Questions and Answers of Fundamentals Of Corporate Finance

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated
Suppose the company in the previous problem uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects. Calculate the MIRR of the project using all three methods
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Garage, Inc., has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this
For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If itis 20 percent? If it is 30 percent?Data From Previous
Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.
Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan,
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $44.50 and all the dividend information remains the same. What required return must investors be
You have found the following historical information for the Daniela Company over the past four years:Earnings are expected to grow at 11 percent for the next year. Using the company’s historical
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.25 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015. What is
Both Bond Sam and Bond Dave have 6.5 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest
Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8.5 percent, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual
Locate the Treasury bond in Figure 7.4 maturing in August 2039. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid–ask spread in
An investment offers a total return of 11.5 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 9 percent. What does Janice believe the inflation
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par
This is a classic retirement problem. A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending
What is the value of an investment that pays $25,000every other year forever, if the first payment occurs one year from today and thediscount rate is 8 percent compounded daily? What is the value
The interest rate on a one-year loan is quotedas 12 percent plus 3 points (see the previous problem). What is the EAR? Is youranswer affected by the loan amount?Data From Previous Problem:You are
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulouslender. You want to borrow $25,000 for one year. The interest rate is 13.4
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $13,500 every yearinstead of equal annual payments.Data From Problem 55:Prepare an amortization schedule for a
You have just purchased a new warehouse. To financethe purchase, you've arranged for a 30-year mortgage loan for 80 percent of the$2,700,000 purchase price. The monthly payment on this loan will be
What is the relationship between thevalue of an annuity and the level of interest rates? Suppose you just bought a 13-yearannuity of $7,500 per year at the current interest rate of 10 percent per
You want to be a millionaire when youretire in 40 years. How much do you have to save each month if you can earn anannual return of 10.5 percent? How much do you have to save each month if you wait10
You are looking at an investment that has an effectiveannual rate of 12.5 percent. What is the effective semiannual return? The effectivequarterly return? The effective monthly return?
You are looking at an investment that has an effectiveannual rate of 12.5 percent. What is the effective semiannual return? The effectivequarterly return? The effective monthly return?
If the appropriate discount rate for the following cash flows is 6.18 percent per year, what is the present value of the cash flows?
If the appropriate discount rate for thefollowing cash flows is 9 percent compounded quarterly, what is the present value ofthe cash flows?
If the appropriate discount rate for thefollowing cash flows is 9 percent compounded quarterly, what is the present value ofthe cash flows?
Find the APR, or stated rate, in each of the following cases:
Find the ear in each of the following case:
Find the ear in each of the following case:
The Maybe Pay Life Insurance Co. is tryingto sell you an investment policy that will pay you and your heirs $40,000 per yearforever. If the required return on this investment is 5.1 percent, how much
You expect to receive $15,000 at graduation in two years. You plan on investing it at 9 percent until you have $75,000. Howlong will you wait from now?
You have just made your first $5,000 contribu-tion to your retirement account. Assuming you earn a return of 10 percent per yearand make no additional contributions, what will your account be worth
Refer back to the Series EE savings bonds wediscussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of returnyou would earn if you held
Refer back to the Series EE savings bonds wediscussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of returnyou would earn if you held
In 1895, the first U.S. Open Golf Championship was held. The winner's prize money was $150. In 2014, the winner's check was $1,260,000. What was the percentage increase per year in the winner's check
Solve for the unknown interest rate in each of the following:
for each of the following compute the future values:
First City Bank pays 8 percentsimple interest on its savings account balances, whereas Second City Bank pays8 percent interest compounded annually. If you made a deposit of $9,000 in eachbank, how
After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year's sales. The company had historically used little planning for
After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year's sales. The company had historically used little planning for
In the chapter, we discussed the two versions of the sustainable growth rate formula. Derive the formula ROE × b from the formulagiven in the chapter, where ROE is based on beginning of period
Redo Problem 26 using sales growth rates of 30 and 35 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the
Redo Problem 24 using sales growth ratesof 15 and 25 percent in addition to 20 percent. Illustrate graphically the relationshipbetween EFN and the growth rate, and use this graph to determine the
In Problem 24, suppose the firm wishes to keep its debt-equity ratio constant. What is EFN now?Data From Problem 24:The most recent financial statements for Fleury, Inc., follow. Sales for 2015 are
Dante Co. wishes to maintain a growth rate of12 percent per year, a debt-equity ratio of .85, and a dividend payout ratio of 30 percent. The ratio of total assets to sales is constant at .95. What
Southern Mfg., Inc., is currently operating at only 92percent of fixed asset capacity. Current sales are $690,000. How fast can sales growbefore any new fixed assets are needed?
Assuming the following ratios are constant, what is the sustainable growth rate?
From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming a 15 percent increase in sales, no new external debt or equity financing, and a constant payout ratio.Data
From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming a 15 percent increase in sales, no new external debt or equity financing, and a constant payout ratio.Data
From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming a 15 percent increase in sales, no new external debt or equity financing, and a constant payout ratio.Data
The most recent financial statements for Hornick, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividendsare paid. Next
Determine the cash flow of ABC Inc.
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to
The Graham Corporation has annual sales of $90 million. The average collection period is 70 days. What is Graham’s average investment in accounts receivable as shown on the balance sheet?
Suppose Sunburn Sunscreen and Frostbite Thermalwear in the previous problems have decided to merge. Since the two companies have seasonal sales, the combined firm’s return on assets will have a
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $2,000,000,
a. For accounting purposes, what constitutes a capital lease?b. How are capital leases reported?
a. What are the cash flow consequences of leasing instead of buying?b. Explain why the $10,000 in Table 26.2 has a positive sign.Table 26.2 Lease versus
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $2,000,000,
a. Why is the IRS concerned about leasing?b. What are some of the standards the IRS uses in evaluating a lease?
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $2,000,000,
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $2,000,000,
a. What is the relevant discount rate for evaluating whether or not to lease an asset? Why?b. Explain how to go about a lease versus buy analysis.
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $2,000,000,
a. Why do we say that leasing is a zero-sum game?b. What paradox does the previous question create?
You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $2,000,000,
a. Explain why the existence of differential tax rates may be a good reason for leasing.b. If leasing is tax motivated, who will have the higher tax bracket, lessee or lessor?
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to
In February 1996, Trans World Airlines (TWA) agreed to acquire 20 Boeing 757-200s, in a deal valued at about $1 billion. Of the 20 planes, 10 would be purchased directly from Boeing. However, the
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer assisted drilling system for its oil exploration business. Management has decided that it must use the system to
In February 1996, Trans World Airlines (TWA) agreed to acquire 20 Boeing 757-200s, in a deal valued at about $1 billion. Of the 20 planes, 10 would be purchased directly from Boeing. However, the
This chapter discussed some of the listing requirements for the NYSE and Nasdaq. Find the complete listing requirements for the New York Stock Exchange at www.nyse.com and Nasdaq at www.nasdaq.com.
Mojo Corporation currently employs a lockbox system with collection centers in San Francisco, St. Louis, Atlanta, and Boston. Each lockbox center, on average, handles $150,000 in payments every day.
In the previous problem, suppose the project requires an initial investment in net working capital of $275,000 and the fixed asset will have a market value of $325,000 at the end of the project. What
Go to www.abiworld.org and follow the “Bankruptcy Headlines” link. How many companies filed for bankruptcy on this day?
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is
Slap Shot Corporation has a fixed cost associated with buying and selling marketable securities of $100. The interest rate is currently .019 percent per day, and the firm has estimated that the
It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s
The variance of the daily cash flows for the Pele Bicycle Shop is $1.05 million. The opportunity cost to the firm of holding cash is 7 percent per year. What should be the target cash level and the
Pain Free Dentistry, Inc., disburses checks every two weeks that average $80,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
Bates Corporation has determined that its target cash balance if it uses the BAT model is $1,000. The total cash needed for the year is $16,000, and the order cost is $5. What interest rate must
Puddle of Mudd Corporation has an agreement with Lollipop Bank whereby the bank handles $6 million in collections a day and requires a $500,000 compensating balance. Puddle of Mudd is contemplating
Bumper Crop, 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
You place an order for 200 units of inventory at a unit price of $60. The supplier offers terms of 3/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full
What are the highest and lowest historical interest rates for banker’s acceptances? Go to www.economagic.com and follow the “Interest Rates” link. Find the highest and lowest interest rates for
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 60,000 units per period at a
The Air Walker Company sells 2,000 pairs of running shoes per month at a cash price of $105 per pair. The firm is considering a new policy that involves 45 days’ credit and an increase in price to
Silicon Wafers, Inc. (SWI), is debating whether or not to extend credit to a particular customer. SWI’s products, primarily used in the manufacture of semiconductors, currently sell for $1,800 per
Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 3/10, net 30. Based on experience, 60 percent of all customers will take the discount.a. What is the average
Vitale, Baby!, Inc., has weekly credit sales of $20,000, and the average collection period is 35 days. The cost of production is 80 percent of the selling price. What is Vitale’s average accounts
A firm offers terms of 2/8, net 45. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this
Ya’ll-Who, Inc., has an average collection period of 61 days. Its average daily investment in receivables is $40,000. What are annual credit sales? What is the receivables turnover?
Essence of Skunk Fragrances, Ltd., sells 3,000 units of its perfume collection each year at a price per unit of $400. All sales are on credit with terms of 2/10, net 30. The discount is taken by 50
Ebbert, 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 Ebbert should proceed or not.

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