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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

A company has a single zero coupon bond outstanding that matures in five years with a face value of $17.5 million. The current value of the company’s assets is $15.9 million, and the standard
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $23,000 that matures in one year. The current market value of the firm’s assets is $26,200. The standard
Suppose the firm in Problem 16 is considering two mutually exclusive investments. Project A has an NPV of $1,900, and Project B has an NPV of $2,800. As the result of taking Project A, the standard
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firm’s assets is $16,200. The standard deviation of
A call option has an exercise price of $60 and matures in six months. The current stock price is $64, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the
A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded
A call option with an exercise price of $25 and four months to expiration has a price of $2.75. The stock is currently priced at $23.80, and the risk-free rate is 2.5 percent per year, compounded
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1,250,000. Over the past five years, the price of land in the area has increased 7 percent per year,
You are given the following information concerning options on a particular stock:Stock price = $59Exercise price
In Problem 9, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of the
What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?Stock price
What are the prices of a call option and a put option with the following characteristics?Stock price = $64Exercise price
A put option and a call option with an exercise price of $70 and three months to expiration sell for $1.30 and $6.25, respectively. If the risk-free rate is 3.1 percent per year, compounded
A put option and call option with an exercise price of $50 expire in four months and sell for $5.99 and $8.64, respectively. If the stock is currently priced at $52.27, what is the annual
A put option that expires in six months with an exercise price of $45 sells for $2.34. The stock is currently priced at $48, and the risk-free rate is 3.5 percent per year, compounded continuously.
A stock is currently selling for $67 per share. A call option with an exercise price of $70 sells for $3.21 and expires in three months. If the risk-free rate of interest is 2.6 percent per year,
If you need $20,000 in 12 years, how much will you need to deposit today if you can earn 9 percent per year compounded continuously?
If you have $1,275 today, how much will it be worth in six years at 8 percent per year compounded continuously?
Consider the following project of Hand Clapper, Inc. The company is considering a fouryear project to manufacture clap-command garage door openers. This project requires an initial investment of
You have been hired to value a new 25-year callable, convertible bond. The bond has a coupon rate of 2.3 percent, payable annually. The conversion price is $68, and the stock currently sells for
Liberty Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $5.3 million for the next eight years. The company uses a discount rate of 11
Suppose a share of stock sells for $63. The risk-free rate is 5 percent, and the stock price in one year will be either $70 or $80. a. What is the value of a call option with an exercise price
In Problem 15, suppose 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 be desirable only if the project
In Problem 14, suppose you think it is likely that expected sales will be revised upward to 10,800 units if the first year is a success and revised downward to 3,900 units if the first year is not a
We are examining a new project. We expect to sell 7,100 units per year at $56 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $56 × 7,100 =
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $275,000 per year. You believe the technology used in the machine has a 10-year life; in other
A bond with 20 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $24. Each warrant gives the owner the right to purchase two
You have been hired to value a new 30-year callable, convertible bond. The bond has a coupon rate of 2.7 percent, payable semiannually, and its face value is $1,000. The conversion price is $54, and
A $1,000 par convertible debenture has a conversion price for common stock of $27 per share. With the common stock selling at $31, what is the conversion value of the bond?
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,040. Urban Meyer, the CEO, believes that the
Rackin Pinion Corporation’s assets are currently worth $1,065. In one year, they will be worth either $1,000 or $1,340. The risk-free interest rate is 3.9 percent. Suppose the company has an
A one-year call option contract on Cheesy Poofs Co. stock sells for $845. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current
The price of Cilantro, Inc., stock will be either $70 or $90 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.a. Suppose the current
The price of Chive Corp. stock will be either $67 or $91 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.a. Suppose the current price
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $40.a. Suppose you buy 10 contracts of the February 38 call option. How much will
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $85.a. Are the call options in the money? What is the intrinsic value of an RWJ
T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $58 per share. There is no possibility that the stock will be worth less than $50 per share in one
In calculating insurance premiums, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the expected
Refer to Table 23.1 in the text to answer this question. Suppose today is February 10, 2017, and your firm produces breakfast cereal and needs 145,000 bushels of corn in May 2017 for an upcoming
Suppose your company has a building worth $165 million. Because it is located in a high-risk area for natural disasters, the probability of a total loss in any particular year is 1.15 percent. What
Refer to Table 23.2 in the text to answer this question. Suppose you purchase the May 2017 put option on corn futures with a strike price of $3.80. Assume your purchase was at the last price. What
Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $57 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise
Refer to Table 23.2 in the text to answer this question. Suppose you purchase the May 2017 call option on corn futures with a strike price of $3.85. Assume you purchased the option at the last
Refer to Table 23.1 in the text to answer this question. Suppose you sell five March 2017 silver futures contracts this day at the last price of the day. What will your profit or loss be if silver
Refer to Table 23.1 in the text to answer this question. Suppose you purchase a March 2017 cocoa futures contract this day at the last price of the day. What will your profit or loss be if cocoa
1. What are the pros and cons of the international sales? What additional risks will the company face?2. What happens to the company’s profits if the dollar strengthens? What if the dollar
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .28 percent per month. The interest rate in Great Britain is .31 percent per
Suppose the Japanese yen exchange rate is ¥114 = $1, and the British pound exchange rate is £1 = $1.26.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥147 =
Suppose the spot exchange rate for the Canadian dollar is Can$1.29 and the six-month forward rate is Can$1.31.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP
Bismark Co. is in the process of considering a change in its terms of sale. The current policy is cash only; the new policy will involve one period’s credit. Sales are 25,000 units per period at a
In Problem 21, assume that the probability of default is 15 percent. Should the orders be filled now? Assume the number of repeat customers is affected by the defaults. In other words, 30 percent of
Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 125 units have been made by customers requesting credit. The variable cost is $6,900
In Problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same. Data from problem 15Veni, Inc., currently has an all-cash credit
In Problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 3,310 units and all other values remain
In Problem 14, what is the break-even quantity for the new credit policy? Data from problem 14The Snedecker Corporation is considering a change in its cash only policy. The new terms would be
The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 125 bicycles. The average cost to the shop of a bicycle is $750.
Veni, Inc., currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you
The Snedecker 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 the company should proceed or not.
After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 3 percent or
National Business Machine Co. (NBM) has $4 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets.
The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9
Awake Corporation is evaluating an extra dividend versus a share repurchase. In either case, $17,500 would be spent. Current earnings are $1.89 per share, and the stock currently sells for $64 per
In Problem 10, suppose you want only $1,500 total in dividends the first year. What will your homemade dividend be in two years?Data from problem 10You own 1,000 shares of stock in Avondale
You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.15 per share dividend in one year. In two years, the company will pay a liquidating dividend of $57 per share. The
In Problem 8, suppose the company instead decides on a four for-one stock split. The firm’s 65-cent per-share cash dividend on the new (postsplit) shares represents an increase of 10 percent over
The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $53 per share. What effects will the distribution of the stock
The market value balance sheet for Bobaflex Manufacturing is shown here. The company has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend
In Problem 5, suppose the company has announced it is going to repurchase $18,200 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be
The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding.The company has declared a dividend of $1.30 per share. The stock goes ex
Simmons Mineral Operations, Inc. (SMO), currently has 530,000 shares of stock outstanding that sell for $68 per share. Assuming no market imperfections or tax effects exist, what will the share price
The Trektronics store begins each week with 450 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $34 per year and the fixed order cost is $130,
Provenza Manufacturing uses 3,400 switch assemblies per week and then reorders another 3,400. If the relevant carrying cost per switch assembly is $7.45, and the fixed order cost is $1,100, is the
Sanchez, 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 the company should proceed or not.
Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which
The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, five days past due. If annual credit sales are $8.35 million, what is the company’s balance sheet amount
Essence of Skunk Fragrances, Ltd., sells 7,900 units of its perfume collection each year at a price per unit of $385. All sales are on credit with terms of 1/10, net 40. The discount is taken by 65
Starset, Inc., has an average collection period of 27 days. Its average daily investment in receivables is $46,300. What are annual credit sales? What is the receivables turnover? Assume 365 days per
Skye Flyer, Inc., has weekly credit sales of $21,900, and the average collection period is 33 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, 70 percent of all customers will take the discount.a. What is the average
The Red Zeppelin Corporation has annual sales of $34 million. The average collection period is 28 days. What is the average investment in accounts receivable as shown on the balance sheet? Assume
You place an order for 300 units of inventory at a unit price of $140. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full
Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4.5 million in collections per day and requires a $340,000 compensating balance. No More Books is contemplating
Every two weeks, No More Pencils, Inc., disburses checks that average $107,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. The company’s management is considering a lockbox system to reduce the firm’s collection
Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following: Average number of payments per day...............................
A mail-order firm processes 5,300 checks per month. Of these, 60 percent are for $47 and 40 percent are for $79. The $47 checks are delayed two days on average; the $79 checks are delayed three days
Your firm has an average receipt size of $125. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,100 checks per
Your neighbor goes to the post office once a month and picks up two checks, one for $10,700 and one for $4,600. The larger check takes four days to clear after it is deposited; the smaller one takes
Purple Feet Wine, Inc., receives an average of $17,500 in checks per day. The delay in clearing is typically three days. The current interest rate is .017 percent per day.a. What is the company’s
Each business day, on average, a company writes checks totaling $17,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
In a typical month, the Monk Corporation receives 80 checks totaling $113,000. These are delayed four days on average. What is the average daily float? Assume 30 days in a month.
Suppose a firm has a book balance of $2 million. On the bank’s website, the cash manager finds out that the bank balance is $2.5 million. What is the situation here? If this is an ongoing
Cheap Money Bank offers your firm a discount interest loan at 8.25 percent for up to $25 million and, in addition, requires you to maintain a 5 percent compensating balance against the amount
In exchange for a $300 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.85 percent per quarter on any funds actually borrowed.2. Maintain a 4.5 percent
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows: Sales for the first quarter of the following year are projected at $180 million. Accounts receivable at
A bank offers your firm a revolving credit arrangement for up to $50 million at an interest rate of 1.65 percent per quarter. The bank also requires you to maintain a compensating balance of 5
You’ve worked out a line of credit arrangement that allows you to borrow up to $40 million at any time. The interest rate is .36 percent per month. In addition, 4 percent of the amount that you
Below are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash and the amount: COUNTRY KETTLES,
Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2018: The company predicts that 5 percent of its credit sales will never be collected, 35

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