Questions and Answers of Fundamentals Of Corporate Finance

A put option and a call option with an exercise price of $65 and three months to expiration sell for $5.27 and $1.04, respectively. If the risk-free rate is 3.1 percent per year, compounded
A put option that expires in six months with an exercise price of $45 sells for $4.84. The stock is currently priced at $43, and the risk-free rate is 3.5 percent per year, compounded continuously.
A stock is currently selling for $73 per share. A call option with an exercise price of $70 sells for $5.27 and expires in three months. If the riskfree rate of interest is 2.6 percent per year,
If you need $25,000 in 12 years, how much will you need to deposit today if you can earn 7 percent per year compounded continuously?
What impact does an increase in the volatility of the underlying stock’s return have on an option’s value? Explain.
Exotic Cuisines, Inc., a restaurant chain that just went public last year. The company’s restaurants specialize in exotic main dishes, using ingredients such as alligator, bison, and ostrich. A
If you have $1,490 today, how much will it be worth in six years at 9 percent per year compounded continuously?
Consider the following project of Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $12
You have been hired to value a new 25-year callable, convertible bond. The bond has a coupon rate of 2.1 percent, payable annually. The conversion price is $54, and the stock currently sells for
Liberty Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $4.9 million for the next eight years. The company uses a discount rate of 11
Campbell, Inc., has a $1,000 face value convertible bond issue that is currently selling in the market for $960. Each bond is exchangeable at any time for 17 shares of the company’s stock. The
Suppose a share of stock sells for $54. The risk-free rate is 5 percent, and the stock price in one year will be either $60 or $70. a. What is the value of a call option with an exercise price
In Problem 15, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project
In Problem 14, suppose you think it is likely that expected sales will be revised upward to 11,400 units if the first year is a success and revised downward to 3,500 units if the first year is not a
We are examining a new project. We expect to sell 7,400 units per year at $59 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $59 × 7,400 =
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $485,000 per year. You believe the technology used in the machine has a 10-year life; in other
A bond with 20 detachable warrants has just been offered for sale at $1,000. The bond matures in 20 years and has an annual coupon of $18. Each warrant gives the owner the right to purchase two
You have been hired to value a new 30-year callable, convertible bond. The bond has a coupon rate of 2.3 percent, payable semiannually, and its face value is $1,000. The conversion price is $49, and
The following facts apply to a convertible bond making semiannual payments:Conversion price ....................................... $37/shareCoupon rate
A $1,000 par convertible debenture has a conversion price for common stock of $18 per share. With the common stock selling at $25, what is the conversion value of the bond?
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,060. The CEO believes that the assets in the
Rackin Pinion Corporation’s assets are currently worth $1,030. In one year, they will be worth either $1,000 or $1,270. The risk-free interest rate is 3.7 percent. Suppose the company has an
A one-year call option contract on Cheesy Poofs Co. stock sells for $725. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current
The price of Cilantro, Inc., stock will be either $60 or $80 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent.a. Suppose the current
The price of Chive Corp. stock will be either $57 or $84 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.a. Suppose the current price
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $40.a. Suppose you buy 10 contracts of the February 38 call option. How much will
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $85.a. Are the call options in the money? What is the intrinsic value of an RWJ
T-bills currently yield 3.4 percent. Stock in Deadwood Manufacturing is currently selling for $67 per share. There is no possibility that the stock will be worth less than $60 per share in one
S&S Air is preparing its first public securities offering. In consultation with Renata Harper of underwriter Raines and Warren, Chris Guthrie decided that a convertible bond with a 20-year
In calculating insurance premiums, the actuarially fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the expected
Suppose your company has a building worth $125 million. Because it is located in a high risk area for natural disasters, the probability of a total loss in any particular year is 1.05 percent. What
Joi Chatman recently received her finance degree and has decided to enter the mortgage broker business. Rather than working for someone else, she will open her own shop. Her cousin Mike has
Refer to Table 23.1 in the text to answer this question. Suppose you purchase a September 2020 cocoa futures contract this day at the last price of the day. What will your profit or loss be if cocoa
In the mid- to late-1990s, the performance of the pros was unusually poor—on the order of 90 percent of all equity mutual funds underperformed a passively managed index fund. How does this fact
In Problem 16, assume the equity increases by 1,250 solaris due to retained earnings. If the exchange rate at the end of the year is 1.54 solaris per dollar, what does the balance sheet look
Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 39,000 solaris, debt in the amount of 11,000 solaris, and equity of 28,000
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 13.8 million. The cash flows from the project would be SF 4.1 million
Lakonishok Equipment has an investment opportunity in Europe. The project costs €9.5 million and is expected to produce cash flows of €1.6 million in Year 1, €2.1 million in Year 2, and €3.2
Suppose the spot exchange rate for the Hungarian forint is HUF 308.27. The inflation rate in the United States will be 2.6 percent per year. It will be 4.5 percent in Hungary. What do you predict the
Suppose the spot and three-month forward rates for the yen are ¥114.37 and ¥113.89, respectively. a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference
You observe that the inflation rate in the United States is 2.6 percent per year and that T bills currently yield 3.2 percent annually. Using the approximate international Fisher effect, what do you
Suppose the spot and six-month forward rates on the Norwegian krone are Kr 9.14 and Kr 9.27, respectively. The annual riskfree rate in the United States is 3.8 percent, and the annual risk-free rate
Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 21.1. You have just placed an order for 30,000 motherboards at a cost to you of 218.50
Suppose the current exchange rate for the Polish zloty is Z 3.91. The expected exchange rate in three years is Z 3.98. What is the difference in the annual inflation rates for the United States and
Are the following statements true or false? Explain why.a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound to appreciate relative to
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .15 percent per month. The interest rate in Great Britain is .26 percent per
Use Figure 21.1 to answer the following questions: Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.3 percent. What must the six month risk-free
Suppose the Japanese yen exchange rate is ¥116 = $1, and the British pound exchange rate is £1 = $1.27.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥156 = £1.
Suppose the spot exchange rate for the Canadian dollar is Can$1.34 and the six-month forward rate is Can$1.41.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP
Mark Sexton and Todd Story, the owners of S&S Air, have been in discussions with a light aircraft dealer in Monaco about selling the company’s planes in Europe. Jarek Jachowicz, the dealer,
Solar Engines manufactures solar engines for tractor-trailers. Given the fuel savings available, new orders for 125 units have been made by customers requesting credit. The variable cost is $14,800
Fitzgerald, Inc., 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
The Branson 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 the company should proceed or not. The
The Trektronics store begins each week with 380 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $31 per year and the fixed order cost is $325,
Queen Manufacturing uses 3,900 switch assemblies per week and then reorders another 3,900. If the relevant carrying cost per switch assembly is $6.25, and the fixed order cost is $1,400, is the
Red Hawk, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if the company should proceed or
Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which
The Paa Ko Corporation sells on credit terms of net 30. Its accounts are, on average, four days past due. If annual credit sales are $7.2 million, what is the company’s balance sheet amount in
Essence of Skunk Fragrances, Ltd., sells 9,300 units of its perfume collection each year at a price per unit of $415. All sales are on credit with terms of 1/10, net 40. The discount is taken by 45
What are the different inventory types? How do the types differ? Why are some types said to have dependent demand whereas other types are said to have independent demand?
Benton, Inc., has an average collection period of 24 days. Its average daily investment in receivables is $49,300. What are annual credit sales? What is the receivables turnover? Assume 365 days per
Sweetens Cove, Inc., has weekly credit sales of $23,400, and the average collection period is 31 days. What is the average accounts receivable figure?
What are the five Cs of credit? Explain why each is important.
Silicon Wafers, Inc. (SWI), is debating whether or not to extend credit to a particular customer. SWI’s products, primarily used in the manufacture of semiconductors, currently sell for $975 per
Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/10, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average
What costs are associated with carrying receivables? What costs are associated with not granting credit? What do we call the sum of the costs for different levels of receivables?
The Caccamisse Corporation has annual sales of $29 million. The average collection period is 34 days. What is the average investment in accounts receivable as shown on the balance sheet? Assume 365
Sterling Wyatt, the president of Howlett Industries, has been exploring ways of improving the company’s financial performance. Howlett manufactures and sells office equipment to retailers. The
You place an order for 250 units of inventory at a unit price of $190. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full
Describe each of the following:a. Sight draft.b. Time draft.c. Banker’s acceptance.d. Promissory note.e. Trade acceptance.
One option usually available to a firm with excess cash is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?
Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by
One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $3.4 million in collections per day and requires a $320,000 compensating balance. No More Books is contemplating
Every two weeks, No More Pencils, Inc., disburses checks that average $124,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. The company’s management is considering a lockbox system to reduce the firm’s collection
Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:Average number of payments per day ...................................
A mail-order firm processes 5,800 checks per month. Of these, 60 percent are for $49 and 40 percent are for $84. The $49 checks are delayed two days on average; the $84 checks are delayed three days
Your firm has an average receipt size of $135. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 4,900 checks per
Your neighbor goes to the post office once a month and picks up two checks, one for $8,450 and one for $4,200. The larger check takes four days to clear after it is deposited; the smaller one takes
Purple Feet Wine, Inc., receives an average of $18,600 in checks per day. The delay in clearing is typically three days. The current interest rate is .017 percent per day.a. What is the company’s
Each business day, on average, a company writes checks totaling $19,500 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
Webb Corporation was founded 20 years ago by its president, Bryan Webb. The company originally began as a mail-order company, but it has grown rapidly in recent years, in large part due to its
In a typical month, the Montrose Corporation receives 90 checks totaling $85,000. These are delayed four days on average. What is the average daily float? Assume 30 days in a month.
Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?
Cheap Money Bank offers your firm a discount interest loan at 9.85 percent for up to $25 million and, in addition, requires you to maintain a 4.5 percent compensating balance against the amount
In exchange for a $300 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.93 percent per quarter on any funds actually borrowed.2. Maintain a 4.5 percent
Rework Problem 15 assuming:a. Wildcat maintains a minimum cash balance of $40 million.b. Wildcat maintains a minimum cash balance of $20 million.Based on your answers in parts (a) and (b), do you
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Sales for the first quarter of the following year are projected at $180 million. Accounts receivable at the
A bank offers your firm a revolving credit arrangement for up to $75 million at an interest rate of 1.75 percent per quarter. The bank also requires you to maintain a compensating balance of 5
You’ve worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .37 percent per month. In addition, 4 percent of the amount that you
Below are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash and the amount: COUNTRY KETTLES, INC.
Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2021:The company predicts that 5 percent of its credit sales will never be collected, 35 percent
The following is the sales budget for Lemonis, Inc., for the first quarter of 2021:Credit sales are collected as follows:65 percent in the month of the sale.20 percent in the month after the sale.15
The Bandon Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses
Sexton Corp. has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers
Your firm has an average collection period of 38 days. Current practice is to factor all receivables immediately at a discount of 1.75 percent. What is the effective cost of borrowing in this case?
Consider the following financial statement information for the Newk Corporation:Assume all sales are on credit. Calculate the operating and cash cycles. How do you interpret your answer? Item
The Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $335. The company has a 45-day
Is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or why not.

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