Questions and Answers of Fundamentals Of Corporate Finance 10th

In this chapter, we discussed TransCanada’s Energy East pipeline project. Suppose demand for crude oil transportation went extremely high and TransCanada was forced to expand capacity to meet
A project has the following estimated data: price = $54 per unit; variable costs = $36 per unit; fixed costs = $19,300; required return = 12%; initial investment = $26,800; life = four years.
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Year 1 2 3 4 5 X 15% 26 7 -13 11 Returns Y 21% 36 13 -26 15
Natural resource extraction facilities (e.g., oil wells or gold mines) provide a good example of the value of the option to suspend operations. Why?
Consider a four-year project with the following information: initial fixed asset investment = $475,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $26;
Baird Golf has decided to sell a new line of golf clubs. The clubs will sell for $715 per set and have a variable cost of $385 per set. The company has spent $150,000 for a marketing study that
A stock has had the following year-end prices and dividends: What are the arithmetic and geometric returns for the stock?
Suppose a stock had an initial price of $79 per share, paid a dividend of $1.45 per share during the year, and had an ending share price of $88. Compute the percentage total return.
You find a certain stock that had returns of 9%, −16%, 21%, and 17% for four of the last five years. If the average return of the stock over this period was 10.3%, what was the stock’s return for
A stock has had returns of 9%, 21%, 32%, −18%, 27%, and −12% over the last six years. What are the arithmetic and geometric returns for the stock?
You own a portfolio that has $2,650 invested in Stock A and $4,450 invested in Stock B. If the expected returns on these stocks are 8% and 11%, respectively, what is the expected return on the
Based on the following information, calculate the expected return: State of Economy Recession Boom Probability of State of Economy .20 .80 Portfolio Return if State Occurs -.14 .17
You own a portfolio that is 35% invested in Stock X, 20% in Stock Y, and 45% in Stock Z. The expected returns on these three stocks are 9%, 17%, and 13%, respectively. What is the expected return on
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 11.5% and Stock Y with an expected return of 9.4%. If your goal is to create a portfolio with an
A portfolio is invested 25% in Stock G, 55% in Stock J, and 20% in Stock K. The expected returns on these stocks are 8%, 14%, and 18%, respectively. What is the portfolio’s expected return? How do
You own a stock portfolio invested 20% in Stock Q, 30% in Stock R, 35% in Stock S, and 15% in Stock T. The betas for these four stocks are .84, 1.17, 1.08, and 1.36, respectively. What is the
A stock has a beta of 1.15, the expected return on the market is 10.3%, and the risk-free rate is 3.8%. What must the expected return on this stock be?
A stock has an expected return of 11.05%, its beta is 1.13, and the risk-free rate is 3.6%. What must the expected return on the market be?
A stock has an expected return of 12.15%, its beta is 1.31, and the expected return on the market is 10.2%. What must the risk-free rate be?
Stock Y has a beta of 1.2 and an expected return of 11.4%. Stock Z has a beta of .80 and an expected return of 8.06%. If the risk-free rate is 2.5% and the market risk premium is 7.2%, are these
Stock in Coalhurst Industries has a beta of 0.95. The market risk premium is 7%, and T-bills are currently yielding 3.6%. The company’s most recent dividend was $2.05 per share, and dividends are
Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 97% of face value. The issue makes semiannual payments and
Craddock Company needs to raise $65 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company
Cumberland Corp. is expected to have an EBIT of $1.9 million next year. Depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $85,000, and $115,000,
The Cresthaven Horses Corporation needs to raise $75 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed
An investment project provides cash inflows of $585 per year for eight years. What is the project payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if it is
An investment project has annual cash inflows of $4,200, $5,300, $6,100, and $7,400, and a discount rate of 14%. What is the discounted payback period for these cash flows if the initial cost is
In evaluating an annuity present value, there are four pieces. What are they?
Draw up a statement of comprehensive income and a statement of financial position for this company for 2017 and 2018. Sales Depreciation Cost of goods sold Other expenses Interest Cash Accounts
For each of the following, compute the future value: Present Value $ 2,250 8,752 76,355 183,796 Years 11 7 14 8 Interest Rate 10% 8 17 7 Future Value
For each of the following, compute the present value: Present Value Years 6 7 23 18 Interest Rate 7% 13 14 19 Future Value $15,451 51,557 886,073 550,164
Bank of Vancouver pays 7% simple interest on its savings account balances, whereas Bank of Calgary pays 7% interest compounded annually. If you made a $6,000 deposit in each bank, how much more money
What is compounding? What is discounting?
Dundonald Inc. has identified an investment project with the following cash flows. If the discount rate is 8%, what is the future value of these cash flows in year 4? What is the future value at a
Assume the total cost of a university education will be $300,000 when your child enters university in 18 years. You currently have $65,000 to invest. What annual rate of interest must you earn on
Normandin Inc. has an unfunded pension liability of $575 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to
What do you think about a lottery advertising a $500,000 prize when the lumpsum option is $250,000? Is it deceptive advertising?
If you put up $45,000 today in exchange for a 6.25% 15-year annuity, what will the annual cash flow be?
If the appropriate discount rate for the following cash flows is 7.38% per year, what is the present value of the cash flows? Year 1 2 3 4 Cash Flow $2,480 0 3,920 2,170
A common source of financial aid for university students is a student loan where interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a first-year student or a
What happens to the future value of a perpetuity if interest rates increase? What if interest rates decrease?
Payday loans are loans that can have extremely high interest rates and are even called predatory by some. Do you think such high interest loans are ethical? Why or why not?
What is the future value of $2,600 in 19 years assuming an interest rate of 7.9% compounded semiannually?
Edzeil Credit Bank is offering 6.73% compounded daily on its savings accounts. If you deposit $5,100 today, how much will you have in the account in 5 years? In 10 years? In 20 years?
You are planning to make monthly deposits of $400 into a retirement account that pays 10% interest compounded monthly. If your first deposit will be made one month from now, how large will your
You are looking at an investment that has an effective annual rate of 14%. What is the effective semiannual return? The effective quarterly return? The effective monthly return?
You are planning to save for retirement over the next 30 years. To do this, you will invest $800 a month in a stock account and $400 a month in a bond account. The return of the stock account is
You have just won the lottery and will receive $1,000,000 every year. You will receive payments for 30 years, which will increase 3% per year. If the appropriate discount rate is 7%, what is the
Maddy Christiansen received $2,900 today July 1, 2015, from her annuity. Ms. Christiansen has been receiving similar payments on the first of each month for several years from an annuity that will
What is the present value of $4,000 per year, at a discount rate of 10%, if the first payment is received six years from now and the last payment is received 20 years from now?
A local finance company quotes a 17% interest rate on one-year loans. So, if you borrow $25,000, the interest for the year will be $4,250. Since you must repay a total of $29,250 in one year, the
You want to buy a new Ducati Monster 696 for $78,000. The contract is in the form of a 60-month annuity due at a 7.25% APR. What will your monthly payment be? Assume that the APR is compounded
Suppose you buy a 7% coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15%, what happens to the value of your bond? Why?
Leechtown Co. has 4.3% coupon bonds on the market with 18 years left to maturity. The bonds make annual payments. If the bond currently sells for $870, what is its YTM?
Goldstream Enterprises has bonds on the market making annual payments, with nine years to maturity, and selling for $948. At this price, the bonds yield 5.9%. What must the coupon rate be on the
Braemar Corp. issued 30-year bonds two years ago at a coupon rate of 7.1%. The bonds make semiannual payments. If these bonds currently sell for 105% of par value, what is the YTM?
Happy Valley Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.1%, and a current price of $1,038. The bonds make semiannual payments. What must the coupon rate be on these
If Treasury bills are currently paying 6% and the inflation rate is 2.6%, what is the approximate real rate of interest? The exact real rate?
Suppose the real rate is 2.5% and the inflation rate is 4.1%. What rate would you expect to see on a Treasury bill?
Say you own an asset that had a total return last year of 10.7%. If the inflation rate last year was 3.7%, what was your real return?
Consider a bond that has just paid a semi-annual coupon and has exactly 2.5 years to maturity and an annual coupon rate of 3.5%. Price the bond with a yield 4.2%. This is an annuity calculation and
Bond X is a premium bond making annual payments. The bond pays a 9% coupon, has a YTM of 7%, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 7%
Both Bond Sam and Bond Dave have 7% coupons, make semiannual payments and are priced at par value. Bond Sam has three years to maturity, whereas Bond Dave has 20 years to maturity. If interest rates
Bond J is a 3% coupon bond. Bond K is a 9% coupon bond. Both bonds have 15 years to maturity, make semiannual payments and have a YTM of 6%. If interest rates suddenly rise by 2%, what is the
Oak Bay Software has 9.2% coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 106.8% of par. What is the YTM? The effective annual yield?
You purchase a bond with a coupon rate of 7.3% and a clean price of $945. If the next semiannual coupon payment is due in two months, what is the invoice price?
Colwood Corp. has 8% coupon bonds making annual payments with a YTM of 7.2%, current market value of $1,059.6. How many years do these bonds have left until they mature?
You’ve just found a 10% coupon bond on the market that sells for par value. What is the maturity on this bond?
The next dividend payment by Kilbride Inc. will be $1.89 per share. The dividends are anticipated to maintain a 5% growth rate forever. If the stock currently sells for $38.00 per share, what is the
Glenhill Co. is expected to maintain a constant 5.2% growth rate in its dividends indefinitely. If the company has a dividend yield of 6.3%, what is the required return on the company’s stock?
Goulds Corp. pays a constant $9.75 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this
Big Pond Inc. has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?
Talcville Farms just paid a dividend of $3.20 on its stock. The growth rate in dividends is expected to be a constant 5% per year indefinitely. Investors require a 15% return on the stock for the
Kelligrews Inc. has an odd dividend policy. The company has just paid a dividend of $3 per share and has announced that it will increase the dividend by $5 per share for each of the next five years,
Chamberlain Corporation is expected to pay the following dividends over the next four years: $12, $8, $7, and $2.50. Afterward, the company pledges to maintain a constant 5% growth rate in dividends
Duffs Co. is growing quickly. Dividends are expected to grow at a 24% rate for the next three years, with the growth rate falling off to a constant 6% thereafter. If the required return is 11% and
Codner Corporation stock currently sells for $64 per share. The market requires a 10% return on the firm’s stock. If the company maintains a constant 4.5% growth rate in dividends, what was the
You have found the following stock quote for Enerplus Corp. in the “Globe Investor” on March 18, 2015. What was the closing price for this stock that appeared in yesterday’s paper? If the
Firm A and Firm B have total debt ratios of 45% and 35% and return on assets of 9% and 12%, respectively. Which firm has a greater return on equity?
What are the three primary disadvantages to the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the
An IPO of a company’s securities is a term you’ve probably noticed in the financial press. Is an IPO a primary market transaction or a secondary market transaction?
What does it mean when we say the Toronto Stock Exchange is both an auction market and a dealer market? How are auction markets different from dealer markets? What kind of market is the Nasdaq?
Suppose you were the financial manager of a not-for-profit business such as the Mountain Equipment Co-op. What kinds of goals do you think would be appropriate?
What is the difference between direct and indirect finance? Give an example of each.
Oakville Pucks Inc. has current assets of $4,900, net fixed assets of $27,500, current liabilities of $4,200, and longterm debt of $10,500. What is the value of the shareholders’ equity account
In preparing a statement of financial position, why do you think standard accounting practice focuses on historical cost rather than market value?
Suppose a company’s cash flow from assets is negative for a particular period. Is this necessarily a good sign or a bad sign?
Could a company’s cash flow to shareholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?
The 2017 statement of financial position of Owosso Inc. showed current assets of $3,120 and current liabilities of $1,570. The 2018 statement of financial position showed current assets of $3,460 and
The 2017 statement of financial position of Roger’s Tennis Shop Inc. showed $740,000 in the common stock account and $5.2 million in the additional retained earnings account. The 2018 statement of
Prepare a 2018 statement of financial position for Listowel Corp. based on the following information: cash = $127,000; patents and copyrights = $630,000; accounts payable = $210,000; accounts
Kanata Construction specializes in large projects in Edmonton and Saskatoon. In 2017, Kanata invested $1.5 million in new excavating equipment, which qualifies for a CCA rate of 50%. At the same time
The Stayner Company experienced an operating loss of $4,100,000 in 2015. Taxable income figures for recent years are given below. Show how the firm can maximize its tax refunds. Taxable income
In recent years, Cheticamp Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?
Prepare the 2015 combined common-size, common–base year statement of financial position for Birtle.Birtle Corporation reports the following statement of financial position information for 2017 and
Explain what peer group analysis means. As a financial manager, how could you use the results of peer group analysis to evaluate the performance of your firm?
Wolseley PLC has a net loss of £45,831 on sales of £198,352 (both in thousands of pounds). Does the fact that these figures are quoted in a foreign currency make any difference? Why? What was the
Earl Grey Golf Corp. has 25,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2018 was $43. What is the price–earnings ratio? What are the dividends
Testaburger Ltd. uses no external financing and maintains a positive retention ratio. When sales grow by 15%, the firm has a negative projected EFN. What does this tell you about the firm’s
A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a

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