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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 21.1. You have just placed an order for 30,000 motherboards at a cost to you of 233.5
The treasurer of a major Canadian firm has $30 million to invest for three months. The interest rate in Canada is .24 percent per month. The interest rate in Great Britain is .29 percent per month.
Use Figure 21.1 to answer the following questions: Suppose interest rate parity holds, and the current six-month risk-free rate in Canada is 1.7 percent. What must the six-month risk-free rate be in
Take a look back at Figure 21.1 to answer the following questions:a. If you have CAD100, how many euros can you get?b. How much is one euro worth?c. If you have 5 million euros, how many dollars do
Given the following information for Bowie Pizza Co., calculate the depreciation expense: Sales = $64,000; Costs = $30,700; Addition to retained earnings = $5,700; Dividends paid = $1,980; Interest
Square Hammer Corp. shows the following information on its 2018 income statement: Sales = $305,000; Costs = $176,000; Other expenses = $8,900; Depreciation expense = $18,700; Interest expense =
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $6 million. The machinery can be sold to the Romulans today for $5.1 million. Klingon’s current balance sheet shows net
Given the information for Kerber’s Tennis Shop, Inc., in Problems 8 and 9, suppose you also know that the firm’s net capital spending for 2018 was $1,250,000 and that the firm reduced its net
The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed $650,000 in the common stock account and $3.98 million in the additional paid-in surplus account. The 2018 balance sheet showed
The 2017 balance sheet of Kerber’s Tennis Shop, Inc., showed long-term debt of $1.87 million, and the 2018 balance sheet showed long-term debt of $2.21 million. The 2018 income statement showed
The 2017 balance sheet of Dream, Inc., showed current assets of $4,810 and current liabilities of $2,230. The 2018 balance sheet showed current assets of $5,360 and current liabilities of $2,970.
Logano Driving School’s 2017 balance sheet showed net fixed assets of $2.4 million, and the 2018 balance sheet showed net fixed assets of $3.3 million. The company’s 2018 income statement
Pompeii, Inc., has sales of $46,200, costs of $23,100, depreciation expense of $2,200, and interest expense of $1,700. If the tax rate is 22 percent, what is the operating cash flow, or OCF?
Suppose the firm in Problem 3 had 80,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure?
Suppose the firm in Problem 2 paid out $95,000 in cash dividends. What is the addition to retained earnings?Data from Problem 2Griffin’s Goat Farm, Inc., has sales of $796,000, costs of $327,000,
Griffin’s Goat Farm, Inc., has sales of $796,000, costs of $327,000, depreciation expense of $42,000, interest expense of $34,000, and a tax rate of 21 percent. What is the net income for this firm?
Wims, Inc., has current assets of $4,900, net fixed assets of $27,300, current liabilities of $4,100, and long-term debt of $10,200. What is the value of the shareholders’ equity account for this
Referring back to the Boeing example used at the beginning of the chapter, note that we suggested that Boeing’s stockholders probably didn’t suffer as a result of the reported loss. What do you
Critics have charged that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Mark Parker, CEO of Nike, earned
Suppose that you buy a 1-year maturity bond for $1,000 that will pay you $1,000 plus a coupon payment of $60 at the end of the year. What real rate of return will you earn if the inflation rate isa.
A bond with par value $1,000 has a current yield of 7% and a coupon rate of 8%. What is the bond's price if it pays interest annually?
In Canada, futures are traded on the Boursede Montreal, www.m-x.ca. What futures contracts are offered for trading? Why would an investor be interested in purchasing a bond futures?
A large dental lab plans to purchase 1,000 ounces of gold in 1 month. Assume again that gold prices can be $1,330, $1,450, or $1,650 an ounce.a. What will total expenses be if the firm purchases call
A gold mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,450 an ounce, but the price is extremely volatile and could fall as low as $1,330 or rise as
Suppose that in the 5 days following a farmer's sale of September wheat futures at a futures price of $3.83 the futures prices areAt the end of day 5 the farmer decides to quit wheat farming and buys
"The farmer does not avoid risk by selling canola futures. If canola prices stay above $580 per tonne, then he will actually have lost by selling canola futures at $580." ls this a fair comment?
Look at Figure 25.8, which shows the possible future payoffs in October 2014 from a particular package of investments involving TO stock and options.a. What package of investments would provide you
Suppose that you hold a share of stock and a put option on that share with an exercise price of $100. Show algebraically and graphically the value of your portfolio when the option expires ifa. The
The Organisation for Economic Co-operation and Development (OECD) provides data on nominal and effective (that is, real) exchange rates. Log in to www.oecd.org and then click on ' Statistics," and
Sanyo produces audio and video consumer goods and exports a large fraction of its output to the United States under its own name and the Fisher brand name. It prices its products in yen, meaning that
An importer in Canada is due to take delivery of silk scarves from Europe in 6 months. The price is fixed in euros. Which of the following transactions could eliminate the importer's exchange risk?a.
McPhee Food Halls operated a chain of supermarkets in western Scotland. The company had had a lacklustre record, and, since the death of its founder in late 2005, it had been regarded as a prime
True o r false?a. One of the first tasks of an LBO's financial manager is to pay down debt.b . The cost of a merger is affected by the size of the merger gains only when the merger is financed with
A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase monthly sales from 200 to 220 units per month. The price per unit is $101 and the
Complete the following passage by selecting the appropriate terms from the following list (some terms may be used more than once): acceptance, open, commercial, trade, Canada, his or her own, note,
The total cash outflows of Alpha Restaurant are twice that of Beta Restaurant. Would Alpha's optimal cash balance be twice that of Beta, according to the Baumol model?
Calculate Paymore's cash payments to its suppliers under the assumption that the firm pays for its goods with a 1-month delay. Therefore, on average, two-thirds of purchases are paid for in the
Will each of the following events increase or decrease cash conversion cycles?a. Higher financing rates induce the firm to reduce its level of inventory.b. The firm obtains a new line of credit
Investors require an after-tax rate of return of 10% on their stock investments. Assume that the tax rate on dividends is 28% while capital gains escape taxation. A firm will pay a $2 per share
Nodhead College needs a new computer. It can either buy it for $250,000 or lease it from Compulease. The lease terms require Nodhead to make 6 annual payments (prepaid) of $55,000. Nodhead pays no
Financial leases make sense when the lessee faces a lower marginal tax rate than the lessor. Does this tax advantage carry over to operating leases?
Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a
The common stock and debt of Northern Sludge are valued at $70 million and $30 million, respectively. Investors currently require a 16% return on the common stock and an 8% return on the debt. If
What is the pecking-order theory of optimal capital structure? If the theory is correct, what types of firms would you expect to operate at high debt levels?
What is the trade-off theory of optimal capital structure? How does it define the optimal debt ratio?
Establishment Industries borrows $800 million at an interest rate of 7.6%. It expects to maintain this debt level into the far future. What is the present value of interest tax shields? Establishment
"For small issues of common stock, the costs of flotation amount to about 15 % of the proceeds. This means that the opportunity cost of external equity capital is about 15 percentage points higher
Each of the following terms is associated with one of the events beneath. Can you match them up?a. Red herringb. Firm commitmentc. Rights issueA. The underwriter agrees to buy the issue from the
Other things being equal, will the following provisions increase or decrease the yield to maturity at which a firm can issue a bond?a. A call provisionb. A restriction on further borrowingc. A
The shareholders of the Pickwick Paper Company need to elect 5 directors. There are 400,000 shares outstanding. How many shares do you need to own to ensure that you can elect at least 1 director if
If there are 10 directors to be elected and a shareholder owns 90 shares, indicate the maximum number of votes that he or she can cast for a favourite candidate undera. Majority votingb. Cumulative
Are the following statements true or false? Explain.a. In several recent years, non-financial corporations in Canada have repurchased more stock than they have issued.b. A Canadian corporation pays
Find the WACC of William Tell Computers. The total book value of the firm's equity is $10 million; book value per share is $20. The stock sells for a price of $30 per share, and the cost of equity
The common stock of Buildwell Conservation & Construction, Inc. (BCCI), has a beta of .8. The Treasury bill rate is 4% and the market risk premium is estimated at 7%. BCCI's capital structure
Micro Spinoffs, Inc., issued 20-year debt a year ago at par value, with a coupon rate of 9% paid annually. Today, the debt is selling at $1,050. If the firm's tax bracket is 30%, what is its
You are considering the purchase of real estate that w ill provide perpetual in come that should average $50,000 per year. How much will you pay for the property if yo u believe its market risk is
Which firm from each pair would you expect to have greater market risk? Explain your choice.a. General Steel or General Food Suppliesb. Exotic World Tours Agency or General Cinemas
In which of the following situations would you get the largest reduction in risk by spreading your portfolio across 2 stocks? In each case, is the correlation less than, greater than, or equal to
Go to Yahoo Finance (ca.finance.yahoo. com).a. Can you guess Dell's incremental cost for producing one computer? You probably have that amount in your wallet or purse! Let's estimate the sales
A project has fixed costs of $1,000 per year, depreciation charges of $500 a year, revenue of $6,000 a year, and variable costs equal to two-thirds of revenues.a. If sales increase by 5%, what will
a. What is the degree of operating leverage of Modern Artifacts (in problem 14) when sales are $8,000?b. What is the degree of operating leverage when sales are $10,000?c. Why is operating leverage
Modern Artifacts can produce keepsakes that will be sold for $80 each. Non-depreciated fixed costs are $1 ,000 per year and variable costs are $60 per unit.a. If the project requires an initial
A project currently generates sales of $10 million, variable costs equal to 50% of sales, and fixed costs of $2 million. The firm's tax rate is 35%. What are the effects of the following changes on
Ilana Industries, Inc., needs a new lathe. It can buy a new high-speed lathe for $1 million. The lathe will cost $35,000 to run, will save the firm $125,000 in labour costs, and will be useful for 10
You can buy a car for $25,000 and sell it in 5 years for $5,000, or you can lease the car for 5 years for $5,000 a year. The discount rate is 10% per year.a. Which option do you prefer?b. What is
Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $20,000 and will be depreciated in an asset class that carries a CCA rate of 30%. It will be sold for
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and
The owner of a bicycle repair shop forecasts revenues of $ 160,000 a year. Variable costs will be $45,000, and rental costs for the shop are $35,000 a year. Depreciation on the repair tools will be
We've emphasized that the firm should pay attention only to cash flows when assessing the net present value of proposed projects. Depreciation is a noncash expense. Why then does it matter whether we
Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 mill ion. If the tax rate is 40%, what is the
A firm can lease a truck for 4 years at a cost of $30,000 annually. It can instead buy a truck at a cost of $80,000, with annual maintenance expenses of $10,000. The truck will be sold at the end of
A proposed nuclear power plant will cost $2.2 billion to build and then will produce cash flows of $300 million a year for 15 years. After that period (in year 15), it must be decommissioned at a
A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years. The firm accepts projects with a discounted payback of 5 years or less. Should this project
What is the profitability index of a project that costs $10,000 and provides cash flows of $3,000 in years 1 and 2 and $5,000 in years 3 and 4? The discount rate is 10%.
Considering your answers to problems 2, 3, and 7, is there any reason to believe that the project with the lower payback period is the better project? Year Project A Project B -S100 -S100 50 40 40
What is the payback period of each project? Year Project A Project B -S100 -S100 50 40 40 50 40 50 4 40
If the opportunity cost of capital is 11%, what is the profitability index for each project? Does the profitability index rank the projects correctly? Year Project A Project B -S100 -S100 50 40 40
In the light of your answers to problems 2 to 4, is there any reason to believe the project with the higher IRR is the better one? Year Project A Project B -S100 -S100 50 40 40 50 40 50 4 40
What are the internal rates of return on projects A and B? Year Project A Project B -S100 -S100 50 40 40 50 40 50 4 40
Which project would you choose if the opportunity cost of capital were 16%? Year Project A Project B -S100 -S100 50 40 40 50 40 50 4 40
Suppose that you can choose only one of these projects. Which would you choose? The discount rate is still 11%. Year Project A Project B -S100 -S100 50 40 40 50 40 50 4 40
If the opportunity cost of capital is 11%, which of these projects is worth pursuing? Year Project A Project B -S100 -S100 50 40 40 50 40 50 4 40
Your wealthy uncle established a $ 1,000 bank account for you when you were born. For the first 8 years of your life, the interest rate earned on the account was 8%. Since then, rates have been only
What is the value of a perpetuity that pays $100 every 3 months forever? The discount rate quoted on an APR basis is 12%.
Inflation in Brazil in 1992 averaged about 23% per month. What was the annual inflation rate?
An engineer in 1950 was earning $6,000 a year. Today, in 2011, she earns $60,000 a year. However, on average, goods today cost 8.2 times what they did in 1950.a. What is her real income today in
Lever Age pays an 8% rate of interest on $ 10 million of outstanding debt with face value $10 million. The firm's EBIT was $1 million.a. What is times interest earned?b. If depreciation is $200,000,
There are no universally accepted definitions of financial ratios, but some of the following ratios make no sense at all. Substitute correct definitions and then explain what each ratio measures.
Use the data from question 1 to demonsrrate that ROE = leverage ratio x asset turnover ratio x operating profit margin x debt burden. Income Statement (millions of dollars) Net sales 13,193 Cost of
We mentioned banks and insurance companies as two examples of financial institutions. What other types of financial institutions can you identify?
Pollution Busters, Inc., is considering a purchase of 10 additional carbon sequesters for $ 100,000 apiece. The sequesters last for only 1 year until saturated with carbon. Then the carbon is removed
In a stroke of good luck, your company has uncovered an opportunity to invest for 10 years at a guaranteed 8% rate of return. What is the opportunity cost of capital? Assume interest rates as in
Go to job Bank, www.jobbank.gc.ca/home-eng.do, a career and education Web site provided by the Government of Canada. Type in a job title that you find interesting and pick your province or territory.
Sometimes lawyers work on a contingency basis. They collect a percentage of their client's settlement instead of receiving a fixed fee. Why might clients prefer this arrangement? Would this sort of
Choose in each case the type of company that best fits the description:a. Owned by a small group of investors (private corporation/public corporation)b. Does not pay income tax (private corporation/
What are the advantages and disadvantages of organizing a firm as a proprietorship, partnership, or corporation? In what sense are LLPs or professional corporations hybrid forms of business
1. Justin believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company?2. Suzanne
Pandosy Inc. has declared a $5.10 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. Pandosy sells for $93.85 per share, and the stock is about to go ex
Lepreau Books Corporation has an agreement with Hampton Bank whereby the bank handles $5 million in collections a day and requires a $350,000 compensating balance. Lepreau Books is contemplating
The Salisbury Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 500 bicycles. The average cost to the shop of a bicycle is $390. The

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