Questions and Answers of Fundamentals Of Corporate Finance

The Staind Corporation sells on credit terms of net 20. Its accounts are, on average, 12 days past due. If annual credit sales are $6 million, what is the company’s balance sheet amount in accounts
Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. Anew customer has placed an order for 10 high-bypass turbine engines, which increase
Clapper Manufacturing uses 2,000 switch assemblies per week and then reorders another 2,000. If the relevant carrying cost per switch assembly is $40, and the fixed order cost is $1,100, is
The Trektronics store begins each week with 170 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $45 per year and the fixed order cost is $48, what
The Killarney Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Killarney should proceed or not. The
Gorillaz Systems currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you
In Problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 3,300 units and all other values remain
Nestlé S. A. has American Depository Receipts listed on the Nasdaq over-the-counter market. Many ADRs listed on U.S. exchanges are for fractional shares. In the case of Nestlé, 20 ADRs are equal to
Suppose the spot exchange rate for the Canadian dollar is Can$1.30 and the six-month forward rate is Can$1.27.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP
Suppose the Japanese yen exchange rate is ¥110 = $1, and the British pound exchange rate is £1 = $1.60.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥160 = £1.
Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 22.1. You have just placed an order for 30,000 motherboards at a cost to you of 172.50
The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .40 percent per month. The interest rate in Great Britain is .70
Suppose the current exchange rate for the French franc is FF 7.47. The expected exchange rate in three years is FF 8.05. What is the difference in the annual inflation rates for the United States and
Refer to Table 23.1 in the text to answer this question. Suppose you purchase a July 2002 cocoa futures contract on September 4, 2001. What will your profit or loss be if cocoa prices turn out to be
Suppose the spot and six-month forward rates on the deutsche mark are DM 1.55 and DM 1.62, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in
You observe that the inflation rate in the United States is 3 percent per year and that T-bills currently yield 3.7 percent annually. What do you estimate the inflation rate to be in:a. The
Suppose the spot and three-month forward rates for the yen are ¥124 and ¥122, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference between the
Suppose the spot exchange rate for the Hungarian forint is HUF 280. Interest rates in the United States are 3.5 percent per year. They are triple that in Hungary. What do you predict the exchange
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 27.0 million. The cash flows from the project would be SF 7.5 million
You want to find the specifications for futures contracts. Go to the Chicago Board of Trade at www.cbot.com and, under the “Market Info” pull-down menu, follow the “Contract Specs” link. Now
Refer to Table 23.1 in the text to answer this question. Suppose you sell an October 2001 copper futures contract on September 4, 2001. What will your profit or loss be if copper prices turn out to
a. What is hedging?b. Why do firms place greater emphasis on hedging now than they did in the past?
Refer to Table 23.1 in the text to answer this question. Suppose today is September 4, 2001, and your firm is a piping manufacturer that needs 100,000 pounds of copper in March for the upcoming
Refer to Table 23.2 in the text to answer this question. Suppose you purchase the November 2001 call option on crude oil futures with a strike price of $27.50. How much does your option cost per
You want to find the price of a future on light sweet crude oils. Go to the New York Mercantile Exchange at www.nymex.com and follow the “Markets” link, the “Quotes” link, then the “Quotes,
a. What is a risk profile? Describe the risk profiles with regard to oil prices for an oil producer and a gasoline retailer.b. What can a firm accomplish by hedging financial risk?
Go to the New York Board of Trade web site at www.nybot.com and follow the “Market Information” link and the “Contract Specs” link. What contracts are traded on the New York Board of Trade?
a. What is a swap contract? Describe three types.b. Describe the role of the swap dealer.c. Explain the cash flows in Figure 23.10.Figure 23.10 Company A Prime +1% (floating) Debt
a. What is a forward contract? Describe the payoff profiles for the buyer and the seller of a forward contract.b. Explain how a firm can alter its risk profile using forward contracts.
a. Suppose that the unhedged risk profile in Figure 23.13 sloped down instead of up. What option-based hedging strategy would be suitable in this case?b. What is a futures option?c. What is a
You are working for a company that processes beef and will take delivery of 200,000 pounds of cattle in August. You would like to lock in your costs today because you are concerned about an increase
Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $25 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise
Looking back at the EquiCredit example we used to open the chapter, why would you say EquiCredit used a swap agreement? In other words, why didn’t EquiCredit just go ahead and issue fixed-rate
If you have $1,000 today, how much will it be worth in five years at 7 percent per year compounded continuously?
Go to www.cfo.com and, under CFO.com Toolbox, follow the “Stock Options Calculator” link, then the “Options Calculator (Java)” link. There is a call and a put option on a stock that expires
Go to www.cboe.com, click on the “Trading Tools” tab, then the “Option Calculator” link. A stock is currently priced at $93 per share, and its return has a standard deviation of 48 percent
If you need $10,000 in three years, how much will you need to deposit today if you can earn 10 percent per year compounded continuously?
A stock is currently selling for $54 per share. A call option with an exercise price of $55 sells for $3.10 and expires in three months. If the risk-free rate of interest is 2.6 percent per year,
Go to www.numa.com and look under the section titled “Options” and follow the calculator link. You purchased a call option for $10.50 that matures in 51 days. The strike price is $100, and the
a. Why do we say that the equity in a leveraged firm is a call option? What does the delta of the call option tell us in this context?b. What is the connection between the standard balance sheet
A put option that expires in six months with an exercise price of $65 sells for $2.05. The stock is currently priced at $67, and the risk-free rate is 3.6 percent per year, compounded continuously.
Recalculate the first two problems assuming a dividend yield of 2 percent per year. How does this change your answers? Can you explain why dividends have the effect they do?Data from Problem 1Go to
a. What is a pure financial merger?b. Why might stockholders in a leveraged firm prefer a low NPV project over a higher NPV project?
A put option and a call option with an exercise price of $80 and five months to expiration sell for $2.05 and $4.80, respectively. If the risk free rate is 4.8 percent per year, compounded
A put option and call option with an exercise price of $65 expire in two months and sell for $2.50 and $0.90, respectively. If the stock is currently priced at $63.20, what is the annual continuously
A put option with a maturity of five months sells for $6.33. A call with the same expiration sells for $9.30. If the exercise price is $75 and the stock is currently priced at $77.20, what is the
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.5 million. Over the past five years, the price of land in the area has increased 12 percent per
A call option with an exercise price of $90 and four months to expiration has a price of $9.02. The stock is currently priced at $94.30, and the risk-free rate is 5 percent per year, compounded
A call option matures in six months. The underlying stock price is $85, and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded
A call option has an exercise price of $75 and matures in six months. The current stock price is $80, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the
A stock is currently priced at $35. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 12 percent per year, compounded continuously, and the standard
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm’s assets is $11,000. The standard deviation of
Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has a NPV of $700, and Project B has an NPV of $1,000. As the result of taking Project A, the
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm’s assets is $20,000. The standard
A company has a single zero coupon bond outstanding which matures in 10 years with a face value of $25 million. The current value of the company’s assets is $22 million, and the standard deviation
Christina Industries has a zero coupon bond issue that matures in two years with a face value of $25,000. The current value of the company’s assets is $12,400, and the standard deviation of the
In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes Option Pricing Model with dividends is:All of the variables are the same as
Ozzy Corp. has a zero coupon bond that matures in five years with a face value of $50,000. The current value of the company’s assets is $48,000, and the standard deviation of its return on assets
a. What is a merger? How does a merger differ from other acquisition forms?b. What is a takeover?
Pearl Inc. has offered $510 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $380 million as an independent operation. If the merger makes
Consider the following premerger information about Firm X and Firm Y:Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $8 per share. Assuming
a. What factors influence the choice between a taxable and a tax-free acquisition?b. Under current tax law, why are taxable acquisitions less attractive than they once were?
Assume that the following balance sheets are stated at book value. Construct a postmerger balance sheet assuming that Sipowicz purchases Sorenson and the pooling of interests method of accounting is
In the previous problem, suppose the fair market value of Sorenson’s fixed assets is $10,000 versus the $5,000 book value shown. Sipowicz pays $14,000 for Sorenson and raises the needed funds
a. What is the difference between a purchase and a pooling of interests?b. What is “goodwill”?
In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Mining’s
a. What are the relevant incremental cash flows for evaluating a merger candidate?b. What are some different sources of gain from acquisition?
a. Why can a merger create the appearance of earnings growth?b. Why is diversification by itself not a good reason for a merger?
a. Why does the true cost of a stock acquisition depend on the gain from the merger?b. What are some important factors in deciding whether to use stock or cash in an acquisition?
The shareholders of Creed Security Company have voted in favor of a buyout offer from What If Corporation. Information about each firm is given here:Creed’s shareholders will receive one share of
Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt. Eastman believes the acquisition will increase its total aftertax annual cash flows by $2.6 million
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.Firm B has estimated that the value of the
a. What can a firm do to make a takeover less likely?b. What is a share rights plan? Explain how the rights work.
a. What does the evidence say about the benefits of mergers and acquisitions to target-company shareholders?b What does the evidence say about the benefits of mergers and acquisitions to
Consider the following premerger information about Firm A and Firm B:Assume that Firm A acquires Firm B via an exchange of stock at a price of $20 for each share of B’s stock. Both A and B have no
Foxy News, Inc., is considering making an offer to purchase Pulitzer Publications. The vice president of finance has collected the following information:Foxy also knows that securities analysts
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as:Sales for the first quarter of the year after this one are projected at $225 million. Accounts receivable at the
Rework Problem 14 assuming:a. Wildcat maintains a minimum cash balance of $45 million.b. Wildcat maintains a minimum cash balance of $15 million. Based on your answers in (a) and (b), do you think
In exchange for a $750 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.8 percent per quarter on any funds actually borrowed2. Maintain a 5 percent
Stream Bank offers your firm a 7 percent discount interest loan for up to $3 million, and in addition requires you to maintain an 8 percent compensating balance against the amount borrowed. What is
In a typical month, the Bungee Jump Corporation receives 100 checks totaling $90,000. These are delayed six days on average. What is the average daily float?
What are the highest and lowest historical interest rates for commercial paper? Go to www.economagic.com and follow the “Interest Rates” link. Find the highest and lowest interest rates for one-,
Each business day, on average, a company writes checks totaling $30,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
One provider of float reduction services is ePayment Systems. You can find their web site at www.epaymentsystems.com. Follow the “Services” link and then the “Electronic Check Conversion”
White Whale Corporation has an average daily cash balance of $300. Total cash needed for the year is $30,000. The interest rate is 5 percent, and replenishing the cash costs $6 each time. What are
Purple Feet Wine, Inc., receives an average of $6,000 in checks per day. The delay in clearing is typically five days. The current interest rate is .025 percent per day.a. What is the company’s
Debit and Credit Bookkeepers needs a total of $4,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off $300 in securities and transfers the cash in.
Most often, when news breaks about a firm’s cash position, it’s because the firm is running low, but that wasn’t the case for Ford, Chrysler, and General Motors at the end of 1997. At that
Your neighbor goes to the post office once a month and picks up two checks, one for $20,000 and one for $4,000. The larger check takes four days to clear after it is deposited; the smaller one takes
The Bud Wiser Company is currently holding $600,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by $340,000 per month. How much of the current cash holding
Your firm has an average receipt size of $60. A bank has approached you concerning a lockbox service that will decrease your total collection time by three days. You typically receive 12,000 checks
Econoline Crush, Inc., uses a Miller-Orr cash management approach with a lower limit of $30,000, an upper limit of $125,000, and a target balance of $45,000. Explain what each of these points
A mail-order firm processes 5,000 checks per month. Of these, 60 percent are for $50 and 40 percent are for $70. The $50 checks are delayed two days on average; the $70 checks are delayed three days
The company with the common equity accounts shown here has declared an 8 percent stock dividend at a time when the market value of its stock is $20 per share. What effects on the equity accounts will
In the previous problem, suppose the company instead decides on a four-for-one stock split. The firm’s 60-cent per share cash dividend on the new (post-split) shares represents an increase of 10
For initial public offerings of common stock, 2000 was a very big year, with over $80.6 billion raised by the process. Relatively few of the 452 firms involved paid cash dividends. Why do you think
Soprano, Inc., a litter recycling company, uses a residual dividend policy. A debt-equity ratio of .80 is considered optimal. Earnings for the period just ended were $900, and a dividend of $420 was
Joe C Corporation has declared an annual dividend of $0.50 per share. For the year just ended, earnings were $8 per share.a. What is Joe C’s payout ratio?b. Suppose Joe C has seven million shares
Red Zeppelin Corporation follows a strict residual dividend policy. Its debt-equity ratio is 3.a. If earnings for the year are $140,000, what is the maximum amount of capital spending possible with
Pamela Rock (PR), Inc., predicts that earnings in the coming year will be $45 million. There are 12 million shares, and PR maintains a debt-equity ratio of 2.a. Calculate the maximum investment funds

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