Questions and Answers of Fundamentals Of Corporate Finance

A proposed cost-saving device has an installed cost of $540,000. The device will be used in a five-year project, but is classified as three-year MACRS property for tax purposes. The required initial
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial
Bob’s Bikes Inc. (BBI) manufactures biotech sunglasses. The variable materials cost is $.74 per unit and the variable labor cost is $2.61 per unit.a. What is the variable cost per unit?b. Suppose
Everest Everwear Corporation can manufacture mountain climbing shoes for $10.94 per pair in variable raw material costs and $32 per pair in variable labor expense. The shoes sell for $95 per pair.
Covington Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,850 per unit; variable costs = $160 per unit; fixed costs = $7 million; quantity = 90,000
We are evaluating a project that costs $924,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at
A project has the following estimated data: price = $65 per unit; variable costs = $33 per unit; fixed costs = $4,000; required return = 16 percent; initial investment = $9,000; life = three years.
Consider a project with the following data: accounting break-even quantity = 18,000 units; cash break-even quantity = 12,000 units; life = five years; fixed costs = $110,000; variable costs = $20 per
At an output level of 30,000 units, you calculate that the degree of operating leverage is 3. If output rises to 36,000 units, what will the percentage change in operating cash flow be? Will the new
In the previous problem, suppose fixed costs are $150,000. What is the operating cash flow at 35,000 units? The degree of operating leverage?Data from Problem 11At an output level of 30,000 units,
A proposed project has fixed costs of $30,000 per year. The operating cash flow at 7,000 units is $63,000. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rises
At an output level of 10,000 units, you have calculated that the degree of operating leverage is 3.5. The operating cash flow is $9,000 in this case. Ignoring the effect of taxes, what are fixed
In the previous problem, what will be the new degree of operating leverage in each case?Data from Problem 14At an output level of 10,000 units, you have calculated that the degree of operating
Consider a three-year project with the following information: initial fixed asset investment = $420,000; straight-line depreciation to zero over the three-year life; zero salvage value; price = $26;
You are considering a new product launch. The project will cost $680,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 160 units per
Go the St. Louis Federal Reserve web site at www.stls.frb.org and follow the “FRED®/Data” link and the “Interest Rates” link. You will find a list of links for different historical interest
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $600 per set and have a variable cost of $240 per set. The company has spent $150,000 for a marketing study that
Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $1,500,000 investment in threading equipment to get the project
Given that OSI Pharmaceuticals was up by over 900 percent for 2000, why didn’t all investors hold OSI Pharmaceuticals?
You want to find the current market risk premium. Go to money.cnn.com, follow the “Bonds & Rates” link, and the “Latest Rates” link. What is the shortest maturity interest rate shown?
Suppose a stock had an initial price of $62 per share, paid a dividend of $1.50 per share during the year, and had an ending share price of $51. Compute the percentage total return.
Download the historical stock prices for Duke Energy (DUK) under the “Mthly. Adj. Prices” link. Find the closing stock price for the beginning and end of the prior two years. Now use the annual
Given that Yahoo! was down by almost 90 percent for 2000, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Download the Monthly Adjusted Prices for Microsoft (MSFT). What is the return on the stock over the past 12 months? Now use the 1 Month Total Return and calculate the average monthly return. Is this
Rework Problems 1 and 2 assuming the ending share price is $81.Data from Problem 1Suppose a stock had an initial price of $62 per share, paid a dividend of $1.50 per share during the year, and had an
What are the best performing stocks over the past year? Go to finance.yahoo.com and select the “Stock Screener” link. You will see a “Performance” category and a pull-down menu labeled “1
Suppose you bought a 10 percent coupon bond one year ago for $1,080. The bond sells for $1,100 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment over the
What was the average annual return on large company stock from 1926 through 2000:a. In nominal terms?b. In real terms?
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: –8 percent, 13 percent, 5 percent, 16 percent, and 32 percent.a. What was the average return on
You bought one of Great White Shark Repellant Co.’s 9 percent coupon bonds one year ago for $1,020. These bonds make annual payments and mature six years from now. Suppose you decide to sell your
What are the portfolio weights for a portfolio that has 90 shares of Stock A that sell for $35 per share and 70 shares of Stock B that sell for $25 per share?
You can find estimates of beta for each company under the “Mthly. Val. Data” link. Locate the beta for AOL Time-Warner (AOL) and Dow Chemical (DOW). How has the beta for each of these companies
You own a portfolio that has $700 invested in Stock A and $2,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 18 percent, respectively, what is the expected return
You own a portfolio that is 50 percent invested in Stock X, 30 percent in Stock Y, and 20 percent in Stock Z. The expected returns on these three stocks are 10 percent, 18 percent, and 13 percent,
Which companies currently have the highest and lowest betas? Go to www.amex.com and follow the “Screening” link. Enter 0 as the maximum beta and enter search. How many stocks currently have a
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15 percent and Stock Y with an expected return of 10 percent. If your goal is to create a
A portfolio is invested 20 percent in Stock G, 70 percent in Stock J, and 10 percent in Stock K. The expected returns on these stocks are 5 percent, 16 percent, and 35 percent, respectively. What is
You own a stock portfolio invested 25 percent in Stock Q, 20 percent in Stock R, 15 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are .9, 1.4, 1.1, and 1.8,
You own a portfolio equally invested in a risk free asset and two stocks. If one of the stocks has a beta of .8 and the total portfolio is equally as risky as the market, what must the beta be for
A stock has a beta of 1.5, the expected return on the market is 14 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?
A stock has an expected return of 13 percent, the risk-free rate is 5 percent, and the market risk premium is 7 percent. What must the beta of this stock be?
A stock has an expected return of 10 percent, its beta is .9, and the risk-free rate is 6 percent. What must the expected return on the market be?
Asset W has an expected return of 17 percent and a beta of 1.4. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset Wand a risk-free asset. Illustrate the
Consider the following information on Stocks I and II:The market risk premium is 10 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most
A stock has an expected return of 14 percent, a beta of 1.6, and the expected return on the market is 11 percent. What must the risk-free rate be?
A stock has a beta of 1.1 and an expected return of 15 percent. A risk-free asset currently earns 5 percent.a. What is the expected return on a portfolio that is equally invested in the two assets?b.
You have $100,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of
Stock Y has a beta of 1.45 and an expected return of 17 percent. Stock Z has a beta of .85 and an expected return of 12 percent. If the risk-free rate is 6 percent and the market risk premium is 7.5
Download the annual income statements for Sharper Image (SHRP). Looking back at Table 2.3, what is the marginal income tax rate for Sharper Image? Using the total income tax and the pretax income
Penguin Pucks, Inc., has current assets of $3,000, net fixed assets of $6,000, current liabilities of $900, and long-term debt of $5,000. What is the value of the shareholders’ equity account for
Find the most recent abbreviated balance sheets for General Dynamics at finance.yahoo.com. Enter the ticker symbol “GD,” follow the “Research” link, and the “Financials” link. Using the
Papa Roach Exterminators, Inc., has sales of $432,000, costs of $210,000, depreciation expense of $25,000, interest expense of $8,000, and a tax rate of 35 percent. What is the net income for this
Find the annual balance sheets for American Electric Power (AEP) and Lands’ End (LE). Calculate the net working capital for each company. Is American Electric Power’s net working capital
The home page for Coca-Cola Company can be found at www.coca-cola.com. Locate the most recent annual report, which contains a balance sheet for the company. What is the book value of equity for
Suppose the firm in Problem 2 paid out $65,000 in cash dividends. What is the addition to retained earnings?Data from Problem 2Papa Roach Exterminators, Inc., has sales of $432,000, costs of
Find the annual income statements for Harley Davidson (HDI), Hawaiian Electric Industries (HE) and AOL Time Warner (AOL). What are the earnings per share (EPS Basic from operations) for each of these
Duke Energy is one of the world’s largest energy companies. Go to the company’s home page at www.dukeenergy.com, follow the link to the investor’s page, and locate the annual reports. What was
Suppose the firm in Problem 3 had 30,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure?Data from Problem 3Suppose the firm
Download the annual balance sheets and income statements for Landry’s Seafood Restaurants (LNY). Using the most recent year calculate the cash flow identity for Landry Seafood. Explain your answer.
Cooper Tire and Rubber Company provides financial information for investors on its web site at www.coopertires.com. Follow the “Investor Information” link and find the most recent annual report.
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $5 million. The machinery can be sold to the Romulans today for $1.5 million. Klingon’s current balance sheet shows net
The Bradley Co. had $185,000 in 2002 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s 2002 income taxes.Table 2.3 $ Taxable
Find the most recent income statement for IBM at www.ibm.com. What is the marginal tax rate for IBM? What is the average tax rate for IBM? Is the average tax rate 35 percent? Why or why not?
Gonas, Inc., has sales of $9,750, costs of $5,740, depreciation expense of $1,000, and interest expense of $240. If the tax rate is 35 percent, what is the operating cash flow, or OCF?
Andretti Driving School’s December 31, 2001, balance sheet showed net fixed assets of $3.1 million, and the December 31, 2002, balance sheet showed net fixed assets of $3.5 million. The company’s
The December 31, 2001, balance sheet of Venus’s Tennis Shop, Inc., showed current assets of $1,200 and current liabilities of $720. The December 31, 2002, balance sheet showed current assets of
The December 31, 2001, balance sheet of Serena’s Tennis Shop, Inc., showed long-term debt of $3.1 million, and the December 31, 2002, balance sheet showed long-term debt of $3.6 million. The 2002
The December 31, 2001, balance sheet of Serena’s Tennis Shop, Inc., showed $750,000 in the common stock account and $7.2 million in the additional paid-in surplus account. The December 31, 2002,
Given the information for Serena’s Tennis Shop, Inc., in Problems 11 and 12, suppose you also know that the firm’s net capital spending for 2002 was $600,000, and that the firm reduced its net
Bedrock Gravel Corp. shows the following information on its 2002 income statement: sales = $130,000; costs = $82,000; other expenses = $3,500; depreciation expense = $6,000; interest expense =
Given the following information for Soprano Pizza Co., calculate the depreciation expense: sales = $21,000; costs = $10,000; addition to retained earnings = $4,000; dividends paid = $800; interest
Prepare a balance sheet for Tim’s Couch Corp. as of December 31, 2002, based on the following information: cash = $300,000; patents and copyrights = $775,000; accounts payable = $700,000; accounts
Corporation Growth has $80,000 in taxable income, and Corporation Income has $9,000,000 in taxable income. (Refer to Table 2.3.) a. What is the tax bill for each firm?b. Suppose both firms have
Clapper’s Clippers, Inc., is obligated to pay its creditors $2,900 during the year.a. What is the market value of the shareholders’ equity if assets have a market value of $3,600?b. What if
During 2002, Lambert Limo Corp. had sales of $900,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $600,000, $170,000, and $105,000, respectively. In
In Problem 19, suppose Lambert Limo Corp. paid out $25,000 in cash dividends. Is this possible? If no new investments were made in net fixed assets or net working capital, and if no new stock was
Use the following information for Taco Swell, Inc., (assume the tax rate is 34 percent):Draw up an income statement and balance sheet for this company for 2001 and 2002. Sales Depreciation Cost of
Faulk Industries had the following operating results for 2002: sales = $12,200; cost of goods sold = $9,000; depreciation expense = $1,600; interest expense = $200; dividends paid = $300. At the
Use the following information for Taco Swell, Inc., (assume the tax rate is 34 percent):For 2002, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
SDJ, Inc., has net working capital of $1,050, current liabilities of $4,300, and inventory of $1,300. What is the current ratio? What is the quick ratio?
Use the balance sheets for Amazon.com (AMZN), Bethlehem Steel (BS), American Electric Power (AEP), and Pfizer (PFE) to calculate the equity multiplier for each company over the most recent two years.
You can find financial statements for Walt Disney Company on the “Investor” link at Disney’s home page, www.disney.com. For the three most recent years, calculate the Du Pont identity for
Music Row, Inc. has sales of $32 million, total assets of $43 million, and total debt of $9 million. If the profit margin is 7 percent, what is net income? What is ROA? What is ROE?
Use the financial statements for Dell Computer Corporation (DELL) and Boeing Company (BA) to calculate the inventory turnover for each company over the past three years. Is there a difference in
You want to examine the financial ratios for Dell Computer Corporation. Go to www.marketguide.com and type in the ticker symbol for the company (DELL). Next, go to the comparison link. You should
Stargell Lumber Yard has a current accounts receivable balance of $392,164. Credit sales for the year just ended were $2,105,620. What is the receivables turnover? The days’ sales in receivables?
Find the SIC codes for Papa Johns’ International (PZZA) and Darden Restaurants (DRI) on each company’s home page. What is the SIC code for each of these companies? What does the business
Go to the “Investor” link for Enron located at www.enron.com and locate the income statement and balance sheet for the two most recent years.a. Prepare the common-size income statements and
Golden Corporation has ending inventory of $423,500, and cost of goods sold for the year just ended was $2,365,450. What is the inventory turnover? The days’ sales in inventory? How long on average
Find the annual income statements and balance sheets for Anheuser-Busch (BUD) and Gateway (GTW). Calculate the Du Pont identity for each company for the most recent three years. Comment on the
Paulette’s Plants, Inc., has a total debt ratio of .62. What is its debt-equity ratio? What is its equity multiplier?
Look under “Valuation” and download the “Profitability” spreadsheet for Southwest Airlines (LUV) and Continental Airlines (CAL). Find the ROA (Net ROA), ROE (Net ROE), PE ratio (P/E-High and
Find the most recent financial statements for Kmart at www.bluelight.com and Boeing at www.boeing.com. Calculate the asset utilization ratio for these two companies. What does this ratio measure? Is
Bethesda Co. had additions to retained earnings for the year just ended of $275,000. The firm paid out $150,000 in cash dividends, and it has ending total equity of $6 million. If Bethesda currently
If Roten Rooters, Inc., has an equity multiplier of 1.90, total asset turnover of 1.20, and a profit margin of 8 percent, what is its ROE?
Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93 indicates that for every
Based only on the following information for Sweeney Corp., did cash go up or down? By how much? Classify each event as a source or use of cash. Decrease in inventory Decrease in accounts
Finley Fire Prevention Corp. has a profit margin of 7 percent, total asset turnover of 1.94, and ROE of 23.70 percent. What is this firm’s debt-equity ratio?
For 2002, BDJ, Inc., had a cost of goods sold of $10,432. At the end of the year, the accounts payable balance was $2,120. How long on average did it take the company to pay off its suppliers during
Just Dew It Corporation reports the following balance sheet information for 2001 and 2002.Prepare the 2001 and 2002 common-size balance sheets for Just Dew It. Assets Current assets Cash Accounts

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