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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

a. What are the different types of cash dividends?b. What are the mechanics of the cash dividend payment?c. How should the price of a stock change when it goes ex dividend?
Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The
Assume a firm's debt is risk-free, so that the cost of debt equals the risk-free rate, Rf . Define βA as the firm's asset beta-that is, the systematic risk of the firm's assets. Define βE to be the
In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision?Data From Problem 14:Frederick & Co.
Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35
Empress Corp. has no debt but can borrow at 8.2 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent.a. What is the company’s cost of equity?b. If the firm converts to
In the previous question, suppose the corporate tax rate is 35 percent. What is EBIT in this case? What is the WACC? Explain.Data From Previous Problem:Wood Corp. uses no debt. The weighted average
Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?Data From Problem 6:Keenan Corp. is comparing two different
In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Data From Problem 4:James Corporation is comparing
Suppose the company in Problem 1 has a market-to-book ratio of 1.0.a. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. Also calculate the
Repeat parts (a) and (b) in Problem 1 assuming Maynard has a tax rate of 35 percent.Data From Problem 1:Maynard, Inc., has no debt outstanding and a total market value of $250,000. Earnings before
Refer to the observed capital structures given in Table 16.7 of the text. What do you notice about the types of industries with respect to their average debt-equity ratios? Are certain types of
a. What is the APR?b. What is the difference between liquidation and reorganization?
a. Do U.S. corporations rely heavily on debt financing?b. What regularities do we observe in capital structures?
a. Under the pecking-order theory, what is the order in which firms will obtain financing?b. Why might firms prefer not to issue new equity?c. What are some differences in implications of the static
a. What are some of the claims to a firm’s cash flows?b. What is the difference between a marketed claim and a nonmarketed claim?c. What does the extended pie model say about the value of all the
a. Can you describe the trade-off that defines the static theory of capital structure?b. What are the important factors in making capital structure decisions?
a. What are direct bankruptcy costs?b. What are indirect bankruptcy costs?
a. What is the relationship between the value of an unlevered firm and the value of a levered firm once we consider the effect of corporate taxes?b. If we consider only the effect of taxes, what is
a. What does M&M Proposition I state?b. What are the three determinants of a firm’s cost of equity?c. The total systematic risk of a firm’s equity has two parts. What are they?
a. What is the impact of financial leverage on stockholders?b. What is homemade leverage?c. Why is Trans Am’s capital structure irrelevant?
a. Why should financial managers choose the capital structure that maximizes the value of the firm?b. What is the relationship between the WACC and the value of the firm?c. What is an optimal capital
Mark Sexton and Todd Story have been discussing the future of S&S Air. The company has been experiencing fast growth, and the two see only clear skies in the company's future. However, the fast
Keira Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $71. The current price is $76 per share, and there are 19 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 $98 per share? (Assume the PE ratio remains constant.) What is the NPV of this
Teardrop, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and no debt. The stock sells for $50 per share, but the book value per share is $18. Net income
The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.20 for each of the 10 million shares sold. The initial offering price was $20 per share, and the stock rose
The Woods Co. and the Mickelson Co. have both announced IPOs at $40 per share. One of these is undervalued by $7, and the other is overvalued by $5, but you have no way of knowing which is which. You
The Clifford Corporation has announced a rights offer to raise $40 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow
In the previous two questions, how would it affect your thinking to know that in addition to the 6.5 million shares offered in the IPO, Eyetech had an additional 32 million shares outstanding? Of
a. What is shelf registration?b. What are the arguments against shelf registration?
a. What is the difference between private and public bond issues?b. A private placement is likely to have a higher interest rate than a public issue. Why?
a. What are the different kinds of dilution?b. Is dilution important?
a. How does a rights offering work?b. What questions must financial managers answer in a rights offering?c. How is the value of a right determined?d. When does a rights offering affect the value of a
a. What are the different costs associated with security offerings?b. What lessons do we learn from studying issue costs?
a. What are some possible reasons why the price of stock drops on the announcement of a new equity issue?b. Explain why we might expect a firm with a positive NPV investment to finance it with debt
a. Why is underpricing a cost to the issuing firm?b. Suppose a stockbroker calls you up out of the blue and offers to sell you “all the shares you want” of a new issue. Do you think the issue
a. What do underwriters do?b. What is the Green Shoe provision?
a. What is the difference between a rights offer and a cash offer?b. Why is an initial public offering necessarily a cash offer?
a. What are the basic procedures in selling a new issue?b. What is a registration statement?
a. What is venture capital?b. Why is venture capital often provided in stages?
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt−equity ratio of .70. It's considering building a new $45 million manufacturing
Floyd Industries stock has a beta of 1.50. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return of the market is 12 percent, and Treasury
Suppose your company needs $20 million to build a new assembly line. Your target debt−equity ratio is .75. The flotation cost for new equity is 8 percent, but the flotation cost for debt is only 5
An all-equity firm is considering the following projects:The T-bill rate is 5 percent, and the expected return on the market is 11 percent.a. Which projects have a higher expected return than the
An all-equity firm is considering the following projects:The T-bill rate is 5 percent, and the expected return on the market is 11 percent.a. Which projects have a higher expected return than the fi
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
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
Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.9 percent. The tax rate is 35 percent. What is
Sixx AM Manufacturing has a target debt−equity ratio of .65. Its cost of equity is 15 percent, and its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company's WACC?
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6
Jiminy’s Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.a. What is the
Holdup Bank has an issue of preferred stock with a $6 stated dividend that just sold for $96 per share. What is the bank’s cost of preferred stock?
Stock in Country Road Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. The company's most recent dividend was $1.60 per share, and
The Up and Coming Corporation’s common stock has a beta of 1.05. If the risk-free rate is 5.3 percent and the expected return on the market is 12 percent, what is the company’s cost of equity
a. What are flotation costs?b. How are flotation costs included in an NPV analysis?
a. What are the likely consequences if a firm uses its WACC to evaluate all proposed investments?b. What is the pure play approach to determining the appropriate discount rate? When might it be used?
a. How is the WACC calculated?b. Why do we multiply the cost of debt by (1 − TC ) when we compute the WACC?c. Under what conditions is it correct to use the WACC to determine NPV?
a. Why is the coupon rate a bad estimate of a firm’s cost of debt?b. How can the cost of debt be calculated?c. How can the cost of preferred stock be calculated?
a. What do we mean when we say that a corporation’s cost of equity capital is 16 percent?b. What are two approaches to estimating the cost of equity capital?
a. What is the primary determinant of the cost of capital for an investment?b. What is the relationship between the required return on an investment and the cost of capital associated with that
Joey Moss, a recent finance graduate, has just begun his job with the investment firm of Covili and Wyatt. Paul Covili, one of the firm's founders, has been talking to Joey about the firm's
In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?Data From Previous Problem:Stock Y has a beta of 1.3 and an expected return of 18.5
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.38 and the total portfolio is equally as risky as the market, what must the beta be for
Consider the following information:a. Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected return of the portfolio?b. What is the variance of this
Consider the following information:a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B and
A portfolio is invested 25 percent in Stock G, 55 percent in Stock J, and 20 percent in Stock K. The expected returns on these stocks are 8 percent, 15 percent, and 24 percent, respectively. What is
Based on the following information, calculate the expected return:
Based on the following information, calculate the expected return:
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 10.5 percent. If your goal is to create a
You own a portfolio that is 60 percent invested in Stock X, 25 percent in Stock Y, and 15 percent in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent, and 13 percent,
You own a portfolio that has $2,950 invested in Stock A and $3,700 invested in Stock B. If the expected returns on these stocks are 11 percent and 15 percent, respectively, what is the expected
What are the portfolio weights for a portfolio that has 180 shares of Stock A that sell for $45 per share and 140 shares of Stock B that sell for $27 per share?
If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the
Suppose the government announces that, based on a just-completed survey, the growth rate in the economy is likely to be 2 percent in the coming year, as compared to 5 percent for the past year. Will
a. If an investment has a positive NPV, would it plot above or below the SML? Why?b. What is meant by the term cost of capital?
a. What is the fundamental relationship between risk and return in well-functioning markets?b. What is the security market line? Why must all assets plot directly on it in a well-functioning
a. What is the systematic risk principle?b. What does a beta coefficient measure?c. True or false: The expected return on a risky asset depends on that asset’s total risk. Explain.d. How do you
a. What happens to the standard deviation of return for a portfolio if we increase the number of securities in the portfolio?b. What is the principle of diversification?c. Why is some risk
a. What are the two basic types of risk?b. What is the distinction between the two types of risk?
a. What are the two basic parts of a return?b. Under what conditions will a company’s announcement have no effect on common stock prices?
a. What is a portfolio weight?b. How do we calculate the expected return on a portfolio?c. Is there a simple relationship between the standard deviation on a portfolio and the standard deviations of
a. How do we calculate the expected return on a security?b. In words, how do we calculate the variance of the expected return?
You recently graduated from college, and your job search led you to S&S Air. Because you felt the company's business was taking off, you accepted a job offer. The first day on the job, while you
Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value)
Over a 40-year period an asset had an arithmetic return of 15.3 percent and a geometric return of 11.9 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5
In Problem 18, what is the probability that the return is less than −100 percent (think)? What are the implications for the distribution of returns?Data From Problem 18:Assuming that the returns
Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2007? Why do you think they were so high during this period? What
Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?Data From Problem 10:For Problem 9, suppose the average
For Problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.a. What was the average real return on Crash-n-Burn’s
Rework Problems 1 and 2 assuming the ending share price is $83.Data From Problem 2:In Problem 1, what was the dividend yield? The capital gains yield?Data From Problem 1:Suppose a stock had an
In Problem 1, what was the dividend yield? The capital gains yield?Data From Problem 1:Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and
Given that Novastar Financial was down by almost 97 percent for 2007, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Given that First Solar was up by over 796 percent for 2007, why didn’t all investors hold this stock?
a. What is an efficient market?b. What are the forms of market efficiency?
a. If you wanted to forecast what the stock market is going to do over the next year, should you use an arithmetic or geometric average?b. If you wanted to forecast what the stock market is going to
a. In words, how do we calculate a variance? A standard deviation?b. With a normal distribution, what is the probability of ending up more than one standard deviation below the average?c. Assuming
a What do we mean by excess return and risk premium ?b What was the real (as opposed to nominal) risk premium on the common stock portfolio?c What was the nominal risk premium on corporate bonds? The
a. With 20/20 hindsight, what do you say was the best investment for the period from 1926 through 1935?b. Why doesn’t everyone just buy small stocks as investments?c. What was the smallest return

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