Questions and Answers of Fundamentals Of Corporate Finance 10th

Dynamic Energy Systems stock is currently trading for $39 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $43 currently trading for $4.37. If
You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $22 per share and the one-year risk-free interest rate is 7%. A one-year put on
What mechanisms allow hostile acquirers to get around the free rider problem in takeovers?
Consider two firms, Yin Corporation and Yang Corporation. Both corporations will either make $50 million or lose $20 million every year with equal probability. The only difference is that the
Consider two corporations that both have earnings of $5 per share. The first firm, OldWorld Enterprises, is a mature company with few growth opportunities. It has 1 million shares that are currently
Calculate NewWorld’s price-earnings ratio, before and after the takeover described in Example 22.2.Data From Example 22.2:Consider two corporations that both have earnings of $5 per share. The
At the time Sprint announced plans to acquire Nextel in December 2004, Sprint stock was trading for $25 per share and Nextel stock was trading for $30 per share. If the projected synergies were $12
FAT Corporation stock is currently trading at $40 per share. There are 20 million shares outstanding, and the company has no debt. You are a partner in a firm that specializes in leveraged buyouts.
You have invested in GreenFrame, Inc. The CEO owns 4% of GreenFrame and is considering an acquisition. If the acquisition destroys $58 million of GreenFrame’s value, but the present value of the
Loki, Inc., and Thor, Inc., have entered into a stock-swap merger agreement whereby Loki will pay a 36% premium over Thor’s premerger price. If Thor’s premerger price per share was $43 and
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading at $47 per share and LE is trading at $23 per share, implying a premerger value of LE of $9.6 billion. If the
ABC has 1 million shares outstanding, each of which has a price of $25. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.27. Assume
BAD Company’s stock price is $30, and the firm has 2 million shares outstanding.You believe you can increase the company’s value if you buy it and replace the management.Assume that BAD has a
You work for a leveraged buyout firm and are evaluating a potential buyout of Under-Water Company. UnderWater’s stock price is $24, and it has 2.25 million shares outstanding.You believe that if
How did the 2017 TCJA change U.S. firms’ incentive to repatriate foreign profits?
What were two potential concerns with the new system under TCJA?
In January 2009, when the exchange rate was $1.30 per euro, Manzini ordered parts for next year’s production from Campagnolo. They agreed to a price of 500,000 euros, to be paid when the parts were
Assume that in January 2009, banks were offering one-year currency forward contracts with a forward exchange rate of $1.29/€. Suppose that at that time, Manzini placed the order with Campagnolo
Suppose that the spot exchange rate for the Japanese yen is ¥116/$. At the same time, the one-year interest rate in the United States is 4.85% and the one-year interest rate in Japan is 0.10%. Based
You are a U.S. investor trying to calculate the present value of a ¥10 million cash flow that will occur one year in the future. The spot exchange rate is ¥110/$ and the one-year forward rate is
Use the Law of One Price to infer the pound WACC from Ityesi’s dollar WACC. Verify that the NPV of Ityesi’s project is the same when its pound free cash flows are discounted at this WACC and
For May 23, 2008, The Financial Times reported a spot ruble–dollar exchange rate of R23.5937/$ and a one-year forward exchange rate of R24.2316/$. At the time, the yield on short-term Russian
Camacho Enterprises is a U.S. company that is considering expanding by acquiring Xtapa, Inc., a firm in Mexico. The acquisition is expected to increase Camacho’s free cash flows by 21 million pesos
You have just landed in London with $730 in your wallet. Stopping at the foreign exchange booth, you see that pounds are being quoted at $1.98/£. For how many pounds can you exchange your $730?
Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $182,500 in three months when the
You are a U.S. investor who is trying to calculate the present value of a €19 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.345/;;and the forward rate
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in India and is expecting a 17 million rupee cash inflow in one year. (The currency of India is the rupee). The
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are employed in Etemadi’s corporate finance department and are responsible for deciding whether to
Etemadi Amalgamated, the U.S. manufacturing company in Problem 7, is still considering a new project in Portugal. All information presented in Problem 7 is still accurate, except the spot rate is now
You work for a U.S. firm, and your boss has asked you to estimate the cost of capital for countries using the euro. You know that S = $1.1625/; and F1 = $1.1617/;.Suppose the dollar WACC for your
Maryland Light, a U.S. manufacturer of light fixtures, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 14.92%. You are in the corporate treasury department, and
The dollar cost of debt for Healy Consulting, a U.S. research firm, is 7.96%. The firm faces a tax rate of 40% on all income, no matter where it is earned. Managers in the firm need to know its yen
Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in Germany. You are in Manzetti’s corporate finance department and are responsible for deciding whether
Suppose the interest on Russian government bonds is 7.9%, and the current exchange rate is 26.1 rubles per dollar. If the forward exchange rate is 26.6 rubles per dollar, and the current U.S.
The Giscome Corporation’s purchases from suppliers in a quarter are equal to 75% of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20% of
Based on the following information, calculate the expected return: State of Economy Recession Normal Boom Probability of State of Economy .10 .60 .30 Portfolio Return if
Vanier Corporation 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 195,000 shares of stock outstanding.
In the context of the extended pie model, what is the basic goal of financial management with regard to capital structure?
Limoilou Corp. uses no debt. The weighted average cost of capital is 8%. If the current market value of the equity is $18 million and there are no taxes, what is EBIT?
Elzear & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7%. Elzear currently has no debt, and its cost of equity is 12%. If the tax rate is 35%, what is the value
The Montmagny Company and the Shawinigan Company are identical in every respect except that Montmagny is not levered. Financial information for the two firms appears in the following table. All
Sillery Manufacturing has an expected EBIT of $67,000 in perpetuity and a tax rate of 35%. The firm has $139,000 in outstanding debt at an interest rate of 6.85%, and its unlevered cost of capital is
In a world of corporate taxes only, show that the WACC can be written as WACC = RU × [1− TC(D/V)].
Pandosy Inc. has declared a $4.80 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15%. Pandosy sells for $68.20 per share, and the stock is about to go ex
The company with the common equity accounts shown here has declared a 15% stock dividend when the market value of its stock is $61 per share. What effects on the equity accounts will the distribution
Ospika Products has projected the following sales for the coming year: Sales in the year following this one are projected to be 15% greater in each quarter. a. Calculate payments to
You own 1,000 shares of stock in Armstrong Corporation. You will receive a $2.70 per share dividend in one year. In two years, Armstrong will pay a liquidating dividend of $46 per share. The required
The Charella Coffee Company has projected the following quarterly sales amounts for the coming year: a. Accounts receivable at the beginning of the year are $345. Charella has a 45-day
The following is the sales budget for Yellowhead Inc. for the first quarter of 2018:Credit sales are collected as follows: 65% in the month of the sale, 20% in the month after the sale, and 15% in
Here are some important figures from the budget of Nechako Nougats Inc. for the second quarter of 2017: The company predicts that 5% of its credit sales will never be collected, 35% of its sales
After completing its capital spending for the year, Banff Manufacturing has $1,000 extra cash. Banff’s managers must choose between investing the cash in Canada bonds that yield 3% or paying the
Below are the most recent statements of financial position for Tabor Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount: TABOR
In a typical month, the Saint John Corporation receives 80 cheques totalling $124,000. These are delayed four days on average. What is the average daily float? Assume 30 days in a month.
Rothesay Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following: The total collection time will be reduced by three days if the
Lancaster Wine Inc. receives an average of $19,000 in cheques per day. The delay in clearing is typically three days. The current interest rate is .017% per day.a. What is the company’s collection
Lepreau Books Corporation has an agreement with Hampton Bank whereby the bank handles $6 million in collections a day and requires a $375,000 compensating balance. Lepreau Books is contemplating
Another option usually available is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?
The Berry Corporation is considering a change in its cashonly policy. The new terms would be net one period. Based on the following information, determine if Berry should proceed or not. The
The Moncton Corporation has annual sales of $31 million. The average collection period is 27 days. What is the average investment in accounts receivable as shown on the balance sheet? Assume 365 days
What are the costs associated with carrying receivables? What are the costs associated with not granting credit? What do we call the sum of the costs for different levels of receivables?
Codiac Corp. currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you
Dieppe Inc. has an average collection period of 29 days. Its average daily investment in receivables is $43,900. What are annual credit sales? What is the receivables turnover? Assume 365 days per
Suppose the exchange rate for the Swiss franc is quoted as CHF 1.50 in the spot market and CHF 1.53 in the 90-day forward market.a. Is the dollar selling at a premium or a discount relative to the
Humphrey Inc. expects to sell 700 of its designer suits every week. The store is open seven days a week and expects to sell the same number of suits every day. The company has an EOQ of 500 suits and
Duracell International confirmed in October 1995 that it was planning to open battery-manufacturing plants in China and India. Manufacturing in these countries allows Duracell to avoid import duties
Use Figure 21.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in Canada is 1.8%. What must the six-month risk-free rate be in Great
Suppose the current exchange rate for the Polish zloty is PLN3.03. The expected exchange rate in three years is PLN 3.06. What is the difference in the annual inflation rates for Canada and Poland
Suppose the spot and three-month forward rates for the yen are ¥103.15 and ¥102.80, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference
Suppose the spot exchange rate for the Hungarian forint is HUF 222.23. The inflation rate in Canada will be 2.9% per year. It will be 4.5% in Hungary. What do you predict the exchange rate will be in
Assuming the asset pool was closed when the network file server became obsolete, redo Self-Test Problem 22.1. Data in Self-Test Problem 22.1.Your company wants to purchase a new network file
Assume the tax rate is 37%. You can borrow at 8% pre-tax. Should you lease or buy?You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very
What are the cash flows from the lease from the lessor’s point of view? Assume a 37% tax bracket. You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner
Assume that the following statements of financial position are stated and a book value. Construct a post-merger statement of financial position assuming that Amherst Co. purchases Essex Inc. and the
What is meant by the term financing off the statement of financial position? When do leases provide such financing, and what are the accounting and economic consequences of such activity?
Roseland Inc. has offered $357 million cash for all of the common stock in Forest Glade Corporation. Based on recent market information, Forest Glade is worth $319 million as an independent
Are poison pills good or bad for shareholders? How do you think acquiring firms are able to get around poison pills?
Knapps Enterprises has acquired Leamington Corp. in a merger transaction. Construct the statement of financial position for the new corporation if the merger is treated as a pooling of interests for
Refer to Figure 24.6 in the text to answer this question. Supposed you sell June 2019 gold futures on May 25, 2018. What will your profit or loss be if gold prices turn out to be $1,090 per ounce at
In the previous problem, construct the statement of financial position for the new corporation, assuming that the transaction is treated as a purchase for accounting purposes. The market value of
Refer to Figure 24.6 in the text to answer this question. If a Canadian company exports its goods to the U.S., how would it use a U.S.–traded futures contract on Canadian dollars to hedge its
Suppose a firm enters into a fixed-for-floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.
T-bills currently yield 3.7%. Stock in Nina Manufacturing is currently selling for $56 per share. There is no possibility that the stock will be worth less than $50 per share in one year.a. What is
Pamela Landry, a novice investor from Montreal, bought 2,000 shares of BP Plc. (BP) during July 2018. During this period, BP reported a loss of $5.8 billion for second quarter of 2018. The company
What is noise-trader risk? How can noise-trader risk lead to market inefficiencies?
Jack Sparrow, a Vancouver-based investor, had a fascination for Seven Generations Energy Ltd. shares. He bought 200 shares of Seven Generations Energy during the IPO for $21 on October 30, 2014.
Matthew and Stephen Fleming are experienced wealth managers in Manitoba. On August 20, 2018, Matthew and Stephen bought 200 shares of Steinbach Gold Inc. and Selkirk Technology Limited. On August 21,
A firm evaluates all of its projects by applying the IRR rule. If the required return is 16%, should the firm accept the following project? Year 0 1 2 3 Cash Flow -$28,000 12,000 15,000 11,000
For the cash flows in the previous problem, what is the NPV at a discount rate of 0%? What if the discount rate is 10%? If it is 20%? If it is 30%?Data in previous problem,What is the IRR of the
A project has the following cash flows: What is the IRR for this project? If the required return is 12%, should the firm accept the project? What is the NPV of this project? What is the NPV of
Belgravia Petroleum Inc. is trying to evaluate a generation project with the following cash flows:a. If the company requires a 12% return on its investments, should it accept this project?
What is the profitability index for the following set of cash flows if the relevant discount rate is 10%? What if the discount rate is 15%? If it is 22%? Year 0 1 2 3 Cash Flow -
In May 2014, German food manufacturer Dr. Oetker opened its first North American plant in London, Ontario. In June of the same year, Spanish company Grupo FerroAtlantica, a world-leading producer of
Consider the following statement of comprehensive income: Fill in the missing numbers and then calculate the OCF. What is the CCA tax shield? Sales Costs Depreciation EBIT Taxes (34%) Net
In the previous problem, suppose your required return on the project is 11%, your pre-tax cost savings are now $150,000 per year, and the machine can be depreciated at 30% (Class 10). Will you accept
You are evaluating two different silicon wafer milling machines. The Techron I costs $270,000, has a three-year life, and has pre-tax operating costs of $69,000 per year. The Techron II costs
Komoka Enterprises needs someone to supply it with 140,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract.
Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $410,000 is estimated to result in $150,000 in annual pre-tax cost
Wyatt M. Corp. can manufacture golfing shoes for $35.85 per pair in variable raw material costs and $26.45 per pair in variable labour expense. The shoes sell for $165 per pair. Last year, production
Whitewater Transmissions Inc. has the following estimates for its new gear assembly project: price = $1,700 per unit; variable costs = $480 per unit; fixed costs = $4.1 million; quantity = 95,000
We are evaluating a project that costs $864,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected

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