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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

A BBB-rated corporate bond has a yield to maturity of 8.5%. A U.S. Treasury security has a yield to maturity of 6.8%. These yields are quoted as APRs with semiannual compounding. Both bonds pay
Why does the stock value depend on its dividends?
Is it true that according to the constant dividend growth model the growth rates in dividends and in the stock price are the same?
What is a limited company? How does it differ from a limited partnership?
What Is the goal of the firm?
What are the main differences between the NYSE and NASDAQ?
You are a shareholder in a corporation. The corporation earns $5.00 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The dividend Is
Rework Example 1.1, assuming the corporation in that example has elected subchapter S tax treatment and your tax rate on non-dividend income is 30%.
Explain the difference between an S and a C corporation in the United States.
What is the difference between a public and a private company?
The following quote on Yahoo! stock appeared on July 10, 2013, on Yahoo! Finance:If you wanted to buy Yahoo!, what price would you pay per share? How much would you receive per share if you wanted to
What are the main financial statements that all public companies must produce?
What is dilution?
What does a high debt-to-equity ratio tell you?
Tequila Crisis (B) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s current account over the period 1992–1996.Break down your analysis among
Tequila Crisis (C) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s capital account over the period 1992–1996. How can you reconcile your findings
Tequila Crisis (D) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s official reserve account over the period 1992–1996. What can you infer about
What is the carry trade?
Why is hedging value-creating?
What are market-based forecasts?
Sarbanes-Oxley What is the motivation behind the legislation? What does its implementation mean to publicly held corporations?
Initial public offerings Discuss the paperwork that is involved in an IPO. What is included in each and what purpose does it serve?
Goal of the firm Name at least four other potential goals of the firm and discuss what those goals lack in relation to the true goal.
Director voting What is the primary difference between cumulative and straight voting? How does this affect minority shareholder participation?
Capital budgeting, capital structure, and working capital management Suppose you are the CFO for a pencil-making firm that is in need of a new machine. Discuss the basic steps that you must go
Corporations Name at least two advantages associated with a corporation.What are the primary disadvantages?
Sole proprietorships and partnerships What are the primary disadvantages to both the sole proprietorship and partnership forms of business organizations?What are potential benefits?
Agency problems Bob Thomas is the manager of MLP, Inc., a publicly traded firm. Last year, he chose to forego a valuable project so he could give himself a larger bonus. What did Bob create? How do
Agency problems Publicly traded companies are likely to have many different owners. Private companies, however, have relatively few owners. Does this mean that agency problems do not exist for
Primary markets What is the difference between primary and secondary markets? Give an example of each.
Initial public offerings What are the primary “ingredients” in the IPO process?Describe each in detail.
Venture capital and underwriters Describe two financial intermediaries that often help the issuing firms in the going-public process. What roles do each play?
Initial public offerings Johnny Quickset sits three seats across from you in finance class. After class he approached you and asked the following question:“How do underwriters make money?” How do
Lockup agreement Scotty Blow’s lamp store went public on July 14, 2010.Three weeks later, Scotty sold 47 % of his shares for a profit of $2 million. Why is this a bad thing? Discuss the mechanism
Goal of the firm What is the only appropriate goal of the firm? Why?
Goal of the firm and agency problems Suppose the CEO of a Fortune 500 firm superficially inflates year-end earnings reports to increase his bonus.What is this an example of? How does this influence
Proxy voting Discuss how proxy voting affects shareholder influence over the ownership structure. What potential benefits of proxy voting come to mind?Can you think of any potential disadvantages?
Capital budgeting How important is capital budgeting in corporate finance?What types of issues have to be addressed in capital budgeting?
Capital structure How important is capital structure in corporate finance?What types of issues have to be addressed in capital structure?
Capital structure Suppose you are the CFO of a company that just built a $40 million dollar plant. What are your options for paying for this plant?
Capital structure and capital budgeting Your friend is having trouble grasping the concepts of capital structure and capital budgeting, so you decide to explain it to her in terms of her personal
Working capital management How does working capital management fit into the equation? What types of things need to be considered in working capital management?
Income statement Fill in the blanks in the following income statements. Income statement for the year ending Dec. 31, 2012 Sales Cost of goods sold Depreciation EBIT Interest Taxable income Taxes
Finance versus accounting You have a friend that is a rising junior in college and is in the process of making a tough decision. She has narrowed her choice for major to either accounting or finance
Net income During 2012, Patrick’s Dog Salon, Inc., had total sales of $430,000 and costs were 59 % of sales. They also had interest expense of $5,300 and depreciation of $3,400. What is the
Income statement Discuss the form and function of the typical income statement.Why is it important for a firm?
Retained earnings In the preceding problem, if Patrick pays out $15,000 in dividends, what is the addition to retained earnings?
Dividends versus retained earnings Hank from the board of directors has issued a proposal that the firm start paying 98 % of their profits in dividends.“There’s no better way to keep shareholders
EPS and DPS Using the two problems above, suppose Patrick has 34,000 shares outstanding. What is the earnings per share (EPS)? What is the dividend paid per share?
Corporate taxes Julie is getting ready to file both her personal and corporate tax returns. She is confused because the tax rates seem to work differently.Explain to Julie what is going on with
Income statement Last year, Billy’s Boat Barn had net income of $1,285,000 and paid out dividends of $482,000. This year, Billy plans to implement a new project that will increase income by 15 %.
Corporate tax rates Company XYZ is proposing a new multimillion dollar project that is expected to generate revenues for the next 10 years. They are using the average tax rate from last year in their
Market versus book values Your company has a large machine that originally cost $100,000. They just sold it for $20,000 and actually got a tax reward for doing so. How could they have received a tax
Taxes Iam’s Security, LLC, generated taxable income of $483,000 last year.What is her tax bill? What is her average tax rate? What is her marginal tax rate?
Balance sheet Discuss the form and function of the balance sheet. Why is it important for a firm?
Depreciation Benefield’s Matchmaking Company just bought a new computer network designed to match customer compatibilities electronically. The machine cost $87,000 and is classified as a 5-year
Using accounting statements Your neighbor across the office just made the statement, “I don’t understand how accounting statements help in finance at all.Accounting tells us what has happened and
Market and book values In the preceding problem, suppose Benefield sold the machine for $18,000 at the end of the fifth year. What are the tax ramifications?Is it a tax bill or tax savings?
Peer analysis How do you determine if values on accounting statements are“good” or “bad.” Discuss the difficulties of doing so, along with potential solutions to those difficulties.
Balance sheet As of the end of 2012, Summerville Paving, Inc., had current assets of $86,000, current liabilities of $45,000, long-term debt of $340,000, and total shareholder equity of 294,000. What
Standardized statements You are trying to explain standardized statements to your friend, who is an avid golfer. He doesn’t understand, so you try it in his language. “Standardizing your
Market and book values Exactly 3 years ago, you bought a van for your firm at a cost of $37,000. The van falls within a 5-year property class. Today, a competitor came to you and offered to buy the
Ratio analysis Discuss the five categories of ratio analysis, detailing the role they play in determining the financial well-being of the firm.
Profitability ratios Holly’s Fish Farm, Inc., has a current ratio of 2.1 times. In addition, she has total assets of $571,000 and total debt of $214,000. Holly’s ROE is 18.7 %. What is her net
DuPont identity Explain the difference between the DuPont Identity and a standard ratio. What does the DuPont allow that the standard ratio does not?
Profitability ratios Billy’s Sheet Factory had taxable income of $20 million last year. In addition, they have total assets of $36 million and a tax rate of 35 %. What is Billy’s return on assets?
Growth rates Internal and sustainable growth rates measure the firm’s expected growth rate, with restrictions. Discuss those restrictions and how you can draw similarities between the way they are
DuPont identity Nanny’s Doll Emporium has a profit margin of 11 %, total asset turnover of .8 times, and return on equity of 16.3 %. What percentage of the firm’s capital structure is debt?
DuPont identity The firm’s net income is $59,423, total assets is $458,008, total sales is $380,083, and debt-to-equity ratio is 2.81 times. What is the firm’s ROE?
Long-term solvency ratios If the firm has an equity multiplier of 1.85 times, what is the firm’s existing capital structure?
Internal growth rate Your firm had net income of $590,000 last year. The firm has debt of $2.4 million and equity of $1.8 million. The firm paid a dividend per share of $.05 for each of their five
Sustainable growth rate Mac and Lindsey’s Doughnut Shop, Inc., had a taxable income of $1,152,546 and a tax rate of 35 %. They have 500,000 shares outstanding and have a dividend per share (DPS) of
Standardized statements Create common-size income statements and balance sheets for Gennifer’s Basket Shop, whose 2012 statements are below. Gennifer's Basket Shop, Inc. Income statement for the
Ratio analysis Complete a ratio panel on Gennifer’s Basket Shop, Inc., using all ratios included in Table 2.7. Gennifer has 5,000 shares outstanding, each selling at $24 per share.
Ratio analysis Gennifer’s Basket Shop has two primary competitors, Bob’s Weave Shop and Harriet’s Container Station. The ratios for each of those firms are presented below. Based upon your work
Cash flows Describe the difference between cash flows and income. Why are we most concerned with cash flows?
Operating cash flow Your firm has total sales of $1,200. Costs are $715 and depreciation is $145. The tax rate is 35 %. The firm does not have interest expenses. What is the operating cash flow?
Cash flow identity Hariet from accounting has forgotten her finance classes from school and just said, “I don’t understand what this cash flow identity is all about. Where are the assets,
Change in NWC Gil’s Barrel Company has cash flow from assets of $162,489.Last year, they bought $334,489 worth of new long-term assets, while selling off$217,555. In addition, the firm had EBIT of
Change in NWC Suppose a firm had current assets of $13,500,000 and current liabilities of $6,590,000 in 2011. In 2012, the firm had current liabilities of$5,480,000. If the firm’s change in NWC is
Cash flow identity Is it possible for any (or all) of the three pieces of the cash flow identity to have negative values? For all that can, create a basic scenario that would explain the negative
Cash flow identity Your boss just burst into your cubicle, sweating profusely and screaming that the firm’s cash flow from assets is negative for last year.“We’re going under, we’re going
Net capital spending A firm’s cash flow from assets is 34,562. During the year, they added $78,000 in NWC. The firm had EBIT of $156,700, depreciation of $26,425, and interest of $8,779. The firm
Incremental cash flows Consider the following cash flows: sunk costs, opportunity costs, and interest expense. Should these cash flows be considered as relevant to the project?
Cash flow to creditors At the beginning of the year, long-term debt of a firm is$280 and total debt is $340. At the end of the year, long-term debt is $260 and total debt is $350. The interest paid
Cash flow from assets Jill’s Grape Vineyard, Inc., had net income last year of$126,555 from $358,000 of sales. They paid interest of $23,000 and depreciation of $9,500. The firm increased their
Project net capital spending and change in NWC Is it possible for an accepted project to require a decrease in net capital spending or net working capital? If so, what does that mean for the company?
Project expected cash flows You have been asked to obtain estimates of cash flows for a massive project the company is considering. Your head spins.Where do you start? On what number is everything
Cash flow from assets You have calculated your cash flow from assets to be$8,800. Suppose you have net capital spending of $14,000 and a decrease in NWC of $2,000. You have EBIT of $25,500 and
Project expected cash flows “I just don’t get it,” your study-mate sighs, “I’m getting a positive number for net capital spending, but you’re saying that it is really an outflow for the
Cash flow Suppose you are given the following information for Stone’s Masonry Service.(a) Create the income statement for 2011 and 2012.(b) Create the balance sheet for both 2011 and 2012.(c) What
Project expected cash flows Suppose you are considering a 7-year project with the following annual pro forma statement.In addition, the project is going to require net capital spending of 10,000 and
Project expected cash flows Your neighbor and good ole boy, Bo Duke, doesn’t understand why you don’t consider the right-hand side of the cash flow identity in estimated project expected cash
Depreciation, taxes, and interest How does depreciation affect project expected cash flows? How do taxes affect project expected cash flows? How does interest affect project expected cash flows?
Project expected cash flows Suppose Scotty’s Exotic Pets, LLC, is considering a project that has a life of 4 years and total NINV of $450,000. During the first year, the company has estimated sales
Time value of money Explain why this concept is so important in business.What are the potential pitfalls you may encounter if you fail to correctly account for the time value of money?
Future value Suppose you have $5,000 to invest. If you invest it in an account earning 5.5 % annually over the next ten years, what will it be worth at the end of those ten years?
Simple versus compound interest Briefly discuss the differences between simple and compound interest. How do these differences affect both the present and future values of cash flows?
Present value If you are to receive a lump sum payment of $1,430 in eight years, what is it worth today? Suppose the APR is 14 %, compounded annually?
Compounding versus discounting What is the difference between compounding cash flows and discounting cash flows? Give an example of when you would use each.

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