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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Velcro Saddles is contemplating the acquisition of Skiers’ Airbags Inc. The values of the two companies as separate entities are $20 million and $10 million, respectively. Velcro Saddles estimates
True or false?a. One of the first tasks of an LBO’s financial manager is to pay down debt.b. Leveraged buyouts reduce the free cash flow available to the firm.c. Targets for LBOs in the 1980s
The following table shows the local prices of a Tall Latte coffee in Starbucks in 2017: a. Calculate the dollar price of a latte in each country using the exchange rates in Table 22.1. b. Does
The following table shows interest rates and exchange rates for the U.S. dollar and the Narnian leo. The spot exchange rate is 15 leos = $1. Complete the missing entries. 3 Months 1 Month 1 Year
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
You have bid for a possible export order that would provide a cash inflow of ?1 million in 6 months. The spot exchange rate is USD1.22 = EUR1, and the 1-year forward rate is USD1.20 = EUR1. There
It is 2024 and Pork Barrels Inc. is considering construction of a new barrel plant in Spain. The forecast cash flows in millions of euros are as follows: The spot exchange rate is USD1.2 = EUR1.
It is 2024 and Carpet Baggers Inc. is proposing to construct a new bagging plant in a country in Europe. The two prime candidates are Germany and Switzerland. The forecast cash flows from the
Fill in the blanks by choosing the appropriate terms from the following list: call, exercise, put.A(n) __(a)__ option gives its owner the opportunity to buy a stock at a specific price, which is
a. Turn back again to Table 23.2, which lists prices of various Amazon options. Use the data in the table to calculate the payoff and the profits for investments in each of the following January 2019
Suppose that you hold a share of stock and a put option on that share with an exercise price of $100. What is the value of your portfolio when the option expires if:a. The stock price is below
Look at Figure 23.8, which shows the possible future payoffs in July 2018 from a particular package of investments in Amazon options. Incidentally, this package of investments is called a ?straddle?
Look at Figure 23.9, which shows the possible future payoffs in July 2018 from a particular package of investments in Amazon options. This package of investments is called a ?butterfly? by option
Look at the data in Table 23.2. a. What is the price of a call option with an exercise price of $1,300 and expiration in April 2018? What if expiration is in January 2019? b. Why do you think the
Table 23.2 shows call options on Amazon stock with the same exercise date in July 2018 and with exercise prices $1,200, $1,300, and $1,400. Notice that the price of the middle call option (with
Look again at the Amazon call option that we valued in Section 23.2. Suppose that by July 2018, the price of Amazon stock could double to $2,600 or halve to $650. Everything else is unchanged from
Look back at Table 23.2. Suppose that by January 2019, the price of Amazon could either rise from its January 2018 level to $1,300 ? 1.22 = $1,586 or fall to $1,300/1.22 = $1,066. a. What would be
The FDIC insures bank deposits. If a bank’s assets are insufficient to pay off all depositors, the FDIC will contribute enough money to ensure that all depositors can be paid off in full. (We
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter’s production of catalytic converters. It buys 3-month futures contracts for 10,000 ounces at a price
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,200 an ounce, but the price is extremely volatile and could fall as low as $1,100 or rise as
Yesterday you sold 6-month futures on Standard & Poor’s Index at a price of 2,700. Today the S&P closed at 2,650, and S&P futures closed at 2,750. You get a call from your broker, who
Suppose that in the 5 days following a farmer?s sale of December wheat futures at a futures price of $5.51, the futures price is: At the end of day 5, the farmer decides to quit wheat farming and
Mutt.Com was founded in 2015 by two graduates of the University of Wisconsin with help from Georgina Sloberg, who had built up an enviable reputation for backing new start-up businesses. Mutt.Com’s
In March 2020, the management team of Londonderry Air (LA) met to discuss a proposal to purchase five shorthaul aircraft at a total cost of $25 million. There was general enthusiasm for the
Garnett Jackson, the founder and CEO of Tech Tune-Ups, stared out the window as he finished his customary peanut butter and jelly sandwich, contemplating the dilemma currently facing his firm. Tech
Capstan Autos operated an East Coast dealership for a major Japanese car manufacturer. Capstan?s owner, Sidney Capstan, attributed much of the business?s success to its no-frills policy of
McPhee Food Halls operated a chain of supermarkets in the west of Scotland. The company had had a lackluster record, and since the death of its founder in late 2009, it had been regarded as a prime
“Jumping jackasses! Not another one!” groaned George Luger. It was a memo from the CEO of DVR Importers dated December 31, 2019. It was the third memo from the CEO that he had received that day.
A 6-year Circular File bond with face value $1,000 pays interest once a year of $80 and sells for $950.a. What is its coupon rate?b. What is its yield to maturity?c. If Circular wants to issue a new
A General Power bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%.a. What interest payments do bondholders receive each year?b. At what price does
A bond with face value $1,000 has a current yield of 6% and a coupon rate of 8%.a. If interest is paid annually, what is the bond’s price?b. Is the bond’s yield to maturity more or less than 8%?
Turn back to Table 6.1. a. What is the current yield of the 4.75% 2041 maturity bond? What is its yield to maturity? b. ?The current yield is less than the yield to maturity whenever the bond price
What was the firm?s average tax bracket for each year? 2018 2019 $4,000 $4,100 Revenue Cost of goods sold 1,600 1,700 500 Depreclatlon 520 Inventorles 300 350 Administrative expenses 500 550
Construct a statement of cash flows for Fincorp for 2019. 2018 2019 $4,000 $4,100 Revenue Cost of goods sold 1,600 1,700 500 Depreclatlon 520 Inventorles 300 350 Administrative expenses 500 550
Suppose that the market value (in thousands of dollars) of Fincorp?s fixed assets in 2019 is $6,000 and that the value of its long-term debt is only $2,200. In addition, the consensus among investors
Examine the values for depreciation in 2019 and net fixed assets in 2018 and 2019. What was Fincorp?s gross investment in plant and equipment during 2019? 2018 2019 $4,000 $4,100 Revenue Cost of
Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share in 2019? 2018 2019 $4,000 $4,100 Revenue Cost of goods sold 1,600 1,700 500 Depreclatlon 520 Inventorles 300 350
Construct a balance sheet for Fincorp for 2018 and 2019. What is shareholders? equity? 2018 2019 $4,000 $4,100 Revenue Cost of goods sold 1,600 1,700 500 Depreclatlon 520 Inventorles 300 350
A bond’s credit rating provides a guide to its risk. Suppose that long-term bonds rated Aa currently offer yields to maturity of 7.5%. A-rated bonds sell at yields of 7.8%. Suppose that a 10-year
What is the payback period of each project? Refer to two projects with the following cash flows: Project A Project B Year -$200 -$200 80 100 80 100 80 100 4 80
A project that costs $3,000 to install will provide annual cash flows of $800 for each of the next 6 years.a. What is NPV if the discount rate is 10%?b. How high can the discount rate be before you
Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses the internal rate of return rule to accept or reject projects. a. What is the project?s
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 million. If the tax rate is 25%, what is the
A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm’s tax rate is 30%. In Section 9.3, we described three
Laurel’s Lawn Care Ltd. has a new mower line that can generate revenues of $120,000 per year. Direct production costs are $40,000, and the fixed costs of maintaining the lawn mower factory are
Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $120,000 and sell its old low-pressure glueball, which is fully depreciated, for $20,000. The
In October 2017 a pound of apples cost $1.32, while oranges cost $1.59. Three years earlier the price of apples was $1.36 a pound and that of oranges was $1.51 a pound.a. What was the annual compound
A U.S. Treasury strip that will pay $1,000 in 10 years is selling today for $422.41. What interest rate does the strip offer?
In 1880 five aboriginal trackers were each promised the equivalent of 100 Australian dollars for helping to capture the notorious outlaw Ned Kelley. In 1993 the granddaughters of two of the trackers
Suppose that the value of an investment in the stock market has increased at an average compound rate of about 5% since 1900. It is now 2019.a. If your great-grandfather invested $1,000 in 1900, how
Would the following events increase or decrease a firm’s current ratio?a. Inventory is sold.b. The firm takes out a bank loan to pay its suppliers.c. The firm arranges a line of credit with a
Here are simplified financial statements for Watervan Corporation: INCOME STATEMENT(Figures in $ millions)Net sales..........................................................$881Cost of goods
Suppose Home Depot’s Stock price falls by 10% in a given year.a. Will the firm’s market value added increase or decrease?b. How will this change affect your assessment of the performance of the
Construct an income statement for Fincorp for 2018 and 2019. What were reinvested earnings for 2019? 2018 2019 $4,000 $4,100 Revenue Cost of goods sold 1,600 1,700 500 Depreclatlon 520 Inventorles
What was the change in net working capital during the year? 2018 2019 $4,000 $4,100 Revenue Cost of goods sold 1,600 1,700 500 Depreclatlon 520 Inventorles 300 350 Administrative expenses 500 550
You have set up your tax preparation firm as an incorporated business. You took $80,000 from the firm as your salary. The firm?s taxable income for the year (net of your salary) was $30,000. Assume
The following table shows an abbreviated income statement and balance sheet for Quick Burger Corporation for 2019. INCOME STATEMENT OF QUICK BURGER CORP., 2019(Figures in $ millions)Net
Value Added Inc. buys $1 million of sow’s ears at the beginning of January but doesn’t pay immediately. Instead, it agrees to pay the bill in March. It processes the ears into silk purses, which
Candy Canes Inc. spends $100,000 to buy sugar and peppermint in April. It produces its candy and sells it to distributors in May for $150,000, but it does not receive payment until June. Assuming
Sheryl’s Shipping had sales last year of $10,000. The cost of goods sold was $6,500, general and administrative expenses were $1,000, interest expenses were $500, and depreciation was $1,000. The
Butterfly Tractors had $14 million in sales last year. Cost of goods sold was $8 million, depreciation expense was $2 million, interest payment on outstanding debt was $1 million, and the firm’s
a. In early 2018, the market values of the shares of many banks (e.g., Bank of America or Citigroup) were barely greater than book value per share. How would you interpret this pattern?b. At the same
Here are the 2018 and 2019 (incomplete) balance sheets for Newble Oil Corp. a. What was shareholders? equity at the end of 2018? b. What was shareholders? equity at the end of 2019? c. If Newble
South Sea Baubles has the following (incomplete) balance sheet and income statement. INCOME STATEMENT, 2019(Figures in $
The year-end 2018 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $1,100,000 and retained earnings at $3,400,000. The next year, retained earnings were listed at
Look at some of the practices described in the Finance in Practice box on ethic disputes in finance. What, if any, do you believe are the ethical issues involved?
Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Which company’s compensation package would most effectively mitigate conflicts of interest
Fritz is risk-averse and is content with a relatively low but safe return on his investments. Frieda is risk-tolerant and seeks a very high rate of return on her invested savings. Yet both
Which of the following are correct descriptions of large corporations?a. Managers no longer have the incentive to act in their own interests.b. The corporation survives even if managers are
Which of the following are real assets, and which are financial?a. A share of stockb. A personal IOUc. A trademarkd. A trucke. Undeveloped landf. The balance in the firm’s checking accountg. An
A married couple earned $95,000 in 2018. How much did they pay in taxes?a. What was their marginal tax bracket?b. What was their average tax bracket?
Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 38,000 solaris, debt in the amount of 12,000 solaris, and equity of 26,000
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 13.8 million. The cash flows from the project would be SF 3.9 million
Lakonishok Equipment has an investment opportunity in Europe. The project costs €10.5 million and is expected to produce cash flows of €1.7 million in Year 1, €2.4 million in Year 2, and €3.3
Suppose the spot exchange rate for the Hungarian forint is HUF 289.97. The inflation rate in the United States will be 2.9 percent per year. It will be 4.5 percent in Hungary. What do you predict
Suppose the spot and three-month forward rates for the yen are ¥113.65 and ¥113.18, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference
You observe that the inflation rate in the United States is 3.5 percent per year and that T-bills currently yield 4.1 percent annually. Using the approximate international Fisher effect, what do you
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 8.39 and Kr 8.48, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate
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 218.50
Automobiles are often leased, and several terms are unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $41,900. This is the base
Return to the case of the diagnostic scanner used in Problems 1 through 6. Suppose the entire $4,800,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan
Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $600,000 security deposit at the inception of the lease.
An asset costs $630,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 6 percent and the lessee can borrow at 9
Suppose it is estimated that the equipment will have an aftertax residual value of $900,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat now?
What is the NAL of the lease from the lessor’s viewpoint? Assume a 21 percent tax rate.
Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Should you lease or buy?
BQ, Inc., is considering making an offer to purchase iReport Publications. The vice president of finance has collected the following information: BQ also knows that securities analysts expect
Harrods PLC has a market value of £95 million and 4.5 million shares outstanding. Selfridge Department Store has a market value of £32 million and 1.8 million shares outstanding. Harrods is
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants.Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual
Consider the following premerger information about Firm A and Firm B:Assume that Firm A acquires Firm B via an exchange of stock at a price of $49 for each share of B’s stock. Both Firm A and Firm
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B has estimated that the value of the
Three Guys Burgers, Inc., has offered $16.5 million for all of the common stock in Two Guys Fries, Corp. The current market capitalization of Two Guys as an independent company is $13.4 million.
Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.6 million
Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting
Assume that the following balance sheets are stated at book value. Suppose that Meat Co. purchases Loaf, Inc. The fair market value of Loaf’s fixed assets is $9,800 versus the $6,900 book
Consider the following premerger information about Firm X and Firm Y:Assume that Firm X acquires Firm Y by issuing new long-term debt for all the shares outstanding at a merger premium of $6 per
Pearl, Inc., has offered $228 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $214 million as an independent operation. If the merger
Colosseum Corp. has a zero coupon bond that matures in five years with a face value of $65,000. The current value of the company’s assets is $62,000, and the standard deviation of its return on
In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes option pricing model with dividends is:All of the variables are the same as
Zevon Industries has a zero coupon bond issue that matures in two years with a face value of $40,000. The current value of the company’s assets is $26,700, and the standard deviation of the return

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