percent, what can you assume the yield on the debt is?
You have invested in a stock with some systematic risk. It has a beta of 1.05. The current anticipated market portfolio return for the upcoming year is 16 percent, and the anticipated market risk premium is 7 percent. Calculate the expected yield on this stock based on the CAPM.
Why would an efficient market be an important assumption for the development of the CAPM?
Calculate the aftertax cost of debt on a bond issue yielding 10 percent. The issuing company pays tax at a rate of 34 percent and will incur distribution costs of 1 percent on this bond issue.
Currently, Treasury bills yield 4.75 percent and the market prices risk at 6.90 percent. You have invested in a stock efficiently priced by the CAPM with a beta of 1.15 that will pay an expected dividend of $1.80 in one year. If the stock expects no capital appreciation in value over the next year,
If an individual stock lay above the SML, what would be an appropriate investment strategy? Why?
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