Questions and Answers of Fundamentals Of Corporate Finance 10th

Axon Industries needs to raise $9.5 million for a new investment project. If the firm issues one-year debt, it may have to pay an interest rate of 8%, although Axon’s managers believe that 6% would
Consider a project with free cash flows in one year of $133,239 or $189,144, with each outcome being equally likely. The initial investment required for the project is $70,000, and the project’s
You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $21 million. If your research is unsuccessful, it will be worth nothing. To fund
Acort Industries owns assets that will have an 70% probability of having a market value of $52 million in one year. There is a 30% chance that the assets will be worth only $22 million. The current
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 9% each year. Both companies have identical projects that generate free cash flows of
Hardmon Enterprises is currently an all-equity firm with an expected return of 11.2%.It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.a. Suppose
Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 8.6%. What would be its cost of equity if it took on the average amount of debt for its
Your firm is financed 100% with equity and has a cost of equity capital of 12%. You are considering your first debt issue, which would change your capital structure to 30% debt and 70% equity. If
Pelamed Pharmaceuticals had EBIT of $354 million in 2018. In addition, Pelamed had interest expenses of $128.34 million and a corporate tax rate of 25%.a. What was Pelamed’s 2018 net income?b. What
Grommit Engineering expects to have net income next year of $40.13 million and free cash flow of $22.16 million. Grommit’s marginal corporate tax rate is 35%.a. If Grommit increases leverage so
Braxton Enterprises currently has debt outstanding of $5 million and an interest rate of 8%. Braxton plans to reduce its debt by repaying $1 million in principal at the end of each year for the next
Assume that Microsoft has a total market value of $303.9 billion and a marginal tax rate of 35%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13% of its
Suppose the corporate tax rate is 30%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year,
Your firm currently has $92 million in debt outstanding with a 7% interest rate. The terms of the loan require the firm to repay $23 million of the balance each year. Suppose that the marginal
Arnell Industries has $15 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future.a. Suppose
Rogot Instruments makes fine violins, violas, and cellos. It has $1.9 million in debt outstanding, equity valued at $2.8 million, and pays corporate income tax at a rate of 40%. Its cost of equity is
Rumolt Motors has 58 million shares outstanding with a price of $26 per share. In addition, Rumolt has issued bonds with a total current market value of $991 million.Suppose Rumolt’s equity cost of
Summit Builders has a market debt-equity ratio of 1.30 and a corporate tax rate of 38%, and it pays 9% interest on its debt. By what amount does the interest tax shield from its debt lower Summit’s
Milton Industries expects free cash flows of $20 million each year. Milton’s corporate tax rate is 35%, and its unlevered cost of capital is 9%. The firm also has outstanding debt of $104.13
NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 17%. NatNah decides to increase its leverage to maintain a market debt-to-value ratio of 0.4. Suppose its debt
Kurz Manufacturing is currently an all-equity firm with 17 million shares outstanding and a stock price of $5.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz
Rally, Inc., is an all-equity firm with assets worth $56 billion and 7 billion shares outstanding.Rally plans to borrow $22 billion and use these funds to repurchase shares.The firm’s corporate tax
With its current leverage, Impi Corporation will have net income next year of $9.5 million. If Impi’s corporate tax rate is 30% and it pays 8% interest on its debt, how much additional debt can
Hawar International is a shipping firm with a current share price of $4.56 and 9.4 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $19.7
Marpor Industries has no debt and expects to generate free cash flows of $17 million each year. Marpor believes that if it permanently increases its level of debt to $30.43 million, the risk of
Colt Systems will have EBIT this coming year of $18 million. It will also spend $7 million on total capital expenditures and increases in net working capital, and have $4 million in depreciation
Dynron Corporation’s primary business is natural gas transportation using its vast gas pipeline network. Dynron’s assets currently have a market value of $142 million. The firm is exploring the
Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $14.9 million due in one year. If left vacant, the land will be worth $10.3 million in one year.
You own a firm, and you want to raise $40 million to fund an expansion. Currently, you own 100% of the firm’s equity, and the firm has no debt. To raise the $40 million solely through equity, you
Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):Approximately $150,000 of Empire’s earnings will be needed to make new, positive-NPV investments.
Suppose Genron does not adopt the third alternative policy and instead pays a $2 dividend per share today. Show how an investor holding 2000 shares could create a homemade dividend of$4.50 per share
Barston Mining has $100,000 in excess cash. Barston is considering investing the cash in one-year Treasury bills paying 2% interest, and then using the cash to pay a dividend next year.
Recall Barston Mining from Example 17.2. Suppose Barston must pay corporate taxes at a 25% rate on the interest it will earn from the one-year Treasury bill paying 2% interest. Would pension fund
Rexton Oil is an all-equity firm with 100 million shares outstanding. Rexton has $150 million in cash and expects future free cash flows of $65 million per year. Management plans to use the cash to
RFC Corp. has announced a $2.30 dividend. If RFC’s last price while trading cumdividend is $58, what should its first ex-dividend price be (assuming perfect capital markets)?
ECB Co. has 1.45 million shares outstanding selling at $25 per share. It plans to repurchase 102,000 shares at the market price. What will its market capitalization be after the repurchase? What will
EJH Company has a market capitalization of $1.4 billion and 25 million shares outstanding.It plans to distribute $120 million through an open market repurchase.Assuming perfect capital markets:a.
The HNH Corporation will pay a constant dividend of $4 per share, per year, in perpetuity.Assume all investors pay a 25% tax on dividends and that there is no capital gains tax. The cost of capital
Clovix Corporation has $54.88 million in cash, 9.8 million shares outstanding, and a current share price of $30. Clovix is deciding whether to use the $54.88 million to pay an immediate special
AMS Company has unexpectedly generated a one-time extra $5 million in cash-flow this year. After announcing the extra cash flow, AMS stock price was $60 per share(it has 1 million shares
FCF Co. has 16,000 shares outstanding and a total market value of $1 million, $350 thousand of which is debt and the other $650 thousand is equity. It is planning a 10%stock dividend.a. What is the
Suppose the stock of Host Hotels & Resorts is currently trading for $21 per share.a. If Host issues a 23% stock dividend, what would its new share price be?b. If Host does a 3:2 stock split, what
If Berkshire Hathaway’s A shares are trading at $80,000, what split ratio would it need to bring its stock price down to $40?
After the market close on May 11, 2018, Adaptec, Inc., distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received 0.1606 share of Roxio
KMS has just revised its sales forecast downward. If KMS expects sales to grow by only 10% next year, what are its costs, except for depreciation, projected to be?
If instead of paying out 30% of earnings as dividends, KMS decides not to pay any dividend and instead retains all its 2019 earnings, how would its net new financing change?
Your firm has $70 million in equity and $30 million in debt and forecasts $14 million in net income for the year. It currently pays dividends equal to 20% of its net income. You are analyzing a
Your company has sales of $103,600 this year and cost of goods sold of $60,300. You forecast sales to increase to $117,700 next year. Using the percent of sales method, forecast next year’s cost of
Assume that Jim’s pays out 90% of its net income. Use the percent of sales method to forecast:a. Stockholders’ equityb. Accounts payable Use the following income statement and balance sheet for
Under the assumption that KMS’s market share will increase by 0.25% per year (and the investment and financing will be adjusted as described in Problem 13), you project the following
Assuming that KMS’s market share will increase by 0.25% per year (implying that the investment, financing, and depreciation will be adjusted as described in Problems 13 and 14), and that the
Your firm has an ROE of 12.3%, a payout ratio of 24%, $638,700 of stockholders’equity, and $415,000 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you
IZAX, Co. had the following items on its balance sheet at the beginning of the year:Its net income this year is $19,600 and it pays dividends of $5100. If its assets grew at its internal growth rate,
The following information is from Apple’s 2018 annual income statement and balance sheet (numbers are in $ millions). Use it to compute Apple’s cash conversion cycle. Sales Cost of Goods Sold
The projected net income and free cash flows next year for Emerald City Paints are given in the following table in $ thousands:Emerald City expects capital expenditures and depreciation to continue
Your firm purchases goods from its supplier on terms of 1/15, net 40.What is the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered?
Your company currently sells its product with a 1% discount to customers who pay cash immediately.Otherwise, the full price is due within 30 days. Half of your customers take advantage of the
Financial Training Systems (FTS) bills its accounts on terms of 3/10, net 30. The firm’s accounts receivable include $100,000 that has been outstanding for 10 or fewer days, $300,000 outstanding
The Rowd Company has an average accounts payable balance of $250,000. Its average daily cost of goods sold is $14,000, and it receives terms of 2/15, net 40 from its suppliers. Rowd chooses to forgo
What is the effective annual cost of credit terms of 1/15, net 40 if the firm stretches the accounts payable to 60 days?
How does working capital impact a firm’s value?
Describe “just-in-time” inventory management.
FastChips Semiconductors has inventory days of 80, accounts receivable days of 60, and accounts payable days of 120. What is its cash conversion cycle?
Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2.11 million in net working capital today. The plant will
Your firm currently has net working capital of $111,000 that it expects to grow at a rate of 5% per year forever. You are considering some suggestions that could slow that growth to 3% per year. If
The Greek Connection had sales of $32 million in 2015, and a cost of goods sold of$12.8 million. A simplified balance sheet for the firm appears below:a. Calculate The Greek Connection’s net
Assume the credit terms offered to your firm by your suppliers are 4/15, net 60.Calculate the cost of the trade credit if your firm does not take the discount and pays on day 60.
Your supplier offers terms of 3/20, net 30. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 30?
The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide. The owner of the firm is investigating the desirability of employing a billing firm to do her billing and
The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system
The Manana Corporation had sales of $54.3 million this year. Its accounts receivable balance averaged $5.6 million. How long, on average, does it take the firm to collect on its sales?
Simple Simon’s Bakery purchases supplies on terms of 1.7/10, net 25. If Simple Simon’s chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A
Your firm purchases goods from its supplier on terms of 1.7/15, net 35.a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 35?b. What
Your company had $14 million in sales last year. Its cost of goods sold was $9.8 million and its average inventory balance was $1,300,000. What was its average days of inventory?
Happy Valley Homecare Suppliers, Inc. (HVHS), had $10.9 million in sales in 2015. Its cost of goods sold was $4.36 million, and its average inventory balance was $1.77 million.a. Calculate the
You are the Chief Financial Officer (CFO) of Walmart. This afternoon you played golf with a member of the company’s board of directors. Somewhere during the back nine, the board member
What is the difference between temporary and permanent working capital?
What is the difference between direct paper and dealer paper?
Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier$10,000 with terms of 2/10 Net
Your firm’s bank has offered you two options for short-term financing in the amount of $450,000. The first option is a committed line of credit with a commitment fee of 0.4% (EAR) and an interest
Consider two loans with one-year maturities and identical face values: a 7.9% loan with a 1.02% loan origination fee and a 7.9% loan with a 4.7% (no-interest) compensating balance requirement. Which
Which of the following one-year, $1000 bank loans offers the lowest effective annual rate?a. A loan with an APR of 6.1%, compounded monthlyb. A loan with an APR of 6.1%, compounded annually, with a
The Needy Corporation borrowed $10,500 from Bank Ease. According to the terms of the loan, Needy must pay the bank $458 in interest every three months for the three-year life of the loan, with the
The Treadwater Bank wants to raise $1.33 million using three-month commercial paper. The net proceeds to the bank will be $1,304,730. What is the effective annual rate of this financing for
Magna Corporation has an issue of commercial paper with a face value of $1,060,000 and a maturity of six months. Magna received net proceeds of $1,032,186 when it sold the paper. What is the
The Signet Corporation has issued four-month commercial paper with a $6.4 million face value. The firm netted $6,248,982 on the sale. What effective annual rate is Signet paying for these funds?
The Ohio Valley Steel Corporation has borrowed $5.1 million for one month at a stated annual rate of 8.7%, using inventory stored in a field warehouse as collateral.The warehouser charges a $5100
The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $550,000. Interest on the loan will be 9.6% (APR, annual
It is May 16, 2019, and you have decided to purchase 10 June call contracts on Amazon’s stock with an exercise price of $1905. Because you are buying, you must pay the ask price. How much money
PLAN From Table 21.2, the ask price of this option is $54.75. Remember that the price quoted is per share and that each contract is for 100 shares.EXECUTE You are purchasing 10 contracts and each
You own a put option on Oracle stock with an exercise price of $20 that expires today. Plot the value of this option as a function of the stock price.
PLAN From Eq. 21.2, and the fact that the strike price is $20, we see that the value of the put option is:EXECUTE Plotting this function gives:EVALUATE Because the put option allows you to force the
You are short a put option on Oracle stock with an exercise price of $20 that expires today. Plot the value of this option as a function of the stock price.SOLUTION PLAN Again, the strike price is
Assume you decided to purchase the June 1890 through 1905 put options quoted in Table 21.2 on May 16, 2019, and you financed each position by borrowing at 3% for 37 days. Plot the profit of each
You own a call option on Intuit stock with a strike price of $36. The option will expire in exactly three months.a. If the stock is trading at $46 in three months, what will be the payoff of the
Assume that you have shorted the call option in Problem 2.a. If the stock is trading at $46 in three months, what will you owe?b. If the stock is trading at $32 in three months, what will you owe?c.
You own a put option on Ford stock with a strike price of $8. The option will expire in exactly six months.a. If the stock is trading at $2 in six months, what will be the payoff of the put?b. If the
Assume that you have shorted the put option in Problem 4.a. If the stock is trading at $2 in three months, what will you owe?b. If the stock is trading at $21 in three months, what will you owe?c.
You are long both a call and a put on the same share of stock with the same exercise date. The exercise price of the call is $35 and the exercise price of the put is $40. Plot the value of this
You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $45 and the exercise price of the second call is $63.In addition, you are short

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