Questions and Answers of Fundamentals Of Corporate Finance 11th

What is the risk-free interest rate for a five-year maturity?
In December 2021, Kraft Heinz Co. (KHC) had 1.22 billion shares outstanding, a share price of $$35.19,$ a book value of debt of $$21.82$ billion, and cash of $$3.45$ billion. What was Kraft
Suppose Global had an additional $$1$ million depreciation expense in 2022. If Global’s tax rate on pretax income is 26%, what would be the impact of this expense on Global’s earnings? How
What is the intuition behind the geometric growth in interest?
You have $100,000 to donate to your college. You want to endow a perpetual scholarship that makes its first payment in 1 year. If the college’s discount rate is 4%, how large will the annual
Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science.She is currently employed as a Tier 2 field service representative for a telephony corporation located in
This is your second interview with a prestigious brokerage firm for a job as an equity analyst.You survived the morning interviews with the department manager and the vice president of equity.
The following quote on Tesla stock appeared on April 8, 2022, on Yahoo! Finance.If you wanted to buy Tesla, what price would you pay per share? How much would you receive per share if you wanted to
What is dilution?
Compute Global’s accounts payable days, inventory days, and inventory turnover for 2022.
What was the change in Global’s book value of equity from 2021 to 2022 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2022? Explain.TABLE 2.1
Use EDGAR (www.sec.gov) to find Qualcomm’s 10K filing for 2021. From the balance sheet, answer the following questions:a. How much did Qualcomm have in cash, cash and equivalents, and marketable
Find the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021). Answer the following questions from its balance sheet:a. How much cash did Costco
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021). Answer the following questions from the income statement:a. What were Costco
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydeco repurchases 2 million shares each year from 2020–2023. What would its earnings per share be in
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021). Answer the following questions from its cash flow statement:a. How much cash
See the cash flow statement below (all values in thousands of dollars):a. What were the company’s cumulative earnings over these four quarters? What were its cumulative cash flows from operating
In December 2021, General Electric (GE) had a book value of equity of $$40$ billion,1.1 billion shares outstanding, and a market price of $$94.47$ per share. GE also had cash of $$28$ billion,
In December 2021, Apple had cash of $$62.64$ billion, current assets of $$134.84$ billion, and current liabilities of $$125.48$ billion. It also had inventories of $$6.58$ billion.a. What was
In early 2022, the following information was true about Abercrombie and Fitch (ANF)and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars.a. What is
In fiscal year 2021, Walmart Stores. (WMT) had revenue of $$572.8$ billion, gross profit of $$143.8$ billion, and net income of $$13.7$ billion. Costco Wholesale Corporation (COST) had revenue
Suppose that in 2023, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4. 50%. Suppose that they had no other income,
For 2021, Walmart and Target had the following information (all values are in millions of dollars):a. What is each company’s accounts receivable days?b. What is each company’s inventory
In January 2022, United Airlines (UAL) had a market capitalization of $$14.3$ billion, debt of $$39.4$ billion, and cash of $$18.4$ billion. United Airlines had revenues of $$24.6$
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021).a. Compute Costco’s net profit margin, total asset turnover, and equity
Some balance sheet information is shown here (all values in millions of dollars):a. What change in the book value of the company’s equity took place at the end of 2021?b. Is the company’s
What is the goal of the financial manager?
What advantage does a stock market provide to corporate investors? To financial managers?
Explain how the control variate technique is implemented.
Suppose that in September 2013 a company takes a long position in a contract on May 2014 crude oil futures. It closes out its position in March 2014. The futures price (per barrel) is $$88.30$ when
A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline futures price changes. The company will lose $1 million for each 1 cent increase in the
A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest accrues per $$100$ of principal to the bond holder between July 7, 2013, and August 9, 2013? How would your answer
The price of a non-dividend paying stock is $$19$ and the price of a three-month European call option on the stock with a strike price of $$20$ is $$1.$ The risk-free rate is 4% per annum.What
A married couple earned $95,000 in 2021. How much did they pay in taxes?a. What was their marginal tax bracket?b. What was their average tax bracket?
Morningstar provides data on mutual fund performance. Log on to its website. Which category of funds has performed unusually well or badly?
Balance Sheet. Construct a balance sheet for Fincorp for 2021 and 2022. What is shareholders’ equity?The table below contains data on Fincorp Inc. The balance sheet items correspond to values at
Construct an income statement for Fincorp for 2021 and 2022. What were reinvested earnings for 2022?The table below contains data on Fincorp Inc. The balance sheet items correspond to values at
Construct a statement of cash flows for Fincorp for 2022.The table below contains data on Fincorp Inc. The balance sheet items correspond to values at year-end 2021 and 2022, while the income
Your uncle owns 10,000 shares of Walmart stock. He is concerned about the short-term outlook for Walmart’s stock due to an impending “major announcement.” This announcement has received much
What will a short-term financial plan enable a financial manager to do?
What is the difference between pledging accounts receivable to secure a loan and factoring accounts receivable? What types of short-term secured financing can a firm use to cover shortfalls?
What is the purpose of long-term forecasting?
Why is trade credit important?
What are the tradeoffs involved in reducing inventory?
You are a senior financial analyst with IBM in its capital budgeting division. IBM is considering expanding in Australia due to its positive business atmosphere and cultural similarities to the
How is an exchange rate used?
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
Today is March 29, 2019, and you have just started your new job with a financial planning firm. In addition to studying for all your license exams, you have been asked to review a portion of a
What is the intuition behind using the average annual return as a measure of expected return?
What does beta measure? How do we use beta?
What relation is described by the security market line?
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
You work for HydroTech, a large manufacturer of high-pressure industrial water pumps. The firm specializes in natural disaster services, ranging from pumps that draw water from lakes, ponds, and
Why are market-based weights important?
You are working for Home Depot and have been asked to help explore the impact of a potential debt issue. The CFO and other top managers in the finance division are all aware that increasing the debt
Suppose that in April 2019, Nike had sales of $36,397 million, EBITDA of $5,219 million, excess cash of $5,245 million, $3,810 million of debt, and 1573.8 million shares outstanding.a. Using the
Consider the following data for the airline industry for April 2019 (EV = enterprise value, Book = equity book value). Discuss the potential challenges of using multiples to value an airline. Company
Suppose that in April 2019, Nike had EPS of $2.57 and a book value of equity of $6.23 per share.a. Using the average P/E multiple in Table 10.1, estimate Nike’s share price.b. What range of share
Suppose Hawaiian Airlines (HA) has 50 million shares outstanding. Estimate Hawaiian’s share value using each of the five valuation multiples in Problem 20, based on the median valuation multiple of
Consider the valuation of Nike given in Example 10.1.Data from example 10.1Recall our example of Nike, Inc., from Chapter 7. Nike had sales of $36.397 billion in 2018. Suppose you expected its sales
GHL, Inc., has a dividend payout ratio of 50%. Its cost of equity is 11% and its dividend growth rate is 5%. If its forward EPS is $6, what is your estimate of its stock price?
Stocks A and B have the following returns:a. What are the expected returns of the two stocks?b. What are the standard deviations of the returns of the two stocks?c. If their correlation is 0.46, what
Download the spreadsheet from the book’s Web site containing the data for Figure 11.1.a. Compute the average return for each of the assets from 1929 to 1940 (the Great Depression).b. Compute the
Using the data in the following table, calculate the return for investing in this stock from January 1 to December 31. Prices are after the dividend has been paid. Jan 1 Mar 31 Jun 30 Sep 30 Dec
Consider the following 6 months of returns for 2 stocks and a portfolio of those 2 stocks.a. What is the expected return and standard deviation of returns for each of the two stocks?b. What is the
Your portfolio consists of 100 shares of CSH and 50 shares of EJH, which you just bought at $20 and $30 per share, respectively.a. What fraction of your portfolio is invested in CSH? In EJH? b.
You expect KStreet Co’s trade at $100 per share right after paying a $2 dividend per share in one year. What is the most you would pay to buy the stock now if you want to earn at least a 15% return?
Given the information below, construct a value-weighted portfolio of the four stocks if you have $500,000 to invest. That is, how much of your $500,000 would you invest in each stock?
Use the data in SBUX_GOOGL.xlsx on MFL to answer the following questions:a. What is the return for SBUX over the period without including its dividends? With the dividends?b. What is the return for
You hear on the news that the S&P 500 was down 2% today relative to the risk-free rate (the market’s excess return was -2%). You are thinking about your portfolio and your investments in
The risk-free rate is 3% and you believe that the S&P 500’s excess return will be 10% over the next year. If you invest in a stock with a beta of 1.2 (and a standard deviation of 30%), what is
Suppose the risk-free return is 4% and the market portfolio has an expected return of 10% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.75. What is its
Suppose Autodesk stock has a beta of 2.16, 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 expected
Suppose Intel stock has a beta of 0.8, whereas Boeing stock has a beta of 1.2. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM,a.
Andyco, Inc., has the following balance sheet and an equity market-to-book ratio of 1.5. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation?
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: $1200 and $960. Its debt will be due with 5%
Book Co. has 1 million shares of common equity with a par (book) value of $1, retained earnings of $30 million, and its shares have a market value of $50 per share. It also has debt with a par
Avicorp has a $10 million debt issue outstanding, with a 6% 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
Aluminum maker Alcoa has a beta of about 2.0, whereas Hormel Foods has a beta of 0.45. If the expected excess return of the marker portfolio is 5%, which of these firms has a higher equity cost of
Laurel, Inc., has debt outstanding with a coupon rate of 6% and a yield to maturity of 7%. Its tax rate is 35%. What is Laurel’s effective (after-tax) cost of debt?
Wild Swings Inc.’s stock has a beta of 2.5. If the risk-free rate is 6% and the market risk premium is 7%, what is an estimate of Wild Swings’ cost of equity?
All City, Inc., is financed 40% with debt, 10% with preferred stock, and 50% with common stock. Its pretax cost of debt is 6%, its preferred stock pays an annual dividend of $2.50 and is priced at
HighGrowth Company has a stock price of $20. The firm will pay a dividend next year of $1, and its dividend is expected to grow at a rate of 4% per year thereafter. What is your estimate of
CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor. Suppose the firm faces a tax rate of 25% and collects the following information. If it plans to finance 11%
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
Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and a cost of preferred stock of 9%. The market values of its debt, preferred stock, and equity are $10 million, $3
Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year.a. What is
A retail coffee company is planning to open 100 new coffee outlets that are expected to generate $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the coffee
Roundtree Software is going public using an auction IPO. The firm has received the following bids:Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will be the winning auction
RiverRocks’ purchase of Raft Adventures (from Problem 20) will cost $100 million, and will generate cash flows that start at $15 million in one year and then grow at 4% per year forever. What is
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
RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures (described in Problem 21) by issuing new debt and equity. The firm estimates that the direct
YVR, Inc. just announced a 10 million share SEO at $50 per share. If all of the SEO shares are primary shares and its underwriter charges 7% of the gross proceeds, how much new capital will YVR raise?
Suppose that on January 15, 2018, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 6%. On the date of issue, the CPI was 200. If the CPI decreases to 150 by January 15,
One of your new employees notes that your debt has a lower cost of capital (5%) than your equity (15%). So, he suggests that the firm swap its capital structure from 30% debt and 70% equity to 70%
Pelamed Pharmaceuticals had EBIT of $325 million in 2018. In addition, Pelamed had interest expenses of $125 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 $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 20%.a. If Grommit increases leverage so
Braxton Enterprises currently has debt outstanding of $35 million and an interest rate of 8%. Braxton plans to reduce its debt by repaying $7 million in principal at the end of each year for the next
Assume that Microsoft has no debt, a total market value of $300 billion, 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%
Suppose the corporate tax rate is 25%. 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,

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