Questions and Answers of Fundamentals Of Corporate Finance 10th

Your bank is offering you an account that will pay 13% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length ofa. six months.b. one year.c. one month.
You are looking to buy a car and you have been offered a loan with an APR of 5.6%, compounded monthly.a. What is the true monthly rate of interest?b. What is the EAR?
You are considering two ways of financing a spring break vacation. You could put it on your credit card, at 12% APR, compounded monthly, or borrow the money from your parents, who want a 7% interest
An online bank is offering to pay 0.20% interest per month on deposits. Your local bank offers to pay 0.65% interest quarterly (every 3 months). Which is the higher interest rate?
Which do you prefer: a bank account that pays 5.4% per year (EAR) for three years ora. an account that pays 2.5% every six months for three years?b. an account that pays 6.9% every 18 months for
You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $67,000 every seven years, starting seven years from now. What is the present
You have found three investment choices for a one-year deposit: 10.3% APR compounded monthly, 10.3% APR compounded annually, and 9.6% APR compounded daily.Compute the EAR for each investment choice.
Your bank account pays interest with an EAR of 9%. What is the APR quote for this account based on semiannual compounding? What is the APR with monthly compounding?
Suppose the interest rate is 6.8% APR with monthly compounding. What is the present value of an annuity that pays $120 every six months for four years?
A payday loan is structured to obscure the true interest rate you are paying. For example, in Washington, you pay a $33 “fee” for a two-week $200 payday loan (when you repay the loan, you pay
You have been accepted into college. The college guarantees that your tuition will not increase for the four years you attend. The first $11,900 tuition payment is due in six months. After that, the
You make monthly payments on your car loan. It has a quoted APR of 5.4% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?
Suppose Capital One is advertising a 60-month, 5.27% APR motorcycle loan. If you need to borrow $7000 to purchase your dream Harley-Davidson, what will your monthly payment be?
Assume you graduate from college with $28,000 in student loans. If your interest rate is fixed at 5% APR with monthly compounding and you will repay the loans over a 10-year period, what will be your
Ironwood Bank is offering a 30-year mortgage with an APR of 6.10% based on monthly compounding. If you plan to borrow $157,000, what will be your monthly payment?
Consider the loan from the previous question: a 60-month, $20,000 car loan with a 6% APR, compounded monthly. Assume that right after you make your 50th payment, the balance on the loan is $3,762.32.
You are buying a house and the mortgage company offers to let you pay a “point” (1% of the total amount of the loan) to reduce your APR from 5.93% to 5.68% on your $402,000, 30-year mortgage with
You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $1850 and you have made every payment on time. The
You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $750,000. The mortgage is currently exactly 18½
You have just purchased a car and taken out a $52,000 loan. The loan has a five-year term with monthly payments and an APR of 5.7%.a. How much will you pay in interest, and how much will you pay in
You are thinking about leasing a car. The purchase price of the car is $25,000. The residual value (the amount you could pay to keep the car at the end of the lease) is$15,000 at the end of 36
You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 7.4%, your loan payments are $624 per month, and you have 36 months left on your
Oppenheimer Bank is offering a 30-year mortgage with an APR of 4.97% based on monthly compounding. With this mortgage your monthly payments would be $1996 per month. In addition, Oppenheimer Bank
The mortgage on your house is five years old. It required monthly payments of $1450, had an original term of 30 years, and had an interest rate of 9% (APR). In the intervening five years, interest
You have credit card debt of $30,000 that has an APR (monthly compounding) of 16%. Each month you pay the minimum monthly payment. You are required to pay only the outstanding interest. You have
Your firm has taken out a $452,000 loan with 8.7% APR (compounded monthly) for some commercial property. As is common in commercial real estate, the loan is a five year loan based on a 15-year
Five years ago you took out a 5/1 adjustable rate mortgage and the five-year fixed rate period has just expired. The loan was originally for $294,000 with 360 payments at 4.1% APR, compounded
In 1975, interest rates were 7.98% and the rate of inflation was 12.6% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over
If the rate of inflation is 4.2%, what nominal interest rate is necessary for you to earn a 2.8% real interest rate on your investment?
Assume the inflation rate is 3.29% APR, compounded annually. Would you rather earn a nominal return of 5.48% APR, compounded semiannually, or a real return of 2.46%APR, compounded quarterly?
Assume inflation is 0.2% per month. Would you rather earn a nominal return of 0.77% per month, or a real return of 6.44% APR, compounded annually?
You are pleased to see that you have been given a 4.97% raise this year. However, you read on the Wall Street Journal Web site that inflation over the past year has been 2.24%. How much better off
You are thinking about investing $4565 in your friend’s landscaping business. Even though you know the investment is risky and you can’t be sure, you expect your investment to be worth $5767 next
You have invested in a business that proudly reports that it is profitable. Your investment of $4600 has produced a profit of $302. The managers think that if you leave your $4600 invested with them,
Suppose Kenai Corp. has debt with a book (face) value of $10 million, trading at 95% of face value. It also has book equity of $10 million, and 1 million shares of common stock trading at $30 per
By using the yield to maturity on AT&T’s debt, we found that its pretax cost of debt is 3.18%. If AT&T’s tax rate is 25%, what is its effective cost of debt?
Assume the following information about Johnson & Johnson (ticker: JNJ). JNJ’s equity beta is 0.55. The yield on 10-year treasuries is 3%, and you estimate the market risk premium to be 6%.
Assume the expected return on Target’s equity is 11.5%, and the firm has a yield to maturity on its debt of 6%. Debt accounts for 18% and equity for 82% of Target’s total market value. If its tax
Suppose Anheuser-Busch InBev is considering introducing a new ultra-light beer with zero calories to be called BudZero. The firm believes that the beer’s flavor and appeal to calorie-conscious
You are working for Microsoft evaluating the possibility of selling energy drinks. Microsoft’s WACC is 8.3%.Energy drinks would be a new line of business for Microsoft, however, so the systematic
You are analyzing AT&T’s potential acquisition of Nike. AT&T plans to offer $150 billion as the purchase price for Nike, and it will need to issue additional debt and equity to finance such a large
MV Corporation has debt with market value of $100 million, common equity with a book value of $104 million, and preferred stock worth $21 million outstanding. Its common equity trades at $48 per
Andyco, Inc., has the following balance sheet and an equity market-to-book ratio of 1.6. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation?
Book Co. has 1.8 million shares of common equity with a par (book) value of $1.05, retained earnings of $28.3 million, and its shares have a market value of $48.93 per share. It also has debt with a
Consider a simple firm that has the following market-value balance sheet:Next year, there are two possible values for its assets, each equally likely: $1220 and $970. Its debt will be due with 5.1%
Aluminum maker Alcoa has a beta of about 1.8, whereas Hormel Foods has a beta of 0.38. If the expected excess return of the marker portfolio is 6%, which of these firms has a higher equity cost of
Avicorp has a $13.4 million debt issue outstanding, with a 6.2% coupon rate. The debt has semiannual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently
Laurel, Inc., has debt outstanding with a coupon rate of 6.1% and a yield to maturity of 7.1%. Its tax rate is 38%. What is Laurel’s effective (after-tax) cost of debt?
Wild Swings Inc.’s stock has a beta of 2.4. If the risk-free rate is 5.9% and the market risk premium is 6.9%, what is an estimate of Wild Swings’ cost of equity?
HighGrowth Company has a stock price of $18. The firm will pay a dividend next year of $1.12, and its dividend is expected to grow at a rate of 3.6% per year thereafter.What is your estimate of
Slow ’n Steady, Inc., has a stock price of $34, will pay a dividend next year of $3.25, and has expected dividend growth of 1.3% per year. What is your estimate of Slow ’n Steady’s cost of
Mackenzie Company has a price of $32 and will issue a dividend of $2 next year. It has a beta of 1.5, the risk-free rate is 5.6%, and it estimates the market risk premium to be 4.8%.a. Estimate the
CoffeeCarts has a cost of equity of 15.3%, has an effective cost of debt of 3.6%, and is financed 70% with equity and 30% with debt. What is this firm’s WACC?
AllCity, Inc., is financed 35% with debt, 6% with preferred stock, and 59% with common stock. Its pretax cost of debt is 6.5%, its preferred stock pays an annual dividend of $2.51 and is priced at
Pfd Company has debt with a yield to maturity of 7.6%, a cost of equity of 15.1%, and a cost of preferred stock of 8.7%. The market values of its debt, preferred stock, and equity are $9.7 million,
A retail coffee company is planning to open 110 new coffee outlets that are expected to generate $15.2 million in free cash flows per year, with a growth rate of 2.9% in perpetuity. If the coffee
Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity firm that specializes in this business. Suppose Harburtin’s equity beta is 0.84, the risk-free
CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor. Suppose the firm faces a tax rate of 22% and collects the following information.If it plans to finance 15%
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the Internet.You have decided that Dell
You are planning to issue debt to finance a new project. The project will require $19.81 million in financing and you estimate its NPV to be $15 million. The issue costs for the debt will be 2.7% of
You founded your own firm two years ago. Initially you contributed $100,000 of your own money and, in return, received 1.5 million shares of stock. Since then, you have sold an additional 500,000
Wagner, Inc., is a private company that designs, manufactures, and distributes branded consumer products.During its most recent fiscal year, Wagner had revenues of $325 million and earnings of $15
Fleming Educational Software, Inc., is selling 500,000 shares of stock in an auction IPO. At the end of the bidding period, Fleming’s investment bank has received the following bids:What will the
You are the CFO of a company that has a market capitalization of $1 billion. The firm has 100 million shares outstanding, so the shares are trading at $10 per share. You need to raise $200 million
You have started a company and are in luck—a venture capitalist has offered to invest.You own 100% of the company with 5.28 million shares. The VC offers $1.02 million for 760,000 new shares.a.
Starware Software was founded last year to develop software for gaming applications.The founder initially invested $1,000,000 and received 12 million shares of stock.Starware now needs to raise a
Your start-up company needs capital. Right now, you own 100% of the firm with 10.2 million shares. You have received two offers from venture capitalists. The first offers to invest $2.95 million for
Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your
Your investment bankers price your IPO at $14.65 per share for 9.8 million shares. If the price at the end of the first day of trading is $16.85 per share,a. What was the percentage underpricing?b.
Wright Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share.Management negotiated a fee (the underwriting spread) of 9% on this transaction.What was the dollar cost of
You are negotiating with your underwriters in a firm commitment offering of 8 million primary shares. You have two options: set the IPO price at $25.00 per share with a spread of 7%, or set the price
Your firm is selling 4 million shares in an IPO. You are targeting an offer price of$16.83 per share. Your underwriters have proposed a spread of 5.6%, but you would like to lower it to 3.6%.
YVR, Inc., just announced a 13 million share SEO at $56 per share. If all of the SEO shares are primary shares and its underwriter charges 9% of the gross proceeds, how much new capital will YVR
On January 20, Metropolitan, Inc., sold 10 million shares of stock in an SEO. The market price of Metropolitan at the time was $42.50 per share. Of the 10 million shares sold, 5 million shares were
Foster Enterprises’ stock is trading for $43 per share and there are currently 18 million shares outstanding. It would like to raise $105 million. If its underwriter charges 6% of gross proceeds,a.
MacKenzie Corporation currently has 11 million shares of stock outstanding at a price of $42 per share. The company would like to raise money and has announced a rights issue. Every existing
Few IPOs have garnered as much attention as social media giant Facebook’s public offering on May 18, 2012. It was the biggest IPO in Internet history, easily topping Google’s initial public
List four different kinds of securities issued by the U.S. Treasury.
What is the distinguishing characteristic of municipal bonds?
What is an asset-backed security?
Do callable bonds have a higher or lower yield than otherwise identical bonds without a call feature? Why?
On January 15, 2011, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 1.125%.On the date of issue, the consumer price index (CPI) was 220.223. On January 15, 2019, the CPI
IBM has just issued a callable (at par) five-year, 8% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price
When will the yield to maturity be higher than the yield to call for a callable bond?
You are finalizing a bank loan for $205,000 for your small business and the closing fees payable to the bank are 1.7% of the loan. After paying the fees, what will be the net amount of funds from the
Your firm is considering two one-year loan options for a $531,000 loan. The first carries fees of 1.9% of the loan amount and charges interest of 4% of the loan amount.The other carries fees of 1% of
Your firm is issuing $98 million in straight bonds at par with a coupon rate of 5.5% and paying total fees of 2.9%. What is the net amount of funds that the debt issue will provide for your firm?
Suppose on January 15, 2013, the U.S. Treasury issued a five-year inflation-indexed note with a coupon of 5%. On the date of issue, the consumer price index (CPI) was 414. By January 15, 2018, the
On January 15, 2020, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 7%. On the date of issue, the CPI was 412. By January 15, 2030, the CPI had decreased to 279. What
Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can only pay dividends out of earnings made after the debt issue and you must maintain a minimum
Your firm has tangible assets of $103.4 million. You are planning to acquire a firm that is half your firm’s size. You have bonds with a merger & acquisition covenant that requires the combined
General Electric has just issued a callable (at par) 10-year, 6.2% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date.
Boeing Corporation has just issued a callable (at par) three-year, 4.7% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon
You own a bond with a face value of $1000 and a conversion ratio of 425. What is the conversion price?
A $1000 face value bond has a conversion ratio of 48. You estimate the transaction costs of conversion to be 2.7% of the face value of the bond. What price must the stock reach in order for you to
You are the CFO of RealNetworks on July 1, 2008. The company’s stock price is $9.74 and its convertible debt (as shown in Table 15.8) is now callable.a. What is the value of the shares the
Suppose you borrow only $6000 when financing your coffee shop. According to Modigliani and Miller, what should the value of the equity be? What is the expected return?
Suppose you borrow only $6000 when financing your coffee shop. According to MM Proposition II, what will your firm’s equity cost of capital be?
Shown below is the pro-forma forecasted income statement for E. C. Builders (ECB). Given its marginal corporate tax rate of 25%, what is the amount of the interest tax shield for ECB in years 2020
Suppose ECB from Example 16.3 borrows $2 billion by issuing 10-year bonds. ECB’s cost of debt is 6%, so it will need to pay $120 million in interest each year for the next 10 years, and then repay

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