Questions and Answers of Fundamentals Of Corporate Finance 11th

Assume that you have shorted the call option in Problem 2.PROBLEM 2You own a call option on Intuit stock with a strike price of $$40.$ The option will expire in exactly three months.a. If the stock
Assume that you have shorted the put option in Problem 4.a. If the stock is trading at $$8$ in three months, what will you owe?b. If the stock is trading at $$23$ in three months, what will you
Redo Problem 14, but assume that Kay must pay a corporate tax rate of 21%, and that investors pay no taxes.Problem 14.Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $$18.50$
Suppose the purchase price of the forklift is $$20,000,$ its residual value in four years is certain to be $$6000,$ and there is no risk that the lessee will default on the lease. If the
Suppose that you purchase the forklift for $20,000 by borrowing the purchase price using a four-year annuity loan. What would the monthly loan payment be in a perfect capital market where the
Compute the lease payments for the forklift lease of Example 24.1 if the lease is (a) a fair market value lease, (b) a $1.00 out lease, or (c) a fixed price lease that allows the lessee to buy the
Harbord Cruise Lines is about to add a new fleet of cruise ships. It will lease the ships, paying $50 million at the end of each year for the next 10 years. These lease payments correspond to an
Consider a seven-year fair market value lease for a $$12.5$ million Gulfstream jet with a remaining useful life of 10 years. Suppose the monthly lease payments are $$175,000$ and the appropriate
Suppose Emory rejects the lease we analyzed, and the lessor agrees to lower the lease rate to $11,700 per year. Does this change make the lease attractive?
Suppose the lease in Example 24.6 is a non-tax lease. Would it be attractive for Emory in this case?
Suppose Emory is offered a true tax lease for the printing press at a lease rate of $11,700 per year. Show that this lease is profitable for Emory as well as for a lessor with a 10% tax rate and an
How is default risk mitigated in a futures contract?
Why is duration important?
As the owner of a landmark Chicago skyscraper, you decide to purchase insurance that will pay $1 billion in the event the building is destroyed by terrorists. Suppose the likelihood of such a loss is
Suppose the risk of an airline accident for a major airline is 1% per year, with a beta of zero. If the riskfree rate is 4%, what is the actuarially fair premium for a policy that pays $$150$
Your firm faces a potential $$100$ million loss that it would like to insure. Because of tax benefits and the avoidance of financial distress and issuance costs, each $$1$ received in the event
Consider a chocolate maker that will need 10,000 tons of cocoa beans next year. The current market price of cocoa beans is $$2900$ per ton. At this price, the firm expects earnings before interest
Bolt Industries is facing increased competition and wants to borrow $10 million in cash to protect against future revenue shortfalls. Currently, long-term AA rates are 10%. Given its credit rating,
How can compensation design help mitigate agency problems?
What is corporate governance?
What is a say-on-pay vote?
Calculate NewWorld’s price-earnings ratio, before and after the takeover described in Example 22.2.
You are a senior financial analyst with IBM in its capital budgeting division. IBM is considering expanding in Australia.The new facility would require an initial investment in fixed assets of 5
Which classification of a lease is more important for cash flows and valuation: that of the FASB or the IRS?
Why is leasing versus buying an unfair comparison?
What is the difference between the accounting treatment of operating and finance leases?
Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years.Craxton can lease the
See the option quote on IBM from the CBOE Web site on the next page showing options expiring in March and April 2022.a. Which option contract had the most trades that day?b. Which option contract is
It is February 21, 2022, and you have decided to purchase 10 June call contracts on eBay’s stock with an exercise price of $$57.50.$ Because you are buying, you must pay the ask price. How much
Two European call options with a strike price of $$50$ are written on two different stocks. Suppose that tomorrow, the low-volatility stock will have a price of $$50$ for certain. The
You are an options dealer who deals in non-publicly traded options. One of your clients wants to purchase a one-year European call option on HAL Computer Systems stock with a strike price of $$20.$
What is the amount of net new financing needed for Jim’s?
Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholders’ equity.
What is the amount of net new financing needed for Global?
What are some benefits of trade credit?
Describe “just-in-time” inventory management.
The following information is from Apple’s 2021 annual income statement and balance sheet (numbers are in $ millions). Use it to compute Apple’s cash conversion cycle Sales 365,817 Cost of Goods
What are three types of collateral firms may use to secure short-term financing?
Illiquid Industries Inc. (III) 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
Your firm’s bank has offered you two options for short-term financing in the amount of $$400,000.$ The first option is a committed line of credit with a commitment fee of 0.5% (EAR) and an
Assume that Timmons Towel and Diaper Service’s bank pays 1% (APR with quarterly compounding) on its compensating balance accounts. What is the EAR of Timmons’s three-month loan?
A firm issues three-month commercial paper with a $$100,000$ face value and receives $$98,000.$ What effective annual rate is the firm paying for its funds?
The Row Cannery wants to borrow $$2$ million for one month. Using its inventory as collateral, it can obtain a 12% (APR) loan. The lender requires that a warehouse arrangement be used. The
Suppose you have $$1000$ in average daily sales. Your payment processor offers you a cash advance of $$20,000$ with a factor rate of 1.12 and a 10% holdback rate. What is the total amount you
AMS Company has unexpectedly generated a one-time extra $$5$ million in cash-flow this year. After announcing the extra cash flow, AMS stock price was $$55$ per share(it has 1 million shares
In your role as a consultant at a wealth management firm, you have been assigned a very powerful client who holds 1 million shares of Cisco Systems, Inc., purchased on January 4, 2007. In researching
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
Maria Suarez returned to her office after spending the afternoon meeting with her firm’s investment bankers. Suarez was CFO of Midco Industries, a mid-sized manufacturing firm, and she was taking a
How does long-term financial planning support the goal of the financial manager?
On January 15, 2015, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 0.25%.On the date of issue, the consumer price index (CPI) was 236.854. On January 15, 2022, the CPI
On May 8, 1984, Hannah Motsi graduated from Louisiana State University. She set to work opening a coffee shop in Baton Rouge called HannaH and found a perfect location in a new development. Using a
How does the firm’s WACC (with taxes) change with leverage?
Assume that Microsoft has no debt, a total market value of $2 trillion, and a marginal tax rate of 21%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13%
Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):Approximately $200,000 of Empire’s earnings will be needed to make new, positive-NPV investments.
You work in Walt Disney Company’s corporate finance and treasury department and have been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team
By using the yield to maturity on AT&T’s debt, we found that its pretax cost of debt is 3.65%. 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 0.60. The yield on 10-year treasuries is 3%, and you estimate the market risk premium to be 6%.
Suppose Starbucks is considering introducing a new low-calorie blended coffee drink called FrapZero. The firm believes that the drink’s flavor and appeal to calorie-conscious drinkers will make it
You are working for Microsoft evaluating the possibility of selling energy drinks. Microsoft’s WACC is 8.1%. Energy drinks would be a new line of business for Microsoft, however, so the systematic
You are analyzing AT&T’s potential acquisition of Netflix. AT&T plans to offer $$150$ billion as the purchase price for Netflix, and it will need to issue additional debt and equity to finance
You and your best friend started a company 4 years ago. You each contributed $25,000 and each received 500,000 Series A preferred shares in the company. Since then, you have had the following funding
If all of the shares sold are primary shares, how much will the firm raise? What will be your percentage ownership of the firm after the IPO?
If all of the shares sold are from your holdings, how much will the firm raise? What will be your percentage ownership of the firm after the IPO?
What is the maximum number of secondary shares you could sell and still retain more than 50% ownership of the firm? How much would the firm raise in that case?
Consider the same setting as problem 20, but suppose instead 80% of the shareholders redeem their shares, and no warrants are exercised.a. What is the amount of cash per share contributed by the SPAC
Insight Partners created a SPAC with units priced at $$10$ share. Each unit consists of 1 share of common stock plus a 3/10ths of a warrant with a strike price of $$11.50$.Insight issued 10
In Lucid’s case, the terms of the warrants allowed Lucid to redeem them at a share price of $$20.75$ shortly after the deal closed. They chose to honor these warrants on a “cashless basis” by
In the Lucid / CCIV case, suppose that after the deal was announced, negative information were to come out about Lucid’s future prospects. As a result, the PIPE investors renegotiate their terms to
What is an asset-backed security?
What is the distinguishing feature of how municipal bonds are taxed?
Suppose Avis Budget Group stock has a beta of 2.55, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the
Suppose Intel stock has a beta of 0.95, whereas Boeing stock has a beta of 2.2. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM,a.
Using the data from Table 12.3, what is the volatility (standard deviation) of a portfolio with equal amounts invested in Microsoft and Hewlett-Packard stock? What is the standard deviation of a
Suppose the stock of Bankruptcy Auction Services Inc. (BAS) has a negative beta of −0.30. Will its expected return be more or less than the risk-free rate, according to the CAPM? Why?
You are currently considering making an investment in the fast food industry. You determine the project has the same level of non-diversifiable risk as investing in McDonald’s stock. You use data
What is an efficient market?
River Enterprises has $$500$ million in debt and 20 million shares of equity outstanding.Its excess cash reserves are $$15$ million. They are expected to generate $$200$ million in free cash
Consider the valuation of Nike given in Example 10.1.Example 10.1.Recall our example of Nike, Inc., from Chapter 7. Nike had sales of $$36.397$ billion in 2018. Suppose you expected its sales to
You are evaluating the stock price of Kroger, a grocery store chain. It has forward earnings per share of $$3.$ You notice that its competitor Target has a P/E ratio of 13.What is a good estimate
You notice that Coca-Cola has a stock price of $$62.90$ and EPS of $$2.37.$ Its competitor PepsiCo has EPS of $$7.30.$ But Jones Soda, a small batch craft soda producer, has a P/E ratio of 35.
Suppose that in July 2022, Nike had EPS of $$3.75$ and a book value of equity of $$9.72$ per share.a. Using the average P/E multiple in Table 10.1, estimate Nike’s share price.b. What range of
Suppose that in July 2022, Nike had EBITDA of $$6,675$ million, excess cash of $$12,997 million,$ $$12,627$ million of debt, and 1573.8 million shares outstanding.a. Using the average
As a new junior analyst for a large brokerage firm, you are excited to demonstrate the skills you learned in college and prove that you are worth your attractive salary. Your first assignment is to
Why do we use the WACC in the discounted free cash flow model?
Nike had sales of $$36.397$ billion in 2018. Suppose you expected its sales to grow at a rate of 10% in 2023, but then slow by 1% per year to the long-run growth rate that is characteristic of the
In Example 10.1, Nike’s EBIT was assumed to be 16% of sales. If Nike can reduce its operating expenses and raise its EBIT to 17% of sales, how would the estimate of the stock’s value change?
Suppose furniture manufacturer Bassett Furniture Industries, Inc., has earnings per share of $$2.00.$ If the average P/E of comparable furniture stocks is 9.5, estimate a value for a share of
Amazon and Macy’s are retailers. At one point in 2022, Amazon had a price of $$108.68$ and forward earnings per share of $$2.26.$ Macy’s had a price of $$18.27$ and forward earnings per
You have just been hired by International Business Machines Corporation (IBM) in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of $$5$ million and cost of goods sold of $$3$ million. You will be depreciating a $$1$ million
Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first
What are real options?
After graduating, your success in business has put you in a position to purchase a house for $$500,000.$ You plan to put $$100,000$ down and borrow $$400,000.$ You need to decide on a mortgage,
Your firm has a credit rating of AA. You notice that the credit spread for 10-year maturity AA debt is 0.90%.In the bond market, this would be quoted as “90 basis points.” (A basis point is
Colgate-Palmolive Company has just paid an annual dividend of $$1.50.$ Analysts are predicting dividends to grow by $$0.12$ per year over the next five years. After then, Colgate’s earnings are
Maynard Steel plans to pay a dividend of $$3$ this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%.a. Assuming that Maynard’s dividend
What pieces of information are needed to forecast dividends per share?
Consolidated Edison, Inc. (Con Ed) is a regulated utility company that services the New York City area. Suppose Con Ed plans to pay $$3.40$ per share in dividends in the coming year. If its equity
What is the NPV rule?
In March 2019, one-year U.S. government bond rates were about 2.4%, while the inflation rate that year was 1.5%. In March 2021, one-year interest rates were about 0.1%, and the inflation rate that

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