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principles corporate finance
Corporate Finance 3rd Global Edition Peter Demarzo, Jonathan Berk - Solutions
Explain the difference between an S corporation and a C corporation.Appendix
You are a shareholder in a C corporation. The corporation earns $2 per share before taxes.Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is
Repeat Problem 6 assuming the corporation is an S corporation.Appendix
You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make.Appendix
When a pharmaceutical company develops a new drug, it often receives patent protection for that medication, allowing it to charge a higher price. Explain how this public policy of providing patent protection might help align the corporation’s interests with society’s interests.Appendix
Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated to act this way?Appendix
Suppose you are considering renting an apartment. You, the renter, can be viewed as an agent while the company that owns the apartment can be viewed as the principal. What principal–agent conflicts do you anticipate? Suppose, instead, that you work for the apartment company.What features would
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will
Are hostile takeovers necessarily bad for firms or their investors? Explain.Appendix
What is the difference between a public and a private corporation?Appendix
Describe the important changes that have occurred in stock markets over the last decade.Appendix
Explain why the bid-ask spread is a transaction cost.Appendix
Explain how the bid-ask spread is determined in most markets today.Appendix
The following quote on Tesla stock appeared on June 29, 2022, on Barchart.com:If you wanted to buy Tesla, what price would you pay? How much would you receive if you wanted to sell Tesla?Appendix Tesla Inc (TSLA) 674.85-23.14 (-3.32%) 11:58 ET [NASDAQ] 674.62 x 8 674.99 x 299 REALTIME by (Cboe BZX)
Suppose the following orders are received by an exchange for AT&T stock:■ Limit Order: Buy 200 shares at $25■ Limit Order: Sell 200 shares at $26■ Limit Order: Sell 100 shares at $25.50■ Limit Order: Buy 100 shares at $25.25a. What are the best bid and ask prices for AT&T stock?b. What is
Why has finance historically been an early adopter of new technology?Appendix
Choose 3 of the following companies and describe how they are utilizing new technology in the provision of financial services.a. Wealthfrontb. LendingTreec. Metromiled. Acornse. Robinhoodf. Stripe g. Klarna h. SoFi i. Lemonade Appendix
Identify a new fintech startup and describe its business model. What new services or features does it provide to its customers? How does it earn its revenue? How does it differ from traditional providers?Appendix
What does the historical relation between volatility and return tell us about investors’ attitude toward risk?
Given a positive investment in every asset in a portfolio, will the expected return on the portfolio be greater or less than that on every asset in the portfolio?
Consider two local banks. Bank A has 100 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of
Given a positive investment in every asset in a portfolio, is it possible for the standard deviation on the portfolio to be less than that on every asset in it? What about for the portfolio beta?
Suppose your brother works for Citibank and you work for a department store. Which company is more likely to be susceptible to systematic risk?
Historically, which types of investments have had the highest average returns and which have been the most volatile from year to year? Is there a relation?
What is the relation between risk and return for large portfolios? How are individual stocks different?
Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:After 5 years, the free cash flows are expected to grow at the industry average of 4% per year. Using the discounted free cash flow model and a weighted average cost of capital of 14%:a. Estimate
Covan, Inc., is expected to have the following free cash flows:a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, what should its stock price be?b. Covan reinvests all its FCF and has no plans to add debt or change its cash
Suppose that in July 2013, Nike had EPS of $2.52 and a book value of equity of $12.48 per share.a. Using the average P/E multiple in Table 10.1, estimate Nike’s share price.b. What range of share prices do you estimate based on the highest and lowest P/E multiples in Table 10.1?c. Using the
Suppose that in July 2013, Nike had sales of $25,313 million, EBITDA of $3,254 million, excess cash of $3,337 million, $1,390 million of debt, and 893.6 million shares outstanding.a. Using the average enterprise value to sales multiple in Table 10.1, estimate Nike’s share price.b. What range of
You have a $100,000 portfolio made up of 15 stocks. You trade each stock five times this year and each time you trade, you pay about $30 in commissions and spread. You have no special knowledge, so you earn only the average market return of 12% on your investments. How much lower will your total
Explain how the profitability index is computed and describe the information this measure provides. What is the relationship between NPV and the profitability index?
You have an opportunity to invest $70,000 now in return for $80,000 in one year. If your cost of capital is 6%, what is the NPV of this investment?
You have an opportunity to invest $125,000 now in return for $50,000 in one year and $90,000 in two years. If your cost of capital is 12%, what is the NPV of this investment?
Your storage firm has been offered $280,000 in one year to store some goods for one year. Assume your costs are $248,000, payable immediately, and the cost of capital is 15%. Should you take the contract?
You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $40 million today and $25 million in one year. The government will pay you $80 million in one year upon the building’s completion. Assume the cost of capital
You have been offered a unique investment opportunity. If you invest $45,000 today, you will receive $2,500 one year from now, $7,500 two years from now, and $50,000 ten years from now.a. What is the NPV of the opportunity if the cost of capital is 8% per year? Should you take the opportunity?b.
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $55,000 at the end of each of the next three years. The opportunity requires an initial investment of $30,000 plus an additional investment at the end of the second year of $35,000.
Your factory has been offered a contract to produce a part for a new printer. The contract would be for five years and your cash flows from the contract would be $3 million per year. Your up-front setup costs to be ready to produce the part would be $6.5 million. Your cost of capital for this
You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $8,400 and will be posted for one year. You expect that it will generate additional free cash flow of $1,200 per month. What is the payback period?
Does the IRR rule agree with the NPV rule in Problem 8?
How many IRRs are there in part(a) of Problem 10? Does the IRR rule give the correct answer in this case?
How many IRRs are there in part(b) of Problem 10? Does the IRR rule work in this case?
You own a coal mining company and are considering opening a new mine. The mine will cost $120 million to open. If this money is spent immediately, the mine will generate $20 million for the next 10 years. After that, the coal will run out and the site must be cleaned and maintained at environmental
You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $250 million. Once this investment is made, the mine is expected to produce revenues of $30 million per year for the next 20 years. It will
You are considering making a movie. The movie is expected to cost $10 million up front and take a year to produce. After that, it is expected to make $5 million in the year it is released and $2 million for the following four years. What is the payback period of this investment? If you require a
You are considering the following projects and can take only one. Your cost of capital is 11%.a. What is the NPV of each project at your cost of capital?b. What is the IRR of each project?c. At what cost of capital are you indifferent between the two projects?d. What should you do? 0 1 2 3 4 A -100
Hassle–Free Web is bidding to provide Web hosting services for Hotel Lisbon. Hotel Lisbon pays its current provider $10,000 per year for hosting its Web page, handling transactions, etc. Hassle-Free figures that it will need to purchase equipment worth $15,000 up front and then spend $2000 per
Why does an increase in net working capital represent a cash outflow?
How does scenario analysis differ from sensitivity analysis?
Why do real options increase the NPV of a project?
What is the difference between an opportunity cost and sunk cost with regard to capital budgeting?
What is the significant difference between scenario analysis and sensitivity analysis?
Daily Enterprises is purchasing an $8 million machine. It will cost $70,000 to transport and install it. The machine has a depreciable life of eight years and will have no salvage value. If Daily uses straight-line depreciation, what are the depreciation expenses associated with this machine?
The machine in Problem 1 will generate incremental revenues of $5 million per year along with incremental costs of $2.3 million per year. If Daily’s marginal tax rate is 40%, what are the incremental earnings associated with the new machine?
Hyperion, Inc., currently sells its latest high-speed color printer, the Hyper 500, for $280. It plans to lower the price to $230 next year. Its cost of goods sold for the Hyper 500 is $180 per unit, and this year’s sales are expected to be 25,000 units.a. Suppose that if Hyperion drops the price
You have a depreciation expense of $450,000 and a tax rate of 40%. What is your depreciation tax shield?
You have forecast pro forma earnings of $2,800,000. This includes the effect of $500,000 in depreciation. You also forecast a decrease in working capital of $410,000 that year. What is your forecast of free cash flows for that year?
Your pro forma income statement shows sales of $2,300,000, cost of goods sold as $980,000, depreciation expense of $600,000, and taxes of $216,000 due to a tax rate of 30%. What are your pro forma earnings? What is your pro forma free cash flow?
Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. Its chief financial officer has developed the following estimates (in millions of dollars) (see
In the HomeNet example from the chapter, its receivables are 15% of sales and its payables are 15% of COGS. Forecast the required investment in net working capital for HomeNet assuming that sales and cost of goods sold (COGS) will be as follows (see MyFinanceLab for the data in Excel format): 1
Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars) (see MyFinanceLab for the data in Excel format):a. What are the
Recall the HomeNet example from the chapter. Suppose HomeNet’s lab will be housed in warehouse space that the company could have otherwise rented out for $200,000 per year during years 1 through 4.How does this opportunity cost affect HomeNet’s incremental earnings?
You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report on your desk, and complains, “We owe these consultants $1 million for this report, and I am not sure their
Why must real options have positive value?
What kind of real option does the XC–900 machine provide to Billingham in Problem 30?
What implicit assumptions do we make when valuing a firm using multiples based on comparable firms?
Why would excessive trading lead to lower realized returns?
On March 31, 2013, Vodafone had 49,190 million shares outstanding, and these shares are trading for a price of £1.86 per share. What is Vodafone’s market capitalization? How does the market capitalization compare to Vodafone’s book value of equity?
In June 2013, H. J. Heinz Co. (HNZ) had 320.7 million shares outstanding, a share price of $72.36, a book value of debt of $4.98 billion, and cash of $1.1 billion. What was Heinz’s market capitalization (its market value of equity)? What was its enterprise value?
Suppose Vodafone had an additional £100 million depreciation expense in 2013. If Vodafone's tax rate on pretax income is 26%, what would be the impact of this expense on Vodafone’s earnings? How would it impact Vodafone’s cash at the end of the year?
Compute Vodafone’s accounts payable, inventory days, and inventory turnover for 2013.
Assess Vodafone’s ability to meet its interest obligations by calculating interest coverage ratios using both EBIT and EBITDA.
Consider the following data as of December 2011 for Deutsche Telekom and France Telecom (in € billion):Compare Deutsche Telekom’s and France Telecom’s EBIT margins, net profit margins, P/E ratios, and the ratio of enterprise value to EBIT and sales. Deutsche Telekom France Telecom Sales 58.7
Assess how Vodafone’s ability to use its assets effectively has changed in the last year by computing the change in its return on assets.
The following table contains information about Deutsche Telekom and France Telecom. Compute their respective ROEs and then determine how much Deutsche Telekom would need to increase its profit margin in order to match France Telecom’s ROE. Profit Margin Asset Turnover Equity Multiplier Deutsche
What is liquidity? What are the compromises involved in being a high-liquidity firm and a low-liquidity firm?
Under what circumstances does a firm’s current ratio increase while its quick ratio decreases? Does it signify an improvement in liquidity?
What is the purpose of the statement of financial position or balance sheet?
How can you use the statement of financial position to assess the health of a firm?
How did accounting fraud contribute to the collapse of Enron in the U.S.?
What are the four main financial statements? What checks are there on the accuracy of these statements?
What is meant by GAAP and who oversees it?
Find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources:a. From the company’s Web page.b. From the SEC Web site (www.sec.gov).c. From the Yahoo! Finance Web site (finance.yahoo.com).d. From at least one other source.
Consider the following potential events that might have taken place at Vodafone Group Plc on 31 March 2013. For each one, indicate which line items in Vodafone’s balance sheet would be affected and by how much. Also indicate the change to Vodafone’s book value of equity. (Ignore taxation.)a.
What was the change in Vodafone’s book value of equity from 2012 to 2013 according to Table 2.1? Does this imply that the market price of Vodafone’s shares decreased in 2013? Explain.
Use Google Finance (www.google.com/finance) to find the balance sheet data for Qualcomm (QCOM) as of the end of September 2012.a. How much did Qualcomm have in cash and short-term investments?b. What were Qualcomm’s total accounts receivable?c. What were Qualcomm’s total assets?d. What were
See Table 2.5 showing financial statement data and share price data for Mydeco Corp.a. By what percentage did Mydeco’s revenues grow each year from 2010 to 2013?b. By what percentage did net income grow each year?c. Why might the growth rates of revenues and net income differ?Table 2.5 Mydeco
See Table 2.5 showing financial statement data and share price data for Mydeco Corp. Suppose Mydeco repurchases 2 million shares each year from 2010 to 2013. What would its earnings per share be in 2013?
See Table 2.5 showing financial statement data and share price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for \($12\) million at the end of 2010, and this equipment was depreciated by \($4\) million per year in 2011, 2012, and 2013. Given Mydeco’s tax rate of 35%,
See Table 2.5 showing financial statement data and share price data for Mydeco Corp. Suppose Mydeco’s costs and expenses had been the same fraction of revenues in 2010– 2013 as they were in 2009. What would Mydeco’s EPS have been each year in this case?
Suppose a firm’s tax rate is 40%.a. What effect would a \($5\) million operating expense have on this year’s earnings? What effect would it have on next year’s earnings?b. What effect would a \($5\) million capital expense have on this year’s earnings if the capital is depreciated at a rate
Local Co. has sales of \($12\) million and cost of sales of \($5\) million. Its selling, general, and administrative expenses are \($850,000\) and its research and development is \($1.5\) million. It has annual depreciation charges of \($1.2\) million and a tax rate of 40%.a. What is Local’s
If Local Co., the company in Problem 23, had an increase in selling expenses of $0.5 million, how would that affect each of its margins?
If Local Co., the company in Problem 23, had an interest expense of $500,000, how would that affect each of its margins?
Chutes & Co. has an interest expense of \($1.8\) million and an operating margin of 15% on total sales of \($50\) million. What is Chutes’ interest coverage ratio?
Ladders, Inc. has a net profit margin of 8% on sales of \($70\) million. It has book value of equity of \($50\) million and total liabilities with a book value of \($40\) million. What is Ladders’ ROE? ROA?
JPJ Corp has sales of \($6\) million, accounts receivable of \($950,000\), total assets of \($25\) million (of which \($18\) million are fixed assets), inventory of \($860,000\), and cost of goods sold of \($2,200,000\). What is JPJ’s accounts receivable days? Fixed asset turnover? Total asset
If JPJ Corp (the company from the previous question) is able to increase sales by 12% but keep its total and fixed asset growth to only 8%, what will its new asset turnover ratios be?
In January 2013, United Airlines (UAL) had a market capitalization of \($8.0\) billion, debt of \($13.2\) billion, and cash of \($4.8\) billion. United Airlines had revenues of \($37.2\) billion. Southwest Airlines (LUV) had a market capitalization of \($7.6\) billion, debt of \($3.2\) billion,
Consider a retail firm with a net profit margin of 5.5%, a total asset turnover of 2.4, total assets of \($53\) million, and a book value of equity of \($25\) million.a. What is the firm’s current ROE?b. If the firm increased its net profit margin to 6%, what would its ROE be?c. If, in addition,
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