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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

The S&P 500 P/E multiple of 25.54 at the end of 2016 was higher than its historical average of approximately 15. Some financial commentators argued that this meant that the firms in the S&P
It is April 4, 2018, and your company is considering the possibility of purchasing the Chrysler automobile manufacturing business. Managers of Fiat Chrysler Automobiles N.V., the automobile
Renewal Company has net income of $1.25 million and a dividend payout ratio of 35 percent. It currently has equity of $2,875,223. What is the firm’s sustainable growth rate (SGR)?
Northwood Corp. has a dividend payout ratio of 60 percent, return on equity of 14.5 percent, total assets of $11,500,450, and equity of $4,652,125. Calculate the fi rm’s internal rate of growth
The Starlight, Inc., financial statements for the fiscal year ended June 30, 2017, are presented below. The firm’s sales are projected to grow at a rate of 20 percent next year, and all financial
What is the plug value in a financial model?
Which of the following is/are usually included in an entrepreneur’s business plan?a. Detailed description of the company’s products and services.b. Discussion of the management team, including
Mastercard, Inc., completed a ten-for-one stock split on January 22, 2014. Immediately before the stock split there were 120.38 million shares outstanding at a price of $826.00 per share. After the
Three years ago, you purchased 4,000 shares of Metwa Inc. for $17 per share. Today Metwa is repurchasing its shares through a fixed-price tender off er at a price of $45 per share. What are the
You are the CFO of a public company that advises distressed companies about how to manage their businesses. Your company has been performing extremely well. In fact, it has earned so much money that
You are the chief fi nancial offi cer (CFO) of a large publicly traded company. You would like to convey positive information about the fi rm to the market. If you agree with the conclusions from the
Llama Wool Company management is doing some financial planning for the coming year. Llama plans to raise $10,000 in new equity this year and wants to pay a dividend to stockholders of $30,000. The
You purchased 1,000 shares of Koogal stock five years ago for $30 per share. Today Koogal is repurchasing your shares through a fixed-price tender off er for $80 per share. What are the after-tax
Shadows, Inc., had shares outstanding that were valued at $120 per share before a two-for-one stock split. After the stock split, the shares were valued at $62 per share. If we accept that the
In 2013 the maximum tax rate on dividends increased from 15 percent to 23.8 percent. How would you expect this increase to affect the prices of dividend-paying stocks versus those of
The price of a share of stock is $15.00 on Tuesday, November 14, 2017. The record date for a $0.50 dividend is Friday, November 17, 2017. If there are no taxes on dividends, what would you expect the
Management of the Veil Acts Company just announced that instead of a regular dividend this quarter, the company will repurchase shares using the same amount of cash that would have been paid in the
You would like to own a common stock that has a record date of Friday, September 8, 2017. What is the last date that you can purchase the stock and still receive the dividend?
You own all of the equity in a debt-free App development business that generates cash flows of $400,000 each year in perpetuity. The cost of assets, kAssets is 10 percent and the tax rate is 25
Forwards Resources Company is currently an all-equity firm with a WACC of 14 percent and a 40 percent marginal tax rate. Forwards wants to move to a capital structure with $250 million of debt
Keyboard Chiropractic Clinic produces $300,000 of cash fl ow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would like to
Cerberus Security Company produces a cash fl ow of $200 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Cerberus is 20 percent, and the firm is
Your boss at Box and Freight Company asks you how much additional debt the company would have to add through a capital restructuring in order to create $9 million in present value from the resulting
Management of Southern Parts Company has decided to sell 10-year bonds to finance expansion into the Pacific Northwest. The loan rate on these bonds is 8 percent and the 3-month Treasury bill rate is
Hurricane Corporation is financed with debt, preferred equity, and common equity with market values of $20 million, $10 million, and $30 million, respectively. The betas for the debt, preferred
You know that the return of Momentum Cyclicals common shares is 1.6 times as sensitive to macroeconomic information as the return of the market. If the risk-free rate of return is 2.88 percent and
If a firm’s management anticipates financing a project with a capital mix that is different from its current capital structure, describe how the firm is subjecting itself to a calculation error if
What are direct out-of-pocket costs?
Seerex Wok Co. is expected to pay a dividend of $1.10 one year from today on its common shares. That dividend is expected to increase by 5 percent every year thereafter. If the price of Seerex common
An online medical advice company just completed an IPO with an investment bank on a firm-commitment basis. The firm issued 5 million shares of common stock, and the underwriting fees were $1.90 per
Myriad Biotech management plans a $114 million IPO in which the offering price to the public will be $51 per share. The company will receive $47.50 per share. The firm’s legal fees, SEC
Trajax, Inc., a high-technology firm in Portland, raised a total of $90 million in an IPO. The company received $27 of the $30 per share offering price. The firm’s legal fees, SEC registration
What are some viable exit strategies for investors in a start-up company?
What are the characteristics of a public bond? (Think in terms of comparing it to private placement and bank term loans.)
You are considering starting a new online dating service, but you lack the initial capital. What are your options for obtaining the necessary financing?
Suppose a firm is doing an IPO and the investment bank offers to buy the securities for $39 per share with an offering price of $42. What is the underwriter’s spread? Assume that the
FRA Manufacturing Company purchases 9,000 units of Part 3BX each year. The cost of placing an order is $5 and the cost of carrying one part in inventory for a year is $1. What is the economic order
The Whole Foods Market, Inc., balance sheet for the fiscal year ending September 25, 2016 included the following: total current assets of $1,975 million, total assets of $6,341 million, total
Which of the companies reduced the average time it took to collect on accounts receivable from 2016 to 2017?a. Company A.b. Company B.c. Company C.d. Company D.Mary Gonzales is evaluating companies
The industry average receivables collection period:a. Increased from 2016 to 2017.b. Decreased from 2016 to 2017.c. Did not change from 2016 to 2017.d. Increased along with the increase in the
Which of the companies has the lowest accounts receivable turnover in 2017?a. Company A.b. Company B.c. Company C.d. Company D.Mary Gonzales is evaluating companies in the office supply industry and
Sliver Computing, Inc., reported the following balance sheet information for the last fiscal year. Sliver Computing also reported cost of goods sold of $291,240 for the same period. Internal auditors
Winegartner Cosmetics management is setting up a line of credit at the company’s bank for $5 million for up to two years. The interest rate is 5.875 percent and the loan agreement calls for an
Describe the risks that are associated with a restrictive current asset management strategy.
Devlin Construction, Inc., reported the following balance sheet information for the last fiscal year. Devlin also reported net sales of $980,770 and days’ sales in inventory of 48.90 days.Devlin
Devon Automotive management estimates that it takes the company 62 days to collect cash from customers on finished goods from the day it receives raw materials, and it takes 65 days to pay its
Northern Manufacturing Company management found that during the last year it took an average of 47 days to pay its suppliers, whereas it took 63 days to collect its receivables. The company’s
List and briefly describe the three main strategies a firm may use to finance its working capital and fixed assets.
What is float?
Why can cash investment in inventory be costly?
What does “4/15, net 30” mean?
Quarri Industries common stock has a beta of 1.6. If the market risk-free rate is 4 percent and the expected return on the market is 9 percent, what is Quarri’s cost of common stock?
WalkAbout Kangaroo Shoe Stores management forecasts that it will sell 9,500 pairs of shoes next year. The firm buys its shoes for $50 per pair from the wholesaler and sells them for $75 per pair. If
Silver Polygon, Inc. management has determined that if revenues were to increase by 10 percent, then EBIT would increase by 25 percent to $100,000. The fixed costs (cash only) for the firm are
Sensitivity, scenario, and simulation analysis: If you were interested in calculating the probability that a project will have a positive FCF, what type of risk analysis tool would you most
Specialty Light Bulbs management anticipates selling 3,000 light bulbs this year at a price of $15 per bulb. It costs Specialty $10 in variable costs to produce each light bulb, and the fixed costs
Duplicate Footballs, Inc., management expects to sell 15,000 balls this year. The balls sell for $110 each and have a variable cost per unit of $80. Fixed costs, including depreciation and
The accounting operating profit breakeven point tells us the number of units that must be sold for a firm to break even in a given year from an accounting operating profit perspective. What measure
Explain how the value of the degree of accounting operating leverage can be used.
What is the advantage of using a simulation analysis instead of a scenario analysis to assess the risk of a project?
Describe how the pretax operating cash flow break-even point is related to the economic break-even point.
Which of the following are relevant cash flows in the evaluation of a proposal to produce a new product?a. Decrease in the cash flows of a substitute product.b. Alternative of leasing an existing
Given the U.S. Corporate Tax Rate Schedule in Exhibit 11.6, what was the marginal tax rate and average tax rate of a corporation that had a taxable income of $12 million in 2016?
Explain how we determine the optimal time to replace an existing asset with a new one.
MusicHeaven,Inc., is a producer of media players which currently have either 20 gigabytes or 30 gigabytes of storage. Now the company is considering launching a new production line making mini media
When choosing between mutually exclusive projects of unequal lives, how can we ensure that the best decision is made?
Management of Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $4 million. The discount rate is 12 percent. The cash flows that
Trident Corp. management is evaluating two independent projects. The costs and expected cash flows are given in the following table. The cost of capital is 10 percent.a. Calculate the projects’
Management of Skywards, Inc., an airline caterer, is purchasing refrigerated trucks at a total cost of $3.25 million. After-tax net income from this investment is expected to be $750,000 for the next
Quasar Tech Co. management is investing $6 million in new machinery that will produce the next-generation routers. Sales to its customers will amount to $1,750,000 for the next three years and then
Primus Corp. management is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. The cost of this project will be $7,125,000. It will
Management of Larsen Automotive, a manufacturer of auto parts, is considering investing in two projects. The company typically compares project returns to a cost of funds of 17 percent. Compute the
Jekyll & Hyde Corp. management is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows for each project are given in the following table. Which
Management of Draconian Measures, Inc., is evaluating two independent projects. The company uses a 13.8 percent discount rate for such projects. The costs and cash flows for the projects are shown
Morningside Bakeries recently purchased equipment at a cost of $650,000. Management expects the equipment to generate cash flows of $275,000 in each of the next four years. The cost of capital is
Champlain Corp. management is investigating two computer systems. The Alpha 8300 costs $3,122,300 and will generate cost savings of $1,345,500 in each of the next five years. The Beta 2100 system
Describe the process of capital rationing?
West Street Automotive is considering adding state safety inspections to their service offerings. The equipment necessary to perform these inspections will cost $557,000 and will generate cash flows
Flowers Unlimited is considering purchasing an additional delivery truck which will have a seven year useful life. The new truck will cost $42,000. Cost savings with this truck are expected to be
The profitability index is a tool for measuring a project’s benefits relative to its costs. How might this help to eliminate bias in project selection?
What decision criteria should managers use in selecting projects when a firm faces capital constraints?
Under what circumstances do the NPV and IRR decision rules always yield the same decision?
What is the internal rate of return (IRR) method?
What are the major shortcomings of using the Accounting Rate of Return (ARR) method as a capital budgeting method?
What is the average accounting rate of return (ARR) on a piece of equipment that will cost $1.2 million and that will result in pretax cost savings of $380,000 for the first three years and then
What do we know about that project’s IRR if we know that it has a positive NPV?
Testco Corporation is considering adding a new product line. The cost of the factory and equipment to produce this product is $1,780,000. Company management expects net cash flows from the sale of
The spot rate on the London market is £0.7531/$, while the 90-day forward rate is £0.7602/$. What is the annualized forward premium or discount on the British pound?
The spot rate of the Australian dollar (A$) is A$1.1667/$. The Australian dollar is quoted at a 30-day forward premium of 4.90 percent against the U.S. dollar. What is the 30-day forward quote?
The foreign exchange department of Bank of America has a bid quote on Canadian dollars (C$) of C$1.0800/$. If the bank typically tries to make a bid-ask spread of 0.5 percent on these foreign
Banco Santiago wants to make a bid-ask spread of 0.65 percent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP 18.3092/$, what does the bid rate have to be?
Alcor Pharma just received revenues of $3,165,300 in Australian dollars (A$). Management has the following exchange rates: A$1.8010/£ and $1.5906/£. What is the U.S. dollar value of the company’s
Tricolor Industries has purchased equipment from a Brazilian firm for a total cost of 272,500 Brazilian reals. The firm has to pay in 30 days. Citibank has given the firm a 30-day forward quote of
Covington Industries just sold equipment to a Mexican firm. Payment of 11,315,000 Mexican pesos (MP) will be due to Covington in 30 days. Covington has the option of selling the pesos today at a
Barrington Fertilizers, Inc., exports its specialized lawn care products to Canada. It made a sale worth C$1,150,000, with the payment due in 90 days. Barrington’s banker gave it a forward quote of
Burnes, Inc., is a mature firm that is growing at a constant rate of 5.5 percent per year. The last dividend that the firm paid was $1.50 per share. If dividends are expected to grow at the same rate
Which type of secondary market provides the most efficient market for financial securities?
Management of ProCor, a biotech firm, forecasted the following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. Management then expects the company to grow at a constant
The preferred stock of Axim Corp. is currently selling at $47.13. If the required rate of return is 12.2 percent, what is the dividend paid by this stock?
Explain why the growth rate g must always be less than the rate of return R for the constant-growth rate model?

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