Questions and Answers of Fundamentals Of Corporate Finance 10th

Assume that Cisco’s managers believe that the HomeNet project has risks similar to its existing projects, for which it has a cost of capital of 12%. Compute the NPV of the HomeNet project.
As production manager, you are overseeing the shutdown of a production line for a discontinued product.Some of the equipment can be sold for $50,000. The equipment was originally purchased and put
You are trying to decide whether to replace a machine on your production line. The new machine will cost$1 million, but will be more efficient than the old machine, reducing costs by $500,000 per
The machine in Problem 1 will generate incremental revenues of $4 million per year along with incremental costs of $1.2 million per year. If Daily’s marginal tax rate is 21%, what are the
You are upgrading to better production equipment for your firm’s only product. The new equipment will allow you to make more of your product in the same amount of time. Thus, you forecast that
Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $6.2 million on TV, radio, and print advertising this
Hyperion, Inc., currently sells its latest high-speed color printer, the Hyper 500, for$349. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $192 per unit,
You have a depreciation expense of $457,000 and a tax rate of 25%. What is your depreciation tax shield?
You have forecast pro forma earnings of $1,089,000. This includes the effect of $206,000 in depreciation. You also forecast a decrease in working capital of $90,000 that year. What is your forecast
Your pro forma income statement shows sales of $1,022,000, cost of goods sold as$483,000, depreciation expense of $97,000, and taxes of $176,800 due to a tax rate of 40%. What are your pro forma
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $5.8 million and cost of goods sold of $3.48 million. You will be depreciating a $1 million machine
Castle View Games would like to invest in a division to develop software for a soon-to-be-released video game console. To evaluate this decision, the firm first attempts to project the working
Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first
Cellular Access, Inc., a cellular telephone service provider, reported net income of $241.6 million for the most recent fiscal year. The firm had depreciation expenses of $95.8 million, capital
One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000
Beryl’s Iced Tea currently rents a bottling machine for $54,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options:a. Purchase
You have just completed a $24,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $96,000, and if you sold it today, you would net
After spending a year and $48,000, you finally have the design of your new product ready. In order to start production, you will need $30,000 in raw materials and you will also need to use some
You purchased a machine for $1.09 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 21%. If you sell the machine today (after
Markov Manufacturing recently spent $19 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its
You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk,
Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.75 million. Unfortunately, installing this machine will
In Example 10.1, Nike’s EBIT was assumed to be 13% of sales. If Nike can reduce its operating expenses and raise its EBIT to 14% of sales, how would the estimate of the stock’s value change?
Suppose furniture manufacturer Herman Miller, Inc., has earnings per share of $1.38. If the average P/E of comparable furniture stocks is 21.3, estimate a value for a share of Herman Miller stock
Amazon.com and Macy’s are retailers. In 2019, Amazon had a price of $1,837.28 and forward earnings per share of $39.97. Macy’s had a price of $25.49 and forward earnings per share of $2.95.
Fairview, Inc., is an ocean transport company with EBITDA of $50 million, cash of $20 million, debt of$100 million, and 10 million shares outstanding. The ocean transport industry as a whole has an
Suppose Tecnor Industries will have free cash flows next year of $40 million. Its weighted average cost of capital is 11%, and you expect its free cash flows to grow at a rate of approximately 4% per
Myox Labs announces that it is pulling one of its leading drugs from the market, owing to the potential side effects associated with the drug. As a result, its future expected free cash flow will
This year, FCF, Inc., has earnings before interest and taxes of $10,300,000, depreciation expenses of $1,200,000, capital expenditures of $1,600,000, and has increased its net working capital by
Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of$2.3 million. Its depreciation and capital expenditures will both be $310,000, and it expects its capital
The present value of JECK Co.’s expected free cash flows is $110 million. If JECK has$27 million in debt, $8 million in cash, and 2.4 million shares outstanding, what is its share price?
Portage Bay Enterprises has $2 million in excess cash, no debt, and is expected to have free cash flow of $12 million next year. Its FCF is then expected to grow at a rate of 6% per year forever. If
River Enterprises has $501 million in debt and 23 million shares of equity outstanding.Its excess cash reserves are $13 million. They are expected to generate $198 million in free cash flows next
Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:After 5 years, the free cash flows are expected to grow at the industry average of 4.3% per
You are evaluating the stock price of Kroger, a grocery store chain. It has forward earnings per share of $3.21. You notice that its competitor Target has a P/E ratio of 12.5. What is a good estimate
CSH has EBITDA of $4 million. You feel that an appropriate EV/EBITDA ratio for CSH is 8. CSH has $9 million in debt, $3 million in cash, and 750,000 shares outstanding.What is your estimate of
Next year, BHH Co. is expected to pay a dividend of $2.77 per share from earnings of $4.75 per share. The equity cost of capital for BHH is 12.1%. What should BHH’s forward P/E ratio be if its
GHL, Inc., has a dividend payout ratio of 55%. Its cost of equity is 10.7% and its dividend growth rate is 4.9%. If its forward EPS is $5.68, what is your estimate of its stock price?
SLYMN Enterprises has a P/E ratio of 12.5 and a dividend payout ratio of 35%. If its equity cost of capital is 12.5%, what growth rate is its P/E ratio consistent with?
Suppose Rocky Brands has earnings per share of $2.24 and EBITDA of $30.4 million.The firm also has 5.6 million shares outstanding and debt of $140 million (net of cash). You believe Deckers Outdoor
Suppose Hawaiian Airlines (HA) has 50 million shares outstanding. Estimate Hawaiian’s share value using each of the five valuation multiples in Problem 20, based on the median valuation multiple of
Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.75 in one year and its dividends had been expected to grow by 6.5% per year. You read in the paper that Summit has
Assume that Cola Co. has a share price of $42.64. The firm will pay a dividend of $1.21 in one year, and you expect Cola Co. to raise this dividend by approximately 6.4% per year in perpetuity.a. If
Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will
Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials were successful, Apnex stock will be worth $74 per
You have a $101,000 portfolio made up of 15 stocks. You trade each stock five times this year and each time you trade, you pay about $35 in commissions and spread. You have no special knowledge, so
Assume the annual return for the lowest turnover portfolio is 19% and the annual return for the highest turnover portfolio is 11%. If you invest $107,000 and have the highest turnover, how much lower
Does systematic or unsystematic risk require a risk premium? Why?
Microsoft paid a one-time special dividend of $3.08 on November 15, 2004. Suppose you bought Microsoft stock for $28.08 on November 1, 2004, and sold it immediately after the dividend was paid for
Suppose you purchased Microsoft stock (MSFT) on Nov 1, 2004, and held it for one year, selling on Oct 31, 2005. What was your annual realized return?
Using the following data, what is the standard deviation of the S&P 500’s returns for the years 2005–2009? 2005 4.9% 2006 15.8% 2007 5.5% 2008 -37.0% 2009 26.5%
In Example 11.3, we found the average return for the S&P 500 from 2005 to 2009 to be 3.1% with a standard deviation of 24.1%. What is a 95% prediction interval for 2010’s return?
You are playing a very simple gambling game with your friend: a $1 bet based on a coin flip. That is, you each bet $1 and flip a coin: heads you win your friend’s $1, tails you lose and your friend
Your portfolio consists of 120 shares of CSH and 60 shares of EJH, which you just bought at $21 and $29 per share, respectively.a. What fraction of your portfolio is invested in CSH? In EJH?b. If CSH
You have just purchased a share of stock for $19.05. The company is expected to pay a dividend of $0.63 per share in exactly one year. If you want to earn a 9.2% return on your investment, what price
You expect KStreet Co’s trade at $98 per share right after paying a $2.25 dividend per share in one year. What is the most you would pay to buy the stock now if you want to earn at least a 12%
You observe a portfolio for five years and determine that its average return is 12.4%and the standard deviation of its returns is 19.6%. Can you be 95% confident that this portfolio will not lose
Suppose you invest $100,000 and buy 200 shares of Apple at $200 per share ($40,000) and 1000 shares of Coca-Cola at $60 per share ($60,000). If Apple’s stock rises to $240 per share and Coca-Cola
Suppose you invest $10,000 in Boeing (BA) stock, and $30,000 in Merck (MRK) stock. You expect a return of 10% for Boeing and 16% for Merck. What is the expected return for your portfolio?
Using the data from Table 12.3, what is the volatility (standard deviation) of a portfolio with equal amounts invested in Starbucks and Microsoft stock? What is the standard deviation of a portfolio
Based on historical data, your expected annual return for Boeing is 13% and for Coca-Cola is 12%. What is the expected return and risk (standard deviation) of your portfolio if you hold only Boeing?
Suppose that in the coming year, you expect SysCo’s stock to have a standard deviation of 30% and a beta of 1.2, and UniCo’s stock to have a standard deviation of 41% and a beta of 0.6. Which
Suppose the risk-free return is 3% and you measure the market risk premium to be 6%. Cisco has a beta of 1.2. According to the CAPM, what is its expected return?
Suppose the stock of Bankruptcy Auction Services Inc. (BAS) has a negative beta of -0.30. How does its expected return compare to the risk-free rate, according to the CAPM? Does your result make
Suppose drug-maker Pfizer (PFE) has a beta of 0.7, whereas the beta of Zumiez (ZUMZ) is 1.2. If the riskfree interest rate is 3% and the market risk premium is 6%, what is the expected return of an
You buy 105 shares of Tidepool Co. for $38 each and 200 shares of Madfish, Inc., for$11 each. What are the weights in your portfolio?
Fremont Enterprises has an expected return of 16% and Laurelhurst News has an expected return of 19%. If you put 48% of your portfolio in Laurelhurst and 52% in Fremont, what is the expected return
HNL has an expected return of 17% and KOA has an expected return of 23%. If you create a portfolio that is 65% HNL and 35% KOA, what is the expected return of the portfolio?
You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 68% of the money in GoldFinger (currently$29/share), 17% of the money in
You have $55,000. You put 22% of your money in a stock with an expected return of 15%, $33,000 in a stock with an expected return of 14%, and the rest in a stock with an expected return of 19%. What
Stocks A and B have the following returns.a. What are the expected returns of the two stocks?b. What are the standard deviations of the returns of the two stocks?c. If their correlation is 0.48 what
The following spreadsheet contains monthly returns for Cola Co. and Gas Co. for 2013.Using these data, estimate the average monthly return and volatility for each stock. Date Jan Feb Mar Apr May June
Using the data from Table 12.3, what is the volatility of an equally weighted portfolio of Microsoft and Coca-Cola stock?Table 12.3: Standard Deviation Microsoft Starbucks Netflix Coca-Cola
Suppose Johnson & Johnson and the Walgreen Company have the expected returns and volatilities shown below, with a correlation of 22.6%.For a portfolio that is equally invested in Johnson &
Arbor Systems and Gencore stocks both have a volatility of 36%. Compute the volatility of a portfolio with 50% invested in each stock if the correlation between the stocks is (a) +1, (b) 0.50, (c) 0,
Suppose Wesley Publishing stock has a volatility of 65%, while Addison Printing stock has a volatility of 30%. If the correlation between these stocks is 45%, what is the volatility of the following
You have a portfolio with a standard deviation of 23% and an expected return of 17%.You are considering adding one of the two stocks in the following table. If after adding the stock you will have
Your client has $95,000 invested in stock A. She would like to build a two-stock portfolio by investing another $95,000 in either stock B or C. She wants a portfolio with an expected return of at
Suppose the risk-free return is 4.6% and the market portfolio has an expected return of 9.5% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.32. What is its
EJH has a beta of 1.6, CSH has a beta of 0.5, and KMS has a beta of 0.8. If you put 25% of your money in EJH, 19% in CSH, and 56% in KMS, what is the beta of your portfolio?
Suppose Autodesk stock has a beta of 2.17, whereas Costco stock has a beta of 0.73.If the risk-free interest rate is 6.5% and the expected return of the market portfolio is 11.5%, what is the
Suppose Intel stock has a beta of 0.8, whereas Boeing stock has a beta of 1.2. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM,a.
You are thinking of buying a stock priced at $103 per share. Assume that the riskfree rate is about 4.4% and the market risk premium is 6.9%. If you think the stock will rise to $125 per share by the
You are analyzing a stock that has a beta of 1.15. The risk-free rate is 4.4% and you estimate the market risk premium to be 6.5%. If you expect the stock to have a return of 11.1% over the next
You have risen through the ranks of a coffee company, from the lowly green-apron barista to the coveted black apron, and all the way to CFO. A quick Internet check shows that your company’s beta is
At the beginning of 2007 (the year the iPhone was introduced), Apple’s beta was 1.3 and the risk-free rate was about 3.7%. Apple’s price was $81.71. Apple’s price at the end of 2007 was 199.08.
You are a shareholder in a corporation. The corporation earns $8.00 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend (we make this
Rework Example 1.1, assuming the corporation in that example has elected subchapter S tax treatment and your tax rate on non-dividend income is 35%.Data From Example 1.1:You are a shareholder in a
What is a limited liability company (LLC)? How does it differ from a limited partnership?
What are the important changes that have occurred in stock markets since 2005?
You sit on the board of a public corporation. Your CEO has proposed taking steps to offset the carbon impact of your company’s manufacturing process. Doing so will add to the company’s overall
The following quote on Apple stock appeared on August 21, 2019, on Yahoo Finance:If you wanted to buy Apple, what price would you pay per share? How much would you receive per share if you wanted to
If Global has 3.6 million shares outstanding, and these shares are trading for a price of $10.00 per share, what is Global’s market capitalization? How does the market capitalization compare to
In December 2018, Kraft Heinz Co. (KHC) had 1.22 billion shares outstanding, a share price of $43.04, a book value of debt of $30.87 billion, and cash of $1.13 billion. What was Kraft Heinz’s
Suppose Global had an additional $1 million depreciation expense in 2019. If Global’s tax rate on pretax income is 26%, what would be the impact of this expense on Global’s earnings? How would it
Compute Global’s accounts payable days, inventory days, and inventory turnover for 2019.
Assess Global’s ability to meet its interest obligations by calculating interest coverage ratios using both EBIT and EBITDA.
Consider the following data for Walmart Stores and Target Corporation ($ billions):Compare Walmart’s and Target’s operating margin, net profit margin, P/E ratio, and the ratio of enterprise value
Assess how Global’s ability to use its assets effectively has changed in the last year by computing the change in its return on assets.

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