Questions and Answers of Fundamentals Of Corporate Finance 11th

Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal
Arnell Industries has $10 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 21% for the foreseeable future.a. Suppose
Rogot Instruments makes fine violins, violas, and cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at a rate of 21%. Its cost of equity is 12%
Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost
Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 25%, and it pays 7% 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 $5 million each year. Milton’s corporate tax rate is 21%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05
NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. NatNah decides to increase its leverage to maintain a market debt-to-value ratio of 0.5. Suppose its debt
Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz
Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s
Rally, Inc., is an all-equity firm with assets worth $25 billion and 10 billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firm’s corporate
If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy? use the following income statement and balance sheet for Global Corp.:
With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impi’s corporate tax rate is 21% and it pays 8% interest on its debt, how much additional debt can
Now that your firm has matured, you are considering adding debt to your capital structure for the first time. Your all-equity firm has a market value of $20 million and you are considering issuing $2
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
Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $20 million
If Jim’s adjusts its payout policy to 70% of net income, how will the net new financing change? the following income statement and balance sheet for Jim’s Espresso Income
Marpor Industries has no debt and expects to generate free cash flows of $16 million each year. Marpor believes that if it permanently increases its level of debt to $40 million, the risk of
Using the information in the following table, calculate this company’s:a. Internal growth rate.b. Sustainable growth rate.c. Sustainable growth rate if it pays out 40% of its net income as a
Forecast KMS’s free cash flows (reproduce Table 18.13), assuming KMS’s market share will increase by 0.25% per year; investment, financing, and depreciation will be adjusted accordingly; and
Colt Systems will have EBIT this coming year of $15 million. It will also spend $6 million on total capital expenditures and increases in net working capital, and have $3 million in depreciation
You purchased CSH stock for $40 and it is now selling for $50. The company has announced that it plans a $10 special dividend.a. Assuming 2016 tax rates, if you sell the stock or wait and receive the
You manage a (tax-free) pension fund that is invested in KOA Corporation. KOA’s managers have just announced that they unexpectedly generated an extra $50 millionin cash flow this year. They are
Calculate the continuation value of KMS using your reproduction of Table 18.8 from Problem 14, and assuming an EBITDA multiple of 8.5.Data from table 18.8Data from problem 14Under the assumption that
Under the assumption that KMS’s market share will increase by 0.25% per year, you determine that the plant will require an expansion in 2021. The expansion will cost $20 million. Assuming that the
The Greek Connection had sales of $32 million in 2018, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below:a. Calculate The Greek Connection’s net working
Assuming a cost of capital of 10%, compute the value of KMS under the 0.25% growth scenario.
Use the financial statements supplied below and on the shown below for International Motor Corporation (IMC) to answer the following questions:a. Calculate the cash conversion cycle for IMC for both
Emerald City Umbrellas sells umbrellas and rain gear in Seattle, so its sales are fairly level across the year. However, it is branching out to other markets where it expects demand to vary across
Happy Valley Homecare Suppliers, Inc. (HVHS), had $20 million in sales in 2015. Its cost of goods sold was $8 million, and its average inventory balance was $2 million.a. Calculate the average number
This case draws on material from Chapters 18–20. See MyLab Finance for the data in Tables 1, 2, 3, and 4 and the spreadsheet referenced in the case questions. Idexo Corporation is a privately held
If you want to limit your maximum short-term borrowing to $500, how much excess cash must you carry? The following table includes quarterly working capital levels for your firm for the next year.
Construct a short-term financial plan for Springfield Snowboards based on its expansion opportunity described in the “Positive Cash Flow Shocks” part of Section 20.1. Base the plan on the
Your firm has a committed line of credit with your bank with a commitment fee of 0.5% (EAR) and an interest rate of 6% (EAR). The total line is $500,000 and you borrowed $300,000 at the beginning of
Magna Corporation has an issue of commercial paper with a face value of $1 million and a maturity of six months. Magna received net proceeds of $973,710 when it sold the paper. What is the effective
See the option quote on IBM from the CBOE Web site on the shown below:a. Which option contract had the most trades today?b. Which option contract is being held the most overall?c. Suppose you
For Ityesi Inc.’s U.K. project example in Table 23.2, assume all sales actually occur in the United States and are projected to be $60 million per year for four years. The risk-free rate on dollars
KMS, the boutique design firm has started selling in Ireland. It now has $1 million in revenues from Ireland, where the tax rate on its income is 15%. Its U.S. tax rate is 21%. What is the total tax
After spending $10,000 on client development, you have just been offered a big production contract by a new client. The contract will add $200,000 to your revenues for each of the next 5 years and it
You have just been hired by Intel in its finance division. Your first assignment is to determine the net cash flows and NPV of a proposed new generation of mobile chips. Capital expenditures to
You have just purchased a house for $500,000 that is located very close to the university you attend. You plan to put $100,000 down and borrow $400,000. You need to decide which mortgage deal to
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
DFB, Inc., expects earnings at the end of this year of $5 per share, and it plans to pay a $3 dividend to shareholders (assume that is one year from now). DFB will retain $2 per share of its earnings
Adam Rust looked at his mechanic and sighed. The mechanic had just pronounced a death sentence on his road-weary car. The car had served him well—at a cost of $500 it had lasted through four years
The following table summarizes the yields to maturity on several one-year, zero coupon securities:a. What is the price (expressed as a percentage of the face value) of a one-year, zero coupon
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 2018?b. Is the company’s
If Local Co., the company in Problem 23, had interest expense of $800,000, how would that affect each of its margins? Local Co. has sales of $10 million and cost of sales of $6 million. Its selling,
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2018 (filed in October 2018). Answer the following questions from its cash flow statement:a. How much cash
How are the balance sheet and the income statement related?
How can you use the balance sheet to assess the health of a firm?
Confirm that you can find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources:a. From the company’s Web page.b. From the SEC Web site
Assume that today is March 28, 2019. 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
Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to
The local electronics store is offering a promotion “1-year: same as cash,” meaning that you can buy a TV now, and wait a year to pay (with no interest). So, if you take home a $1000 TV today,
What is the tuition behind the geometric growth in interest?
What is a discount rate?
Your company has been doing well, reaching $1 million in earnings, and is considering launching a new product. Designing the new product has already cost $500,000. The company estimates that it will
You work for Apple. After toiling away on $10 million worth of prototypes, you have finally produced your answer to Google Glasses: iGlasses (the name alone is genius). iGlasses will instantly
Markov Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its
Nirvana Chip Designs has finished designing its next generation of chips, the XJ5000 series and is getting ready to start production. As the analyst on the project, you are required to prepare pro
The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $300,000.a. What is the book value of the equipment?b. If
You purchased a machine for $1 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 21%. If you sell the machine today (after
After spending a year and $50,000, you finally have the design of your new product ready. In order to start production, you will need $30,000 in raw materials and you will also need to use some
Beryl’s Iced Tea currently rents a bottling machine for $50,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options:a. Purchase
One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages and you can purchase it for $150,000
Your pro forma income statement shows sales of $1,000,000, cost of goods sold as $500,000, depreciation expense of $100,000, and taxes of $160,000 due to a tax rate of 25%. What are your pro forma
You have a depreciation expense of $500,000 and a tax rate of 21%. What is your depreciation tax shield?
Does accelerated depreciation generally increase or decrease NPV relative to straight line depreciation?
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year
What is the role of net working capital in projects?
The machine in Problem 1 will generate incremental revenues of $4 million per year along with incremental costs of $1.2 million per year. If Daily’s marginal tax rate is 21%, what are the
You have just been offered a contract worth $1 million per year for five years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is
Open Seas, Inc., is evaluating the purchase of a new cruise ship. The ship will cost $500 million, and will operate for 20 years. Open Seas expects annual cash flows from operating the ship to
Suppose Compco Systems pays no dividends but spent $5 billion on share repurchases last year. If Compco’s equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow
Zoom Enterprises expects that one year from now it will pay a total dividend of $5 million and repurchase $5 million worth of shares. It plans to spend $10 million on dividends and repurchases every
Assume Highline Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Highline’s earnings are
Assume Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will
Laurel Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on
What are some of the drawbacks of the dividend-discount model?
Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of $3 per share next year. You expect Acap’s stock price to be $52 in two years. Assume that
What is the price per $100 face value of a four-year, zero-coupon, risk-free bond? The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years)
You just purchased a share of SPCC for $100. You expect to receive a dividend of $5 in one year. If you expect the price after the dividend is paid to be $110, what total return will you have earned
What is the risk-free interest rate for a five-year maturity? The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years) 1 YTM 5.00% 2 5.50% 3 5.75% 4 5.95% LO 5 6.05%
Anzio, Inc., has two classes of shares. Class B has 10 times the voting rights as Class A. If you own 10% of the class A shares and 20% of the Class B shares, what percentage of the total voting
You own 20% of the stock of a company that has 10 directors on its board. How much representation can you get on the board if the company has cumulative voting? How much representation can you ensure
What is the price per $100 face value of a two-year, zero-coupon, risk-free bond? The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years)
If you own 15,000 shares of stock of Nike and it pays a dividend of $0.21 per share, then what is the total dividend you will receive?
Adam Rust looked at his mechanic and sighed. The mechanic had just pronounced a death sentence on his road-weary car. The car had served him well at a cost of $500 it had lasted through four years of
Consider a 10-year bond with a face value of $1000 that has a coupon rate of 5.5%, with semiannual payments.a. What is the coupon payment for this bond?b. Draw the cash flows for the bond on a
You are an intern with First Bank, and have been asked to develop estimates for yield spreads that would be appropriate for corporate bonds or loans with different maturities and credit ratings. To
You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay the minimum monthly payment. You are required to pay only the outstanding interest. You have
Consider the loan from the previous question: a 60-month, $20,000 car loan with a 6% APR, compounded monthly. Assume that right after you make your 50th payment, the balance on the loan is $3,762.32.
Ironwood Bank is offering a 30-year mortgage with an APR of 6.00% based on monthly compounding. If you plan to borrow $160,000, what will be your monthly payment?
Assume you graduate from college with $30,000 in student loans. If your interest rate is fixed at 4.66% APR with monthly compounding and you will repay the loans over a 10-year period, what will be
An online bank is offering to pay 0.25% interest per month on deposits. Your local bank offers to pay 0.75% interest quarterly (every 3 months). Which is the higher interest rate?
You are looking to buy a car and you have been offered a loan with an APR of 6%, compounded monthly.a. What is the true monthly rate of interest?b. What is the EAR?
You are considering a car loan with a stated APR of 6% based on monthly compounding. What is the effective annual rate of this loan?
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. By what percentage did Mydeco’s revenues grow each year from 2016–2019?b. By what percentage did net income
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases 2 million shares each year from 2016–2019. What would its earnings per share be in
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2016, and this equipment was
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydeco’s costs and expenses had been the same fraction of revenues in 2016–2019 as they were in

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