Questions and Answers of Fundamentals Of Corporate Finance 11th

Quisco Systems has 7.5 billion shares outstanding and a share price of $18. Quisco is considering developing a new networking product in house at a cost of $500 million. Alternatively, Quisco can
Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general, and administrative expenses are $500,000 and its research and development is $1 million. It has annual
Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company’s stock. Whichever one you choose will be awarded today. The stock is currently trading at $63 per
Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, Restaurant Brands International (QSR), the parent company of Burger King and Tim
Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,000 per ton.a.
Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him. Assume he produces
Due to your good credit, your bank reduces the interest rate on your $12,000 loan from 9% to 7.5% per year. Thanks to the change, how much will you save in interest this year?
A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans:a. How much would you have in one year if you
What is the discount factor that is equivalent to a 6% discount rate?
Suppose the interest rate is 4%.a. Having $200 today is equivalent to having what amount in one year?b. Having $200 in one year is equivalent to having what amount today?c. Which would you prefer,
When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his “$252 million” contract (the total of the payments promised was $252 million). He later moved to the
If your bank pays you 1.5% interest and you deposit $500 today, what will your balance be in 5 years?
Suppose you invest $1000 in an account paying 8% interest per year.a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”?b. What is
Calculate the future value of $2000 ina. 5 years at an interest rate of 5% per year.b. 10 years at an interest rate of 5% per year.c. 5 years at an interest rate of 10% per year.d. Why is the amount
What is the present value of $10,000 receiveda. 12 years from today when the interest rate is 4% per year?b. 20 years from today when the interest rate is 8% per year?c. 6 years from today when the
You just won a prize that comes with two payout choices. The first option is to get $100,000 right now and nothing hereafter. The second option is to get $94,000 right now and $10,000 three years
You are planning to invest $5000 in an account earning 9% per year for retirement.a. If you put the $5000 in an account at age 23, and withdraw it 42 years later, how much will you have?b. If you
Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in
You are offered the right to receive $1000 per year forever, starting in one year. If your discount rate is 5%, what is this offer worth to you?
If you still donate the $100,000 from Problem 16 today, but ask the college to delay the scholarship payment so that the first scholarship payment is made 10 years from today, then how large will the
You are looking to buy a car and can afford to pay $200 per month. If the interest rate on a car loan is 0.75% per month for a 60-month loan, what is the most expensive car you can afford to buy?
You intend to endow a scholarship that pays $5000 every 6 months, starting 6 months from now. If the appropriate discount rate is 2% per 6-month period, how much money will you have to donate today
You have just deposited $1000 in an unusual bank account that pays interest biannually (once every 2 years). If the 2-year interest rate is 8% (total interest over 2 years is 8%, not 8% per year),
What are some examples of principal-agent problems?
What is a whistle-blower?
Should insider trading be illegal?
What is a say-on-pay vote?
What are some of the major behavioural trading biases?
The following quotes were observed for Buffin Corp. (ticker: BUFN) on the two dates indicated.a. Suppose you decide to use a market order to buy 500 shares of BUFN on September 14 and then sell the
The following quotes were observed for Buffin Corp. (ticker: BUFN) on the two dates indicated.a. Suppose you decide to use a market order to buy 1000 shares of BUFN on September 16 and then sell the
What is a limited liability partnership (LLP)? How does it differ from a limited partnership?
Consider the case of SPB Ltd., a solar panel and battery manufacturing company. You are the CEO of SPB. In producing solar panels and batteries, certain toxic chemical waste is generated and proper
What is the financial cycle?
What is the role of an auditor?
What financial statements can be found in a firm’s annual report? What checks exist to ensure the accuracy of these statements?
Find the most recent financial statements for Starbucks Corporation (ticker symbol: SBUX) using the following sources:a. From the company’s webpage.b. From the SEC website, www.sec.gov.c. From the
In fiscal year 2018, Walmart Stores (WMT) had revenue of $514.41 billion, gross profit of $129.10 billion, and net income of $6.67 billion. Costco Wholesale Corporation (COST) had revenue of $141.58
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 turnover?c. Which
Some statement of financial position 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 2020?b. For 2020
What is the purpose of the income statement?
How are the statement of financial position and the income statement related?
What is a firm’s enterprise value?
The analysis from parts (a) and (b) in Problem 35 using Walmart Stores (WMT) instead. Specifically, use Walmart’s 2018 fiscal data, filed in March 2019. Based on the DuPont Identity, what explains
How is an interest rate like a price?
What is the discount factor that is equivalent to a 6% discount rate?
If your discount factor is 0.9009, what is your discount rate?
You just won a prize that comes with two payout choices. The first option is to get $100,000 right now and nothing thereafter. The second option is to get $94,000 right now and $10,000 three years
How do you calculate the future value of a cash flow stream?
What is the difference between an annuity and a perpetuity?
How do you calculate the future value of an annuity?
What are some examples of perpetuities?
How can a perpetuity have a finite value?
What are some examples of annuities?
How do you calculate the future value of a growing annuity?
If you still donate the $100,000 from Problem 16 today, but ask the university to delay the scholarship payment so that the first scholarship payment is made 10 years from today, then how large will
What is the opportunity cost of capital?
Suppose for its deposit accounts Simplii Financial is offering to pay interest at a rate of 0.25% per month with monthly compounding, but Tangerine is offering to pay interest at a rate of 0.75% per
Consider the loan from the previous question: a 60-month, $50,000 car loan with a 6% APR, compounded monthly. Assume that right after you make your 50th payment, the balance on the loan is $9405.81.
How is yield to maturity related to the concept of rate of return?
What is the price per $100 face value of a two-year, zero-coupon, risk-free bond?
What is the price per $100 face value of a four-year, zero-coupon, risk-free bond?
Why do interest rates and bond prices move in opposite directions?
What is the risk-free interest rate for a five-year maturity?
What is a junk bond?
What are some of the drawbacks of the DDM?
This year, Stang Fabrications Inc. has EBIT of $10 million, depreciation expense of $1 million, and capital expenditures of $1.5 million, and has increased its net working capital by $500,000. If its
Assume the annual return for the lowest turnover portfolio is 18% and the annual return for the highest turnover portfolio is 12%. If you invest $100,000 and have the highest turnover, how much lower
Under what conditions will the IRR rule and NPV rule give the same accept/reject decision?
Explain the NPV decision rule for stand-alone projects.
When is it possible to have no IRR or multiple IRRs?
What information do you need to compute the expected return of a portfolio?
How is the expected return of a portfolio related to the expected returns of the stocks in the portfolio?
HNL has an expected return of 18% and KOA has an expected return of 22%. If you create a portfolio that is 60% HNL and 40% KOA, what is the expected return of the portfolio?
When do stocks have more or less correlation?
What does beta measure? How do we use beta?
What is the market portfolio?
Explain what the following financial terms mean:a. Optionb. Expiration datec. Strike priced. Calle. Put
Why does a firm’s capital have a cost?
Why are market-based weights important?
Your uncle owns 10,000 shares of Walmart stock. He is concerned about the shortterm outlook for Walmart’s stock due to an impending “major announcement.” This announcement has received much
What is a replicating portfolio?
How can the Black-Scholes formula not include the expected return on the stock?
Explain put-call parity
Under what circumstances would equity holders have a possible incentive to take on negative-NPV investments?
You are negotiating with your underwriters in a firm commitment offering of 10 million primary shares. You have two options: set the IPO price at $20.00 per share with a spread of 7%, or set the
What are the seven kinds of securities issued by the Canadian government?
What is an asset-backed security?
What is the major difference between U.S. municipal bonds and Canadian municipal bonds?
Describe the prepayment risk in a mortgage-backed bond guaranteed by the CMHC.
What is the distinguishing feature of how U.S. municipal bonds are taxed?
When will the yield to maturity be higher than the yield to call for a bond with a standard call feature?
What is a sinking fund?
What is meant by “indirect costs of financial distress”?
What is an open market share repurchase?
What is the dividend puzzle?
What is the purpose of long-term forecasting?
How does the pro forma balance sheet help the financial manager forecast net new financing?
What is the basic idea behind the percent of sales method for forecasting?
What does a firm’s cash cycle tell us?
Why is trade credit important?

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