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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

The following is the sales budget for Profit, Inc., for the first quarter of 2018: Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the
The Torrey Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses
Your firm has an average collection period of 31 days. Current practice is to factor all receivables immediately at a discount of 1.25 percent. What is the effective cost of borrowing in this case?
Cori’s Corp. has an equity value of $13,315. Long-term debt is $8,200. Net working capital, other than cash, is $2,750. Fixed assets are $17,380. How much cash does the company have? If current
For initial public offerings of common stock, 2017 was a slow year, with about $24.53 billion raised by the process. Relatively few of the 108 firms involved paid cash dividends. Why do you think
Change Corporation expects an EBIT of $31,200 every year forever. The company currently has no debt, and its cost of equity is 11 percent.a. What is the current value of the company?b. Suppose the
The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are
Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21 percent. The firm has $126,000 in outstanding debt at an interest rate of 5.35 percent, and its unlevered cost of
Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. If the tax rate is 24
Citee Corp. has no debt but can borrow at 6.1 percent. The firm’s WACC is currently 9.4 percent, and the tax rate is 21 percent.a. What is the company’s cost of equity?b. If the firm converts to
Blitz Industries has a debt-equity ratio of 1.25. Its WACC is 8.3 percent, and its cost of debt is 5.1 percent. The corporate tax rate is 21 percent.a. What is the company’s cost of equity
In Problem 10, suppose the corporate tax rate is 22 percent. What is EBIT in this case? What is the WACC? Explain.Data from problem 10Thrice Corp. uses no debt. The weighted average cost of capital
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $720,000 in stock. XYZ uses both stock and perpetual debt; its stock is
Thrice Corp. uses no debt. The weighted average cost of capital is 8.4 percent. If the current market value of the equity is $16.3 million and there are no taxes, what is EBIT?
FCOJ, 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 5,800 shares outstanding, and the
Bellwood Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt.
Round Hammer 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 180,000 shares of stock outstanding. Under
Repeat parts (a) and (b) in Problem 1 assuming the company has a tax rate of 21 percent, a market-to-book ratio of 1.0, and the stock price remains constant.Data from problem 1Ghost, Inc., has no
Ghost, Inc., has no debt outstanding and a total market value of $185,000. Earnings before interest and taxes, EBIT, are projected to be $29,000 if economic conditions are normal. If there is strong
Take a look back at the times interest earned (TIE) ratio we discussed in Chapter 3. For interest paid to be fully deductible by a company after the Tax Cuts and Jobs Act of 2017, what must be true
1. At the end of the discussion, Mark asks Renata about the Dutch auction IPO process. What are the differences in the expenses to S&S Air if it uses a Dutch auction IPO versus a traditional IPO?
Prahm Corp. wants to raise $4.7 million via a rights offering. The company currently has 530,000 shares of common stock outstanding that sell for $55 per share. Its underwriter has set a
Bell Hill Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $63. The current price is $68 per share, and there are 26 million shares outstanding. The
In Problem 10, what would the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ratio remains constant.) What is the NPV of this
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:Stock price ........................... $
Wayne, Inc., wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The stock sells for $64 per share, but the book value per share is $19. Net income is
Nemesis, Inc., has 165,000 shares of stock outstanding. Each share is worth $77, so the company’s market value of equity is $12,705,000. Suppose the firm issues 30,000 new shares at the following
The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $21.39 for each of the 20 million shares sold. The initial offering price was $23 per share, and the stock rose
The Woods Co. and the Spieth 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 which. You
Red Shoe 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
The Clifford Corporation has announced a rights offer to raise $35 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
Leah, Inc., is proposing a rights offering. Presently there are 375,000 shares outstanding at $67 each. There will be 50,000 new shares offered at $58 each.a. What is the new market value of the
Why is underpricing not a great concern with bond offerings?Use the following information to answer the question. Zipcar, the car-sharing company, went public in April 2011. Assisted by the
Suppose you are looking at a company with no change in capital spending, no change in net working capital, and no depreciation. Since the company is not increasing its assets, EBIT is constant. What
Lucas Corp. has a debt-equity ratio of .65. The company is considering a new plant that will cost $51 million to build. When the company issues new equity, it incurs a flotation cost of 7 percent.
In the previous problem, suppose you believe that sales in five years will be $29.2 million and the price-sales ratio will be 2.45. What is the share price now? Data from previous problemYou
You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $3.15 million this year. Depreciation, the increase in net working capital, and capital spending
In the previous problem, instead of a perpetual growth rate in adjusted cash flow from assets, you decide to calculate the terminal value of the company with the price-sales ratio. You believe
Pearl Corp. is expected to have an EBIT of $1.8 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $155,000, $75,000, and $115,000,
Minder Industries stock has a beta of 1.08. The company just paid a dividend of $.65, and the dividends are expected to grow at 4 percent. The expected return on the market is 10.5 percent, and
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 22 percent, what is the aftertax
Being Human, Inc., recently issued new securities to finance a new TV show. The project cost $35 million, and the company paid $2.2 million in flotation costs. In addition, the equity issued had a
Sommer, Inc., is considering a project that will result in initial aftertax cash savings of $2.3 million at the end of the first year, and these savings will grow at a rate of 2 percent per year
Cully Company needs to raise $80 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has
Titan Mining Corporation has 7.5 million shares of common stock outstanding, 250,000 shares of 4.2 percent preferred stock outstanding, and 140,000 bonds with a semiannual coupon of 5.1 percent
Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 21 percent.Debt: 15,000 bonds with a 5.8 percent coupon outstanding, $1,000 par value, 25 years
Starset, Inc., has a target debt-equity ratio of .85. Its WACC is 9.1 percent, and the tax rate is 23 percent.a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt?b.
In Problem 12, suppose the most recent dividend was $3.25 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
Dinklage Corp. has 7 million shares of common stock outstanding. The current share price is $68, and the book value per share is $8. The company also has two bond issues outstanding. The first bond
Fama’s Llamas has a weighted average cost of capital of 7.9 percent. The company’s cost of equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What
Lannister Manufacturing has a target debt-equity ratio of .55. Its cost of equity is 11 percent, and its cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC?
Targaryen Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 10 percent, the cost of preferred stock is 5
For the firm in Problem 7, suppose the book value of the debt issue is $95 million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left to
Jiminy’s Cricket Farm issued a 30-year, 6 percent semiannual bond three years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 22 percent.a. What is the
Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 103 percent of face value. The issue makes semiannual
Holdup Bank has an issue of preferred stock with a stated dividend of $4.25 that just sold for $93 per share. What is the bank’s cost of preferred stock?
Suppose Stark, Ltd., just issued a dividend of $2.51 per share on its common stock. The company paid dividends of $2.01, $2.17, $2.25, and $2.36 per share in the last four years. If the stock
Stock in Daenerys Industries has a beta of 1.05. The market risk premium is 7 percent, and T-bills are currently yielding 3.4 percent. The company’s most recent dividend was $2.35 per share, and
The Rhaegel Corporation’s common stock has a beta of 1.07. If the risk-free rate is 3.5 percent and the expected return on the market is 10 percent, what is the company’s cost of equity
The Drogon Co. just issued a dividend of $2.80 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock sells
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 12.7 percent. If Stock X has an expected return of 11.4
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: Investment Asset Stock A Stock
Stock Y has a beta of 1.2 and an expected return of 11.1 percent. Stock Z has a beta of .80 and an expected return of 7.85 percent. If the risk-free rate is 2.4 percent and the market risk premium
Asset W has an expected return of 11.8 percent and a beta of 1.10. If the risk-free rate is 3.3 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
A stock has an expected return of 11.85 percent, its beta is 1.24, and the expected return on the market is 10.2 percent. What must the risk-free rate be?
A stock has an expected return of 10.45 percent, its beta is .93, and the risk-free rate is 3.6 percent. What must the expected return on the market be?
A stock has an expected return of 10.2 percent, the risk-free rate is 3.9 percent, and the market risk premium is 7.2 percent. What must the beta of this stock be?
A stock has a beta of 1.15, the expected return on the market is 10.3 percent, and the risk-free rate is 3.1 percent. What must the expected return on this stock be?
You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R, 35 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36,
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
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 11 percent, 9 percent, and 15 percent, respectively. What is
Based on the following information, calculate the expected return and standard deviation for Stock A and Stock B: Rate of Return If State Occurs Stock B State of Economy Recession Probability
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.1 percent and Stock Y with an expected return of 9.8 percent. If your goal is to create a
You own a portfolio that is invested 35 percent in Stock X, 20 percent in Stock Y, and 45 percent in Stock Z. The expected returns on these three stocks are 9 percent, 15 percent, and 12 percent,
You own a portfolio that has $3,480 invested in Stock A and $7,430 invested in Stock B. If the expected returns on these stocks are 8 percent and 11 percent, respectively, what is the expected return
What are the portfolio weights for a portfolio that has 115 shares of Stock A that sell for $43 per share and 180 shares of Stock B that sell for $19 per share?
Common advice on Wall Street is “Keep your alpha high and your beta low.” Why?
In our discussion of the SML, we defined alpha. What does alpha measure? What alpha would you like to see on your investments?
1. What advantages do the mutual funds offer compared to the company stock?2. Assume that you invest 5 percent of your salary and receive the full 5 percent match from S&S Air. What EAR do you
Assume that the historical return on large-company stocks is a predictor of the future returns. What return would you estimate for large-company stocks over the next year? The next 10 years? 20
Over a 40-year period, an asset had an arithmetic return of 11.2 percent and a geometric return of 9.4 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 18A stock has had the following
A stock has had the following year-end prices and dividends: What are the arithmetic and geometric average returns for the stock? Price Year Dividend $63.40 $.85 .95 1.03 70.20 3 79.18 75.32
A stock has had returns of 8 percent, 26 percent, 14 percent, −17 percent, 31 percent, and −1 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
You find a certain stock that had returns of 9 percent, −16 percent, 18 percent, and 14 percent for four of the last five years. If the average return of the stock over this period was 10.3
You bought one of Great White Shark Repellant Co.’s 5.8 percent coupon bonds one year ago for $1,030. These bonds make annual payments and mature 14 years from now. Suppose you decide to sell your
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 2016? Why do you think they were so high during this period? What
For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent. What was the average real return on the company’s
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 8 percent, −15 percent, 19 percent, 31 percent, and 21 percent. What was the arithmetic average
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year 1 х 12% 25% 28 34 3 9. 13 -27 4 -7 5 14 10 14
What was the average annual return on large-company stocks from 1926 through 2016:a. In nominal terms?b. In real terms?
Suppose you bought a bond with an annual coupon of 7 percent one year ago for $1,010. The bond sells for $985 today.a. Assuming a $1,000 face value, what was your total dollar return on this
Rework Problems 1 and 2 assuming the ending share price is $58.Data from problem 1 & 2.Suppose a stock had an initial price of $65 per share, paid a dividend of $1.45 per share during the
Suppose a stock had an initial price of $65 per share, paid a dividend of $1.45 per share during the year, and had an ending share price of $71. Compute the percentage total return.
Given that AK Steel was up by about 359 percent for 2016, why didn’t all investors hold this stock?
Consider a project to supply Detroit with 30,000 tons of machine screws annually for automobile production. You will need an initial $4.3 million investment in threading equipment to get the project
Hybrid cars are touted as a “green” alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2016 Toyota Camry Hybrid LE, which had a list price of $5,500
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $845 per set and have a variable cost of $405 per set. The company has spent $150,000 for a marketing study that
You are considering a new product launch. The project will cost $1,950,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 210 units
Consider a four-year project with the following information: Initial fixed asset investment = $575,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $29;

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