Questions and Answers of Principles Corporate Finance

Consider the same setting as Problem 18, but suppose instead 80% of the shareholders redeem their shares, and no warrants are exercised.Data from problem 18a. What is the amount of cash per share
Your uncle owns 10,000 shares of Walmart stock. He is concerned about the short-term outlook for Walmart’s stock due to an impending “major announcement.” This announcement has received much
In your role as a consultant at a wealth management firm, you have been assigned a very powerful client who holds one million shares of Cisco Systems, Inc. purchased on January 4, 2007. In
Historically, Meta Platforms (parent company of Facebook) has had more cash than debt. As Problem 21 in Chapter 15 makes clear, by issuing more debt Meta could generate a very large tax shield worth
You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team
Use the data in Problem 8 to determine the change, from 2018 to 2022, in Ford’s Data from in problem 8In early 2018, Ford Motor (F) had a book value of equity of $$34.9$ billion, 4.0 billion
You are 23 years old and decide to start saving for your retirement. You plan to save $5000 at the end of each year (so the first deposit will be one year from now) and will make the last deposit
You would like to buy the house and take the mortgage described in Problem 37. You can afford to pay only $$23,500$ per year. The bank agrees to allow you to pay this amount each year, yet still
You are 27 years old and decide to save $15,000 each year (with the first deposit one year from now), in an account paying 9% interest per year. You will make your last deposit 38 years from now when
What is the role of GILTI, FDII, and BEAT in the new tax code?
Hannah and Daughters is a United States-based graphic design firm. It has a subsidiary in Montenegro that generates foreign EBIT of 30 million euros. The firm has tangible assets overseas with a book
What is the purpose of the BEAT minimum tax?
Suppose the interest on Russian government bonds is 7.1%, and the current exchange rate is 27.7 rubles per dollar. If the forward exchange rate is 28.2 rubles per dollar, and the current U.S.
What types of securities do VCs hold, and what protections do they have?
How does the timing of the SPAC process of going public differ from that of a traditional IPO?
When agreeing to a SPAC merger, what uncertainty does the target firm face that affects the effective terms of the deal?
Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $$900,000$ and received 11 million shares of stock. Starware now needs to raise
You have an arrangement with your broker to request 950 shares of all available IPOs. Suppose that 11% of the time, the IPO is “very successful” and appreciates by 104% on the first day, 82% of
Consider a SPAC with the following terms:■ 100 million units issued at $10 per share.■ Promote equal to 20% of the SPAC ownership.■ 25 million total warrants with an exercise price of $11.50
What is an asset-backed security?
Is a lease more valuable because it provides 100% financing?
Sunnyfield Industries will lease a new rock crusher for $30,000 per year for 5 years, paid at the end of each year. These lease terms are consistent with an annual interest rate of 6%. How will the
What is the firm’s cash cycle? How does it differ from the operating cycle?
Describe “just-in-time” inventory management.
Use the financial statements supplied on the next page for International Motor Corporation (IMC) to answer the following questions.a. Calculate the cash conversion cycle for IMC for both 2018 and
What is the difference between the factor rate and the holdback rate?
Hand-to-Mouth (H2M) is currently cash-constrained and must decide whether to delay paying one of its suppliers or take out a loan. They owe the supplier $$10,000$ with terms of 2.2/10 Net 40, so
Which of the following one-year $1000 bank loans offers the lowest effective annual rate?a. A loan with an APR of 6.1%, compounded monthly.b. A loan with an APR of 6.1%, compounded annually, that
Your firm has expected annual sales of $$2.0$ million, and has been offered a merchant cash advance of $$440,000$ with a factor rate of 1.25 and a holdback rate of 20%.a. When do you expect the
You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater’s stock price is $$25,$ and it has 2 million shares outstanding. You believe that if
What is corporate governance?
What is a say-on-pay vote?
What is an activist hedge fund?
Suppose the current exchange rate is $$1.78/£$ the interest rate in the United States is 5.37%, the interest rate in the United Kingdom is 3.92%, and the volatility of the $$/£$ exchange rate
How can you identify a real option in a decision tree?
In what circumstances does the real option add value?
How do you use a decision tree to make the best investment decision?
Why can staging investment decisions add value?
The current price of Estelle Corporation stock is $$25.$ In each of the next two years, this stock price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year
Suppose Caterpillar, Inc., has 653 million shares outstanding with a share price of $75.14, and $25.99 billion in debt. If in three years, Caterpillar has 710 million shares outstanding trading for
In 2022, Costco Wholesale Corporation had a market capitalization of $$238$ billion, debt of $$6.5$ billion, cash of $$12$ billion, and EBIT of about $$8$ billion. If Costco were to increase
Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 9%, a debt cost of capital of 7.5%, a marginal corporate tax rate of 45%, and a debt-equity ratio of 2.7.Suppose Goodyear
You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $13 million. The product will generate free
Consider Alcatel-Lucent’s project in Problem 6.a. What is the free cash flow to equity for this project?b. What is its NPV computed using the FTE method? How does it compare with the NPV based on
Amarindo, Inc. (AMR), is a newly public firm with 9.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $14.97 million,
You are evaluating a project that requires an investment of $$94$ today and provides a single cash flow of $$123$ for sure one year from now. You decide to use 100% debt financing, that is, you
You are on your way to an important budget meeting. In the elevator, you review the project valuation analysis you had your summer associate prepare for one of the projects to be discussed:Looking
Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 9.1%. Arden’s marginal corporate tax rate is 35%, and its debt cost of capital is 4.7%.a.
Gartner Systems has no debt and an equity cost of capital of 10.7%. Gartner’s current market capitalization is $98 million, and its free cash flows are expected to grow at 3.1% per year.Gartner’s
Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 25%.a. What is Revtek’s WACC given its
Use your answers from Problems 17 and 18 to infer the value today of the projected improvements in working capital under the assumptions that Ideko’s market share will increase by 0.5% per year and
Table 19.20 shows the sensitivity analysis for KKP’s investment in Ideko. Given this information, do you recommend the acquisition of Ideko? TABLE 19.20 SPREADSHEET Sensitivity Analysis for KKP's
Explain put-call parity.
Below is an option quote on IBM from the CBOE Web site showing options expiring in March and April 2022.a. Which option contract had the most trades on that day?b. Which option contract is being held
Consider the IBM call and put options in Problem 3. Ignoring any interest you might earn over the remaining few days’ life of the options:a. Compute the break-even IBM stock price for each option
It is February 21, 2022, and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in terms
Dynamic Energy Systems stock is currently trading for $$31$ per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $$41$ is currently trading for
Consider the IBM call and put options in Problem 3. IBM paid a dividend on February 10, 2022, and was not scheduled to pay another dividend until May 2022. Ignoring the negligible interest you might
In mid-July 2018, European-style options on the S&P 100 index (OEX) expiring in December 2019 were priced as follows:Given an interest rate of 0.38% for a December 2019 maturity (17 months in the
Suppose Amazon stock is trading for $2000 per share, and Amazon pays no dividends.a. What is the maximum possible price of a call option on Amazon?b. What is the maximum possible price of a put
Consider the data for IBM options in Problem 3. Suppose a new American-style put option on IBM is issued with a strike price of $130 and an expiration date of April 1st.a. What is the maximum
Consider an American put option on XAL stock with a strike price of $$49$ and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $$5$ per share, and the one-year
Suppose the S&P 500 is at $$889,$ and a one-year European call option with a strike price of $$429$ has a negative time value. If the interest rate is 6%, what can you conclude about the dividend
Suppose the S&P 500 is at 2700, and it will pay a dividend of $90 at the end of the year.Suppose also that the interest rate is 2%. If a one-year European put option has a negative time value, what
Wesley Corp. stock is trading for $27/share. Wesley has 20 million shares outstanding and a market debt-equity ratio of 0.49. Wesley’s debt is zero-coupon debt with a 5-year maturity and a yield to
RFC Corp. has announced a $$1.58$ dividend. If RFC’s price last price cum-dividend is $$17.78,$ what should its first ex-dividend price be (assuming perfect capital markets)?
EJH Company has a market capitalization of $$1.6$ billion and 25 million shares outstanding. It plans to distribute $$120$ million through an open market repurchase. Assuming perfect capital
KMS Corporation has assets with a market value of $500 million, $50 million of which are cash.It has debt of $200 million, and 10 million shares outstanding. Assume perfect capital markets.a. What is
Natsam Corporation has $$250$ million of excess cash. The firm has no debt and 350 million shares outstanding, with a current market price of $$20$ per share. Natsam’s board has decided to pay
Now suppose Natsam Corporation has $$275$ million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $$19$ per share. The board decided to do
Suppose that all capital gains are taxed at a 26% rate, and that the dividend tax rate is 34%.Arbuckle Corp. is currently trading for $$37$ and is about to pay a $$5$ special dividend.a. Absent
Clovix Corporation has $$50$ million in cash, 10 million shares outstanding, and a current share price of $$30.$ Clovix is deciding whether to use the $$50$ million to pay an immediate special
Berkshire Hathaway’s A shares are trading at $$120,000.$ What split ratio would it need to bring its the stock price down to $$50?$
What is the “tradeoff” in the tradeoff theory?
Why would a firm with excessive leverage not immediately reduce it?
Consider the differences in leverage across industries shown in Figure 15.7. To what extent can you account for these differences?
Kohwe Corporation plans to issue equity to raise $$40$ million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $$10$ million each year. Kohwe
Marpor Industries has no debt and expects to generate free cash flows of $$15$ million each year. Marpor believes that if it permanently increases its level of debt to $$45$ million, the risk of
Dynron Corporation’s primary business is natural gas transportation using its vast gas pipeline network. Dynron’s assets currently have a market value of $$150$ million. The firm is exploring
Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below.
You own your own firm, and you want to raise $$40$ million to fund an expansion. Currently, you own 100% of the firm’s equity, and the firm has no debt. To raise the $$40$ million solely
According to the managerial entrenchment theory, managers choose capital structures so as to preserve their control of the firm. On the one hand, debt is costly for managers because they risk losing
If investors are holding optimal portfolios, how will the portfolios of a more risk averse and a more risk-tolerant investor differ?
Using the data from Table 11.3, what is the covariance between the stocks of Alaska Air and Southwest Airlines? Alaska Southwest Ford General Microsoft HP Air Airlines Motor Kellogg Mills Volatility
Suppose Wesley Publishing’s stock has a volatility of 55%, while Addison Printing’s stock has a volatility of 20%. If the correlation between these stocks is 30%, what is the volatility of the
Suppose Ford Motors stock has an expected return of 15% and a volatility of 42%, and Molson Coors Brewing has an expected return of 11% and a volatility of 32%. If the two stocks are uncorrelated,a.
Suppose Target’s stock has an expected return of 17% and a volatility of 35%, Hershey’s stock has an expected return of 15% and a volatility of 30%, and these two stocks are uncorrelated.a. What
You have $$9800$ to invest. You decide to invest $$19,000$ in Google and short sell $$9200$ worth of Yahoo! Google’s expected return is 14% with a volatility of 27% and Yahoo!’s expected
You have $$175,000$ to invest. You choose to put $$225,000$ into the market by borrowing \($50,000.a. If the risk-free interest rate is 6% and the market expected return is 7%, what is the
The Optima Mutual Fund has an expected return of 19.1% and a volatility of 21.5%. Optima claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the risk-free
Your investment portfolio consists of $13,000 invested in only one stock—Amazon. Suppose the risk-free rate is 6%, Amazon stock has an expected return of 11% and a volatility of 39%, and the market
Suppose the risk-free return is 2.3% and the market portfolio has an expected return of 7.2% and a volatility of 13.8%. Merck & Co. (Ticker: MRK) stock has a 18.2% volatility and a correlation with
Suppose Autodesk stock has a beta of 2.40, whereas Costco stock has a beta of 0.73. If the risk-free interest rate is 6% and the expected return of the market portfolio is 11.5%, what is the expected
Suppose Pepsico’s stock has a beta of 0.72. If the risk-free rate is 2% and the expected return of the market portfolio is 6%, what is Pepsico’s equity cost of capital?
Using the same data as in Problem 11, estimate the alpha of Nike and HP stock, expressed as % per month.Data from in problem 11Go to Chapter Resources in MyLab Finance and use the data in the
Harrison Holdings, Inc. (HHI) is publicly traded, with a current share price of $$30$ per share.HHI has 23 million shares outstanding, as well as $$70$ million in debt. The founder of HHI, Harry
Unida Systems has 32 million shares outstanding trading for $$9$ per share. In addition, Unida has $$85$ million in outstanding debt. Suppose Unida’s equity cost of capital is 13%, its debt
What risk model is most consistent with investors’ choices in their mutual fund investments?
In early 2018, Qualcomm Inc. had $$15$ billion in debt, total equity capitalization of $$88$ billion, and an equity beta of 1.33 (as reported on Yahoo! Finance). Included in Qualcomm’s assets
Indell stock has a current market value of $$170$ million and a beta of 1.80. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $$35.96$

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