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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

The Berry Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Berry should proceed or not. The
The Crandall store begins each week with 300 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $38 per year and the fixed order cost is $75, what is
Odium Manufacturing uses 2500 switch assemblies per week and then reorders another 2500. If the relevant carrying cost per switch assembly is $7.50, and the fixed order cost is $1,300, is Odium’s
Hildegarde Inc. is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Hildegarde should proceed or not.
Barn Yard Inc. is a wholesaler that stocks engine components and tests equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which
The Thaddee Corporation sells on credit terms of net 30. Its accounts are, on average, 7 days past due. If annual credit sales are $9.3 million, what is the company’s balance sheet amount in
Dieppe Inc. has an average collection period of 33 days. Its average daily investment in receivables is $42,300. What are annual credit sales? What is the receivables turnover? Assume 365 days per
Melanson Inc. has weekly credit sales of $17,300, and the average collection period is 36 days. What is the average accounts receivable figure?
Kyoto Joe Inc. sells earnings forecasts for Japanese securities. Its credit terms are 2/10, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average
The Moncton Corporation has annual sales of $38 million. The average collection period is 34 days. What is the average investment in accounts receivable as shown on the balance sheet? Assume 365
Sussex Inc., a large fertilizer distributor based in Nova Scotia, is planning to use a lockbox system to speed up collections from its customers located on the West Coast. A Vancouver-area bank will
Loch Alva Inc. disburses cheques every two weeks that average $86,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
Your neighbour goes to the post office once a month and picks up two cheques, one for $14,000 and one for $5,000. The larger cheque takes four days to clear after it is deposited; the smaller one
Each business day, on average, a company writes cheques totalling $12,000 to pay its suppliers. The usual clearing time for the cheques is four days. Meanwhile, the company is receiving payments from
1. What is Donaghy Corporation’s total net cash flow available from the current lockbox system to meet payroll?2. Under the terms outlined by the bank should the company proceed with the
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 2.1 percent per quarter on any funds actually borrowed.2. Maintain a 4 percent
A bank offers your firm a revolving credit arrangement for up to $70 million at an interest rate of 1.9 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent
Below are the most recent statements of financial position for Tabor Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount: TABOR INC.
Consider the following financial statement information for the Carlboo Corporation:Calculate the operating and cash cycles. How do you interpret your answer? Assume 365 days in a year. Beginning
Prince George Corp. has a book net worth of $13,205. Long-term debt is $8,200. Net working capital, other than cash, is $2,575. Fixed assets are $17,380. How much cash does the company have? If
The statement of financial position for Knox Corp. is shown here in market value terms. There are 9,000 shares of stock outstanding.The company has declared a dividend of $1.40 per share. The stock
Laurier Corp. has no debt but can borrow at 6.1 percent. The firm’s WACC is currently 9.5 percent, and the tax rate is 35 percent.a. What is the company’s cost of equity?b. If the firm converts
Portneuf Industries has a debt–equity ratio of 1.5. Its WACC is 9 percent, and its cost of debt is 5.5 percent. The corporate tax rate is 35 percent.a. What is the company’s cost of equity
Absolute Priority Rule In the event of corporate liquidation proceedings, rank the following claimants of the firm from highest to lowest in order of their priority for being paid:a. Preferred
Limoilou Corp. uses no debt. The weighted average cost of capital is 8 percent. If the current market value of the equity is $18 million and there are no taxes, what is EBIT?
What basic options does a firm have if it cannot (or chooses not to) make a contractually required payment such as interest? Describe them.
Beauport Inc. a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 30 percent debt. Currently, there are 7,000 shares outstanding, and
Vanier 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 210,000 shares of stock outstanding.
Charny Inc. has no debt outstanding and a total market value of $180,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong
The Sicamous Company and the Revelstoke Company are two firms whose business risk is the same but that have different dividend policies. Sicamous pays no dividend, whereas Revelstoke has an expected
Salmon Arm Corporation is evaluating an extra dividend versus a share repurchase. In either case, $11,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $58
You own 1000 shares of stock in Armstrong Corporation. You will receive a $1.85 per share dividend in one year. In two years, Armstrong will pay a liquidating dividend of $58 per share. The required
Penticton Rock (PR) Inc. predicts that earnings in the coming year will be $54 million. There are 19 million shares, and PR maintains a debt-equity ratio of 1.2.a. Calculate the maximum investment
Summerland Corporation follows a strict residual dividend policy. Its debt-equity ratio is 1.5.a. If earnings for the year are $145,000, what is the maximum amount of capital spending possible with
Rutland Corporation has declared an annual dividend of $0.50 per share. For the year just ended, earnings were $8 per share.a. What is Rutland’s payout ratio?b. Suppose Rutland has seven million
Crawford Inc., a litter recycling company, uses a residual dividend policy. A debt-equity ratio of 1.0 is considered optimal. Earnings for the period just ended were $1,400, and a dividend of $420
In the previous problem, suppose the company instead decides on a four-for-one stock split. The firm’s 75 cent per share cash dividend on the new (post-split) shares represents an increase of 10
The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $43 per share. What effects on the equity accounts will the
In the previous problem, suppose Knox has announced it is going to repurchase $12,600 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be
York University pays no taxes on its capital gains or on its dividend income and interest income. Would it be irrational to find low-dividend, high-growth stocks in its portfolio? Would it be
For initial public offerings of common stock, 1993 was a very big year, with over $43 billion raised by the process. Relatively few of the firms involved paid cash dividends. Why do you think that
Last month, East Coast Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was “temporarily suspending payments due
This question is a follow-up to Question A.1 on Miller’s model. In comparing this approach to M&M with corporate taxes, you can see that in one case both models imply that firms should use 100
Miller’s model introduces personal taxes into the theory of capital structure. With both personal and corporate taxes, we got the same indiff erence result as with no taxes. Explain why.
Nicolet Real Estate Company was founded 25 years ago by the current CEO, Steven Nicolet. The company purchases real estate, including land and buildings, and rents the property to tenants. The
The Odanak Corporation (OC) has filed for bankruptcy. All of OC’s assets would fetch $43 million on the open market today if put up for sale. The other alternative would be to reorganize the
A petition for the reorganization of the Boniface Company has been filed under the Insolvency Act. The trustees estimate the firm’s liquidation value, after considering costs, is $102 million.
The Montmagny Company and the Shawinigan Company are identical in every respect except that Montmagny is not levered. Financial information for the two firms appears in the following table. All
Cherrywood Inventory Systems Inc. has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $31. At the close
Belford Corp. wants to raise $4.5 million via a rights offering. The company currently has 580,000 shares of common stock outstanding that sell for $45 per share. Its underwriter has set a
Milne Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $83. The current price is $89 per share, and there are 24 million shares outstanding. The rights
In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $76 per share? (Assume the PE ratio remains constant.) What is the NPV of this
The Hagerman Heavy Metal Mining (H2M2) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:Stock price .......................... $ 76Number
Chancery Inc. wishes to expand its facilities. The company currently has 5 million shares outstanding and no debt. The stock sells for $31 per share, but the book value per share is $7. Net income is
Reesor Inc. has 175,000 shares of stock outstanding. Each share is worth $68, so the company’s market value of equity is $11,900,000. Suppose the firm issues 30,000 new shares at the following
The Rouge Co. has just gone public. Under a firm commitment agreement, Rouge received $17.67 for each of the 15 million shares sold. The initial offering price was $19 per share, and the stock rose
In the previous problem, if the OSC filing fee and associated administrative expenses of the offering are $900,000, how many shares need to be sold?Data from previous questionThe Cresthaven Horses
The Cresthaven Horses Corporation needs to raise $85 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed
The Markville Co. and the Unionville Co. have both announced IPOs at $40 per share. One of these is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which is
Milliken Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined
In 1999, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approximately one month and then sold. The investment rule he followed
The Greensborough Corporation has announced a rights offer to raise $30 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
A firm is considering a project that will last five years and will generate an annual cash flow of $9 million. Th e project requires an initial investment of $28 million. Assume that the cost of
For the company in the previous problem, what is the sustainable growth rate?Data from previous problemThe most recent financial statements for Burnaby Co. are shown here: Statement of Comprehensive
You are the manager of a department that recently launched a new product line for High Flyer Incorporated. High Flyer invested $3.8 million of equity and $2.2 million of debt in the project, and the
What would be the marginal benefit to the mining company if it could obtain a government loan for $42 million at 8.4 percent that has a balloon payment for the full amount at the end of 10 years?
As a new financial analyst at ABC Co., your manager has decided to give you two projects to evaluate for the company. Prior to undertaking either of these projects, the company has an ROA of 37
A mining company has discovered a small silver deposit neighbouring its existing mine site. It has been estimated that there is a 10-year supply of silver in the deposit that would return $13.5
Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider a 2010 Lexus RX 450h, which had a list price of $5,565 (-including
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Retlaw Corporation (RC) manufactures time series photographic equipment. It is currently at its target debt equity ratio of .80. It’s considering building a new $50 million manufacturing facility.
Conrad Mining Inc. uses a cost of capital of 11 percent to evaluate average risk project and it adds or subtracts 3 percent to adjust for risk. Currently the firm has two mutually exclusive
Wrentham Inc. has two divisions of equal size. Division A has a beta of 0.93, while Division B has a beta of 1.57. Wrentham has no debt, and is completely equity-financed. The real risk-free rate is
Judson Inc. recently issued new securities to finance a new TV show. The project cost $14 million, and the company paid $725,000 in flotation costs. In addition, the equity issued had a flotation
Suppose your company needs $15 million to build a new assembly line. Your target debtequity ratio is .60. The flotation cost for new equity is 8 percent, but the flotation cost for debt is only 5
Welling Inc. has a target debt-equity ratio of 1.25. Its WACC is 9.2 percent, and the tax rate is 35 percent.a. If Welling’s cost of equity is 14 percent, what is its pre-tax cost of debt?b. If
In Problem 12, suppose the most recent dividend was $4.10 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
Tempest Manufacturing has 8 million shares of common stock outstanding. The current share price is $73, and the book value per share is $7. Tempest Manufacturing also has two bond issues
Turin Corp. has a weighted average cost of capital of 9.6 percent. The company’s cost of equity is 12 percent and its pre-tax cost of debt is 7.9 percent. The tax rate is 35 percent. What is
Peacock Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 5
Pearce’s Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 35 percent. Assume the par
Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual
Suppose Whitney Ltd. just issued a dividend of $1.69 per share on its common stock. The company paid dividends of $1.35, $1.43, $1.50, and $1.61 per share in the last four years. If the stock
You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 17 percent. If Stock X has an expected return of 14.8
You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Asset Stock A Stock B Stock C
Asset W has an expected return of 12.8 percent and a beta of 1.25. If the risk-free rate is 4.1 percent,complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12 percent and Stock Y with an expected return of 9.5 percent. If your goal is to create a
Suppose the returns on long-term corporate bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than -2.2
What is the historical real return on Scotia Capital Markets long bonds?
Given that Hayes was down by 98 percent for 1998, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Given that Nortel was up by more than 300 percent in the 12 months ending in July 2000, why didn’t all investors hold Nortel?
Baird Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?
You are considering a new product launch. The project will cost $1,400,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 180 units
In the previous problem, supposed the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would only be desirable if
In the previous problem, suppose you think it is likely that expected sales will be revised upwards to 9500 units if the first year is a success and revised downwards to 4300 units if the first year
We are examining a new project. We expect to sell 8,750 units per year at $189 net cash flow apiece (including CCA) for the next 16 years. In other words, the annual operating cash flow is projected
Thunder Bay Inc. (TBI) manufactures biotech sunglasses. The variable materials cost is $10.48 per unit, and the variable labour cost is $6.89 per unit.a. What is the variable cost per unit?b. Suppose
In looking at Euro Disney, and its “Mickey Mouse” financial performance early on, note that the subsequent actions taken amount to a product reformulation. Is this a marketing issue, a finance
In our previous chapter, we discussed Air Canada’s launch of Tango. Suppose Tango ticket sales had gone extremely well and Air Canada was forced to expand capacity to meet demand. Air Canada’s
What is the option to abandon? Explain why we underestimate NPV if we ignore this option.

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