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principles corporate finance
Corporate Finance 6th Edition Jonathan Berk, Peter DeMarzo - Solutions
The Signet Corporation has issued four-month commercial paper with a $6 million face value. The firm netted $5,870,850 on the sale. What effective annual rate is Signet paying for these funds?Appendix
What is the difference between pledging accounts receivable to secure a loan and factoring accounts receivable?Appendix
The Ohio Valley Steel Corporation has borrowed $5 million for one month at a stated annual rate of 9%, using inventory stored in a field warehouse as collateral. The warehouser charges a$5000 fee, payable at the end of the month. What is the effective annual rate of this loan?Appendix
Discuss the three different arrangements under which a firm may use inventory to secure a loan.Appendix
The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $500,000. Interest on the loan will be 10% (APR, annual compounding) to be paid at the end of the year. The warehouse charges 1% of the face value of the loan,
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 loan will be repaid, expressed in days?b. What is the implied interest rate on the loan, expressed as an APR
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $35 per share and LE is trading for $25 per share, implying a premerger value of LE of approximately$4 billion. If the projected synergies are $1 billion, what is the maximum exchange ratio NFF could offer in a
Let’s reconsider part (b) of Problem 9. The actual premium that your company will pay for TargetCo will not be 20%, because on the announcement the target price will go up and your price will go down to reflect the fact that you are willing to pay a premium for TargetCo.Assume that the takeover
What inherent characteristic of corporations creates the need for a system of checks on manager behavior?Appendix
What are some examples of agency problems?Appendix
What are the advantages and disadvantages of the corporate organizational structure?Appendix
What is the role of the board of directors in corporate governance?Appendix
How does a board become captured by a CEO?Appendix
What role do security analysts play in monitoring?Appendix
How are lenders part of corporate governance?Appendix
What is a whistle-blower?Appendix
What are the advantages and disadvantages of increasing the options granted to CEOs?Appendix
Is it necessarily true that increasing managerial ownership stakes will improve firm performance?Appendix
How can proxy contests be used to overcome a captured board?Appendix
What is a say-on-pay vote?Appendix
What are a board’s options when confronted with dissident shareholders?Appendix
What is an activist hedge fund?Appendix
What is the essential tradeoff faced by government in designing regulation of public firms?Appendix
Many of the provisions of the Sarbanes-Oxley Act of 2002 were aimed at auditors. How does this affect corporate governance?Appendix
The Dodd-Frank Act requires that firms disclose whether employees and directors are permitted to hedge against declines in the firm’s stock price. Why might this matter for corporate governance?Appendix
What are the costs and benefits of prohibiting insider trading?Appendix
How do the laws on insider trading differ for merger- versus non-merger-related trading?Appendix
Are the rights of shareholders better protected in the United States or in France?Appendix
You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.25 € and the forward rate is F1 = $1.215 € . You estimate that the appropriate dollar discount rate for this cash flow is
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in the euro area.You are in Etemadi’s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are shown here:You know that the spot exchange
Etemadi Amalgamated, the U.S. manufacturing company in Problem 3, is still considering a new project in the euro area. All information presented in Problem 3 is still accurate, except the spot rate is now S = $0.85 €, about 26% lower. What is the new present value of the project in dollars?
You work for a U.S. firm, and your boss has asked you to estimate the cost of capital for countries using the euro. You know that S = $1.20 € and F1 = $1.157 €. Suppose the dollar WACC for your company is known to be 8%. If these markets are internationally integrated, estimate the euro cost of
Maryland Light, a U.S. light fixtures manufacturer, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 11%. You are in the corporate treasury department, and you need to know the comparable cost of equity in Japanese yen for a project with free cash flows that
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new bond issue in Tokyo to raise money for a new
Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in the euro area. You are in Manzetti’s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are uncorrelated to the
How do GILTI and FDII reduce the incentive for U.S. firms to shift overseas the profits due to intangible assets used to produce foreign goods?Appendix
What is the purpose of the BEAT minimum tax?Appendix
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free interest rate is 4.5%, what is the implied credit spread for Russian government bonds?Appendix
Assume that in the original Ityesi example in Table 31.1, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping the cost of sales, operating expenses, capital expenditures and depreciation expenses unchanged (and in pounds), and assuming
Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year.You are trying to decide whether to open the office now or in a year. Construct the decision tree that shows the
Consider the United Studios example in Section 22.2. Suppose United has the rights to produce the first film, but has not yet purchased the sequel rights.a. How much are the sequel rights worth to United?b. Suppose United can purchase the sequel rights now for $30 million. Alternatively, United can
Using the information in Problem 2, rework the problem assuming you find out the size of the Everlasting Gobstopper market one year after you make the investment. That is, if you do not make the investment, you do not find out the size of the market. Construct the decision tree that shows the
Describe the benefits and costs of delaying an investment opportunity.Appendix
Consider again the electric car dealership in Section 22.3. Suppose the current value of a dealership is $5 million because the first-year free cash flow is expected to be $500,000 rather than$600,000. What is the beta of a corporation whose only asset is a one-year option to open a dealership?
What decision should you make in Problem 2 if the one-year cost of capital is 15.44% and the profits last forever?Appendix
Repeat Problem 14, but this time assume that all the probabilities are risk-neutral probabilities, which means the cost of capital is always the risk-free rate and risk-free rates are as follows: The current interest rate for a risk-free perpetuity is 8%; in one year, there is a 64.375% chance that
You own a wholesale plumbing supply store. The store currently generates revenues of $1 million per year. Next year, revenues will either decrease by 10% or increase by 5%, with equal probability, and then stay at that level as long as you operate the store. You own the store outright. Other costs
An original silver dollar from the late eighteenth century consists of approximately 24 grams of silver. At a price of $0.19 per gram ($6 per troy ounce), the silver content of the coin is worth about $4.50. Assume that these coins are in plentiful supply and are not collector’s items, so they
What implicit assumption is made when managers use the equivalent annual benefit method to decide between two projects with different lives that use the same resource?Appendix
Assume that the project in Example 22.5 pays an annual cash flow of $100,000 (instead of$90,000).a. What is the NPV of investing today?b. What is the NPV of waiting and investing tomorrow?c. Verify that the hurdle rate rule of thumb gives the correct time to invest in this case.Appendix
Assume that the project in Example 22.5 pays an annual cash flow of $80,000 (instead of $90,000).a. What is the NPV of investing today?b. What is the NPV of waiting and investing tomorrow?c. Verify that the hurdle rate rule of thumb gives the correct time to invest in this case.Appendix
What are some of the alternative sources from which private companies can raise equity capital?Appendix
What are the advantages and the disadvantages to a private company of raising money from a corporate investor?Appendix
Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture
Your robotic automation start-up, Kela Controls, has raised capital as follows:a. How much did Kela raise in each round?b. Assuming no other securities were issued, what fraction of the firm’s shares were held by common shareholders (founders and employees) after each round?c. What is the
Beru.com recently raised $5 million with a pre-money value of $9 million. They are seeking to raise another $6 million. What is the largest fraction of the firm they can offer and avoid a down round?Appendix
BitBox has raised $10 million in a Series A round with $40 million post-money value and a 1.5x liquidation preference, and $25 million in a Series B round with a $75 million post-money value and a 3x liquidation preference plus seniority over Series A. What will Series A, Series B, and common
What are the main advantages and disadvantages of going public?Appendix
Do underwriters face the most risk from a best-efforts IPO, a firm commitment IPO, or an auction IPO? Why?Appendix
Roundtree Software is going public using an auction IPO. The firm has received the following bids:Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will the winning auction offer price be?Appendix Price ($) 14.00 Number of Shares 100,000 13.80 200,000 13.60 500,000 13.40
Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds:Currently, it is 2023 and you need to raise additional
What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing?Appendix
Margoles Publishing recently completed its IPO. The stock was offered at a price of $14 per share. On the first day of trading, the stock closed at $19 per share. What was the initial return on Margoles? Who benefited from this underpricing? Who lost, and why?Appendix
Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of this fee?Appendix
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 per share.■ No PIPE investors.a. What is the size of the promote (number of shares in millions)?b.
Consider the same setting as Problem 18, but suppose instead 80% of the shareholders redeem their shares, and no warrants are exercised.a. What is the amount of cash per share contributed by the SPAC in that case?b. If the target is offered 300 million shares, what is the implied valuation of the
Insight Partners created a SPAC with units priced at $10/share. Each unit consists of 1 share of common stock plus a 3/10 of a warrant with a strike price of $11.50. Insight issued 10 million units to investors. The partners also contributed $3 million in exchange for 3 million warrants;this cash
What are the advantages to a company of selling stock in an SEO using a cash offer? What are the advantages of a rights offer?Appendix
Explain some of the differences between a public debt offering and a private debt offering.Appendix
Why do bonds with lower seniority have higher yields than equivalent bonds with higher seniority?Appendix
Explain the difference between a secured corporate bond and an unsecured corporate bond.Appendix
What is the difference between a foreign bond and a Eurobond?Appendix
Describe the kinds of securities the U.S. government uses to finance the federal debt.Appendix
Suppose on January 15, 2022, the U.S. Treasury issued a five-year inflation-indexed note with a coupon of 3%. On the date of issue, the consumer price index (CPI) was 250. By January 15, 2027, the CPI had increased to 300. What principal and coupon payment was made on January 15, 2027?Appendix
On January 15, 2030, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 6%. On the date of issue, the CPI was 400. By January 15, 2040, the CPI had decreased to 300.What principal and coupon payment was made on January 15, 2040?Appendix
Describe what prepayment risk in a GNMA is.Appendix
What is the distinguishing feature of how municipal bonds are taxed?Appendix
Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond issue.Appendix
General Electric has just issued a callable 10-year, 6% coupon bond with annual coupon payments.The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $102. What is the bond’s yield to maturity and yield to call?Appendix
Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of $99. What is the bond’s yield to maturity and yield to call?Appendix
Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature.Appendix
You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?Appendix
Suppose an H1200 supercomputer has a cost of $200,000 and will have a residual market value of $60,000 in five years. The risk-free interest rate is 5% APR with monthly compounding.a. What is the risk-free monthly lease rate for a five-year lease in a perfect market?b. What would be the monthly
Suppose the risk-free interest rate is 5% APR with monthly compounding. If a $2 million MRI machine can be leased for seven years for $22,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk?Appendix
Consider a five-year lease for a $400,000 bottling machine, with a residual market value of$150,000 at the end of the five years. If the risk-free interest rate is 6% APR with monthly compounding, compute the monthly lease payment in a perfect market for the following leases:a. A fair market value
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 lease affect Sunnyfield’s EBIT and net income in the first year if the lease is classified as (a)
Your firm is considering leasing a $50,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9% APR with monthly compounding.Classify each lease below as a finance lease or operating lease, and explain why:a. A four-year fair market value
Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the fabricator for $130,000 per year for seven years. Craxton’s tax rate is 25%. (Assume the fabricator has no
Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based computing. In total, it will purchase$48 million in new equipment. This equipment will qualify for accelerated depreciation: 20%can be expensed
Answer the following questions:a. What is the difference between a firm’s cash cycle and its operating cycle?b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal?c. How will a firm’s cash cycle be affected if a firm begins to take the discounts
Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash poorly?Appendix
Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will last 10 years, at which point the full investment in net working capital will be recovered.Given an
The Green Connection had sales of $32 million in 2022, and a cost of goods sold of $20 million.A simplified balance sheet for the firm appears below:a. Calculate The Green Connection’s net working capital in 2022.b. Calculate the cash conversion cycle of The Green Connection in 2022.c. The
Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.Appendix
Your supplier offers terms of 1/10, Net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45?Appendix
The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide.The owner of the firm is investigating the benefit of employing a billing firm to do her billing and collections. Because the billing firm specializes in these services, collection float will be reduced by
What are the three steps involved in establishing a credit policy?Appendix
The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?Appendix
The Mighty Power Tool Company has the following accounts on its books:The firm extends credit on terms of 1/15, Net 30. Develop an aging schedule using 15-day increments through 60 days, and then indicate any accounts that have been outstanding for more than 60 days.Appendix Customer Amount Owed
What is meant by “stretching the accounts payable”?Appendix
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