Questions and Answers of Fundamentals Of Corporate Finance

Shank Manufacturing, Inc., has recently installed a just-in-time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating
Cori’s Corp. has an equity value of $14,735. Long-term debt is $8,300. Net working capital, other than cash, is $2,850. Fixed assets are $18,440. How much cash does the company have? If current
You have recently been hired by Piepkorn Manufacturing to work in the newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of
After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 3 percent or
National Business Machine Co. (NBM) has $5 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in financial assets.
You have looked at the current financial statements for J&R Homes, Co. The company has an EBIT of $3.35 million this year. Depreciation, the increase in net working capital, and capital spending
In the previous problem, suppose you believe that sales in five years will be $45.5 million and the price-sales ratio will be 2.15. What is the share price now?Previous problemYou have looked at the
Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .60. It’s considering building a new $73 million manufacturing facility.
Chauhan Corp. has a debt-equity ratio of .65. The company is considering a new plant that will cost $55 million to build. When the company issues new equity, it incurs a flotation cost of 6 percent.
This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense
Hassinah, Inc., is proposing a rights offering. Presently there are 435,000 shares outstanding at $71 each. There will be 50,000 new shares offered at $64 each.a. What is the new market value of the
The Clifford Corporation has announced a rights offer to raise $25 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
The Tennis Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly
Why is underpricing not a great concern with bond offerings? Use the following information to answer the next three questions. Zipcar, the car-sharing company, went public in April 2011. Assisted by
The Woods Co. and the Koepka Co. have both announced IPOs at $40 per share. One of these is undervalued by $12, and the other is overvalued by $5, but you have no way of knowing which is which. You
The Meadows Corporation needs to raise $75 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the
In Problem 5, if the SEC filing fee and associated administrative expenses of the offering are $1.9 million, how many shares need to be sold?Problem 5The Meadows Corporation needs to raise $75
The Telwar Co. has just gone public. Under a firm commitment agreement, the company received $25.11 for each of the 30 million shares sold. The initial offering price was $27 per share, and the stock
Damron, Inc., has 250,000 shares of stock outstanding. Each share is worth $81, so the company’s market value of equity is $20,250,000. Suppose the firm issues 40,000 new shares at the following
Marker, Inc., wishes to expand its facilities. The company currently has 5 million shares outstanding and no debt. The stock sells for $64 per share, but the book value per share is $19. Net income
The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:Stock price
In Problem 10, what would the ROE on the investment have to be if we wanted the price after the offering to be $75 per share? (Assume the PE ratio remains constant.) What is the NPV of this
Bell Buckle Mfg. is considering a rights offer. The company has determined that the ex rights price would be $71. The current price is $76 per share, and there are 29 million shares outstanding. The
Show that the value of a right just prior to expiration can be written as:Value of a right = PRO − PX = (PRO − PS)/(N + 1)where PRO, PS, and PX stand for the rights-on price, the subscription
Nougat Corp. wants to raise $5.1 million via a rights offering. The company currently has 530,000 shares of common stock outstanding that sell for $55 per share. Its underwriter has set a
Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong
The TL Corporation currently has no debt outstanding. Josh Culberson, the CFO, is considering restructuring the company by issuing debt and using the proceeds to repurchase outstanding equity. The
Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The
Suppose the company in Problem 1 has a market-to book ratio of 1.0 and the stock price remains constant.a. Calculate return on equity (ROE) under each of the three economic scenarios before any debt
Foundation, Inc., is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding.
Dickson Corp. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $100,050 in debt. Plan II would result in 9,800 shares of stock and $226,200 in debt.
Finch, Inc., is debating whether to convert its allequity capital structure to one that is 30 percent debt. Currently, there are 6,500 shares outstanding, and the price per share is $51. EBIT is
ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all-equity financed with $680,000 in stock. XYZ uses both stock and perpetual debt; its stock is
What is the basic goal of financial management with regard to capital structure?
Sugar Skull Corp. uses no debt. The weighted average cost of capital is 7.9 percent. If the current market value of the equity is $15.6 million and there are no taxes, what is EBIT?
Solar Industries has a debt-equity ratio of 1.25. Its WACC is 7.8 percent, and its cost of debt is 4.7 percent. The corporate tax rate is 21 percent.a. What is the company’s cost of equity
Navarro Corp. has no debt but can borrow at 5.9 percent. The firm’s WACC is currently 9.2 percent, and the tax rate is 21 percent. a. What is the company’s cost of equity?b. If the firm
Fields & Co. expects its EBIT to be $125,000 every year forever. The firm can borrow at 7 percent. The company currently has no debt, and its cost of equity is 12 percent. If the tax rate is 24
Tool Manufacturing has an expected EBIT of $57,000 in perpetuity and a tax rate of 21 percent. The firm has $134,000 in outstanding debt at an interest rate of 5.35 percent, and its unlevered
Tempest Corporation expects an EBIT of $37,700 every year forever. The company currently has no debt, and its cost of equity is 11 percent. The tax rate is 22 percent.a. What is the current value of
The Day Company and the Knight Company are identical in every respect except that Day is not levered. Financial information for the two firms appears in the following table. All earnings streams are
Gatto, Inc., has declared a $5.85 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the
The owners’ equity accounts for Vulcano International are shown here:Common stock ($.50 par value) ............ $ 20,000Capital surplus ......................................... 210,000Retained
On Tuesday, December 5, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3.
Stockton Mineral Operations, Inc. (SMO), currently has 540,000 shares of stock outstanding that sell for $83 per share. Assuming no market imperfections or tax effects exist, what will the share
The balance sheet for Quinn Corp. is shown here in market value terms. There are 12,000 shares of stock outstanding.The company has declared a dividend of $1.45 per share. The stock goes ex dividend
In Problem 5, suppose the company has announced it is going to repurchase $17,400 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be
The market value balance sheet for Murray Manufacturing is shown here. The company has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend
The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $64 per share. What effects will the distribution of the stock
You own 1,000 shares of stock in Avondale Corporation. You will receive a $3.45 per share dividend in one year. In two years, the company will pay a liquidating dividend of $62 per share. The
Erna Corporation is evaluating an extra dividend versus a share repurchase. In either case, $53,500 would be spent. Current earnings are $1.79 per share, and the stock currently sells for $64 per
The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year .................... Cash Flow 0 .................... −$52,000,000 1
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
Your company has been approached to bid on a contract to sell 5,000 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be
A proposed project has fixed costs of $76,000 per year. The operating cash flow at 9,200 units is $108,700. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise
At an output level of 14,500 units, you have calculated that the degree of operating leverage is 3.41. The operating cash flow is $81,000 in this case. Ignoring the effect of taxes, what are fixed
Rework Problems 1 and 2 assuming the ending share price is $61.Problem 1Suppose a stock had an initial price of $74 per share, paid a dividend of $1.65 per share during the year, and had an ending
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year X Y 1 13% 27% 2 26 36 3 7 11 4 -5 -29 11 16
You bought one of Great White Shark Repellant Co.’s 5.1 percent coupon bonds one year ago for $1,010. These bonds have a par value of $1,000, make annual payments, and mature 14 years from now.
You find a certain stock that had returns of 18 percent, −23 percent, 16 percent, and 9 percent for four of the last five years. If the average return of the stock over this period was 10.3
A stock has had the following year-end prices and dividends:What are the arithmetic and geometric average returns for the stock? Year Price Dividend 1 $73.20 2 81.27 $1.05 90.37 1.15 4 86.18 1.26
Over a 40-year period, an asset had an arithmetic return of 12.8 percent and a geometric return of 9.7 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5
A stock has a beta of 1.15, the expected return on the market is 11.3 percent, and the risk free rate is 3.6 percent. What must the expected return on this stock be?
A stock has an expected return of 11.4 percent, the risk-free rate is 3.9 percent, and the market risk premium is 6.8 percent. What must the beta of this stock be?
A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be?
A stock has an expected return of 10.45 percent, its beta is .85, and the expected return on the market is 11.8 percent. What must the risk-free rate be?
Asset W has an expected return of 8.8 percent and a beta of .90. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has a beta of .80 and an expected return of 8.5 percent. If the risk-free rate is 3.2 percent and the market risk premium is
A stock has a beta of 1.19 and an expected return of 12.4 percent. A risk-free asset currently earns 2.7 percent.a. What is the expected return on a portfolio that is equally invested in the two
Consider the following information about three stocks:a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The
You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 12.1 percent. If Stock X has an expected return of 10.28
Consider the following information about Stocks I and II:The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. Which stock has the most systematic risk? Which one has the most
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Expected Security
Suppose you observe the following situation:a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock B’s
The Tribiani Co. just issued a dividend of $2.90 per share on its common stock. The company is expected to maintain a constant 4.5 percent growth rate in its dividends indefinitely. If the stock
The Swanson Corporation’s common stock has a beta of 1.07. If the risk-free rate is 3.4 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?
Stock in Jansen Industries has a beta of 1.05. The market risk premium is 7 percent, and T bills are currently yielding 3.5 percent. The company’s most recent dividend was $2.45 per share, and
Suppose Wacken, Ltd., just issued a dividend of $2.73 per share on its common stock. The company paid dividends of $2.31, $2.39, $2.48, and $2.58 per share in the last four years. If the stock
Savers has an issue of preferred stock with a stated dividend of $3.85 that just sold for $87 per share. What is the bank’s cost of preferred stock?
Sunrise, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 96 percent of face value. The issue makes semiannual payments
Jiminy’s Cricket Farm issued a 30-year, 4.5 percent semiannual bond three years ago. The bond currently sells for 104 percent of its face value. The company’s tax rate is 22 percent.a. What is
For the firm in Problem 7, suppose the book value of the debt issue is $75 million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left to
Suppose Tom O’Bedlam, president of Bedlam Products, Inc., has hired you to determine the firm’s cost of debt and cost of equity capital.a. The stock currently sells for $50 per share, and the
Ninecent Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5
Brannan Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC?
Fama’s Llamas has a weighted average cost of capital of 8.4 percent. The company’s cost of equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What is
Dani Corp. has 5.5 million shares of common stock outstanding. The current share price is $83, and the book value per share is $5. The company also has two bond issues outstanding. The first bond
In Problem 12, suppose the most recent dividend was $3.85 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
Given the following information for Lightning Power Co., find the WACC. Assume the company’s tax rate is 21 percent.Debt: 12,000 bonds with a 4.6 percent coupon outstanding, $1,000 par value, 25
Lingenburger Cheese Corporation has 6.4 million shares of common stock outstanding, 200,000 shares of 3.8 percent preferred stock outstanding, par value of $100, and 120,000 bonds with a semiannual
Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2
Shinedown Company needs to raise $95 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company
Lebleu, Inc., is considering a project that will result in initial aftertax cash savings of $2.9 million at the end of the first year, and these savings will grow at a rate of 2 percent per year
Cookies ’n Cream, Inc., recently issued new securities to finance a new TV show. The project cost $45 million, and the company paid $2.2 million in flotation costs. In addition, the equity issued
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 22 percent, what is the aftertax
Ginger Industries stock has a beta of 1.08. The company just paid a dividend of $.85, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.3 percent, and
Derry Corp. is expected to have an EBIT of $2.1 million next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $80,000, and

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