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principles corporate finance
Questions and Answers of
Principles Corporate Finance
How would you evaluate the comments by Simpson’s supervisor about not using the IRR and about using the EAA? The supervisor is:A. incorrect about both.B. correct about IRR and incorrect about
If the outlay is lower by the amount that Simpson suggests, the project NPV should increase by an amount closest to:A. €0.09 billion.B. €0.14 billion.C. €0.17 billion.Barbara Simpson is a
A switch from straight-line to accelerated depreciation would:A. increase the NPV and decrease the first year operating income after taxes.B. increase the first year operating income after taxes and
Is Simpson’s estimate of the NPV of the project correct?A. Yes.B. No. The NPV is –€0.01 billion.C. No. The NPV is €0.34 billion.Barbara Simpson is a sell-side analyst with Smith Riccardi
Simpson should estimate the initial outlay and the terminal year nonoperating cash flow, respectively, to be closest to:A. €1.50 billion and €0.70 billion.B. €1.90 billion and €0.70
Simpson should estimate the after-tax operating cash flow for Years 1–6 and 7–12, respectively, to be closest to:A. €0.31 billion and €0.21 billion.B. €0.31 billion and €0.25 billion.C.
Is Bo¨hm most likely correct regarding Comment C that it is acceptable to use either NPV or IRR and Comment D about the immediate impact on EPS?A. No for both comments.B. Yes for both comments.C. No
Is Bo¨hm most likely correct regarding Comment A about the \($10\) million investment and Comment B about using the after-tax cost of debt?A. No for both comments.B. Yes for both comments.C. No for
Are Goldberg’s comments about real options correct?A. No for Comment #1 and Comment #2.B. No for Comment #1 and Yes for Comment #2.C. Yes for Comment #1 and No for Comment #2.Maximilian Bo¨hm is
Are Robinson’s first two observations, respectively, correct?A. Yes for both observations.B. No for the first and Yes for the second.C. Yes for the first and No for the second.Mun Hoe Yip is
Which of the following would be Yip’s most appropriate response to Robinson’s third observation?A. The market value added is not equal to the present value of EP, although the market value of
What is a company’s purpose, and what steps can it take to put purpose into practice?
In 1973, Gordon Moore, one of Intel’s founders, predicted that the number of transistors that could be placed on a single silicon chip would double every 18 months, equivalent to an annual growth
If you invest $100 at an interest rate of 15%, how much will you have at the end of eight years?
Compute the future value of a $100 investment for the following combinations of rates and times.a. r = 6%, t = 10 years.b. r = 6%, t = 20 years.c. r = 4%, t = 10 years.d. r = 4%, t = 20 years.
a. If the present value of $139 is $125, what is the discount factor?b. If that $139 is received in year 5, what is the interest rate?
Lofting Snodbury is considering investing in a new boring machine. It costs $380,000 and is expected to produce the following cash flows:If the cost of capital is 12%, what is the machine’s NPV?
A project produces a cash flow of $432 in year 1, $137 in year 2, and $797 in year 3. If the cost of capital is 15%, what is the project’s PV? If the project requires an investment of $1,200, what
In Figure 13.1, would it have been better to have deducted dividends from the net cash raised from shareholders? Should we then have deducted interest payments from net cash raised from debtholders?
The following table shows the nominal returns on Brazilian stocks and the rate of inflationa. What was the standard deviation of the market returns?b. Calculate the average real return.
What did Milton Friedman argue in 1970, and how did he support his argument?
Do you think firms rely too much on internal funds? Would it be better if they had to go back to shareholders when they needed cash?
Who are the main stakeholders of a company?
Name two parties that will protect stakeholder welfare under shareholder capitalism.
Why is enlightened shareholder value referred to as “enlightened”?
What is the objective of the corporation undera. Shareholder capitalism?b. Stakeholder capitalism?
How did the Business Roundtable change its Statement on the Purpose of a Corporation in 2019?
Name two advantages of having shareholder value as the only goal of a corporation.
Give three reasons stakeholder capitalism might be more effective than shareholder capitalism.
What is the definition of a responsible business?
What principles can a responsible business use to make decisions?
What does shareholder primacy mean? Give examples of countries where shareholder primacy is in operation.
Can companies invest in stakeholders under shareholder primacy?
a. What is a benefit corporation?b. What is a B Corp?c. How do they differ?
Examine some recent examples of divestitures. What do you think were the underlying reasons for them? How did investors react to the news?
How do you think mergers should be regulated? For example, what defenses should target companies be allowed to employ? Should managers of target firms be compelled to seek out the highest bids?
Examine a hostile acquisition and discuss the tactics employed by both the predator and the target companies. Do you think that the management of the target firm was trying to defeat the bid or to
Examine a recent merger in which at least part of the payment made to the seller was in the form of stock. Use stock market prices to obtain an estimate of the gain from the merger and the cost of
Look up current interest rates offered by short-term investment alternatives. Suppose that your firm has $1 million excess cash to invest for the next two months. How would you invest this cash? How
Look up some firms that have been in trouble. Plot the changes over the preceding years in the principal financial ratios. Are there any patterns?
Select five companies and, using their financial statements, compare the days in inventory and average collection period for receivables. Can you explain the differences between the companies?
Look up the latest financial statements for a company of your choice and calculate the following ratios for the latest year:a. Return on capital.b. Return on equity.c. Operating profit margin.d.
a. How many U.S. dollars are worth one Canadian dollar today?b. How many Canadian dollars are worth one U.S. dollar today?c. Suppose that you arrange today to buy Canadian dollars in 90 days. How
Check out the delayed quotes for Amazon options for different exercise prices and maturities. Take the mean of the bid and ask prices.a. Confirm that higher exercise prices mean lower call prices and
Take another look at the valuations of Rio in Tables 19.1 and 19.2. Now use the live spreadsheets in Connect to show how Rio?s value depends on: a. The forecasted long-term growth rate. b. The
On February 29, 2019, when PDQ Computers announced bankruptcy, its share price fell from $3.00 to $.50 per share. There were 10 million shares outstanding. Does that imply bankruptcy costs of 10 ×
Look up a recent IPO on biz.yahoo.com/ipo and then use the Edgar database to find the prospectus. (You may find it easiest to look up the company on finance.yahoo.com and use the link to SEC filings.
An aggregate balance sheet for U.S. manufacturing corporations can be found on www.census.gov/econ/qfr. Find the balance sheet for the latest year. What was the ratio of long-term debt to long-term
Use data from finance.yahoo.com to work out the financing proportions given in Figure 14.1 for a particular industrial company for some recent year. Figure 14.1 200.0 150.0 - 100.0 - 50.0 - 0.0
Use finance.yahoo.com to download daily prices for five U.S. stocks for a recent five-year period. For each stock, construct a scatter diagram of successive returns as in Figure 13.1. Calculate the
Identify a sample of food companies. For example, you could try Campbell Soup (CPB), General Mills (GIS), Kellogg (K), Mondelez International (MDLZ), and Tyson Foods (TSN).a. Estimate beta and R2 for
a. Download up to 10 years of monthly returns for 10 different stocks and enter them into the Excel program. Enter some plausible figures for the expected return on each stock and find the set of
Calculate the NPV of the proposed overhaul of the Vital Spark, with and without the new engine and control system. To do the calculation, you will have to prepare a spreadsheet table showing all
Look up Intel (INTC), Oracle (ORCL), and HP (HPQ) on finance .yahoo.com. Rank the companies’ forward P/E ratios from highest to lowest. What are the possible reasons for the different ratios? Which
Look up General Mills (GIS), Kellogg (K), Campbell Soup (CPB), and Seneca Foods (SENEA).a. What are the current P/E and P/B ratios for these food companies? What are the dividend and dividend yield
Go to finance.yahoo.com and get trading quotes for IBM.a. What is the latest IBM stock price and market cap?b. What is IBM’s dividend payment and dividend yield?c. What is IBM’s trailing P/E
The websites of The Wall Street Journal (www.wsj.com) and the Financial Times (www.ft.com) are wonderful sources of market data. You should become familiar with them.Use www.wsj.com to answer the
Go to finance.yahoo.com and look up “Analyst Estimates” for Apple (AAPL). You should find earnings per share (EPS) for the current year, the percentage annual growth rate of EPS for the past five
Find the terms and conditions of a recent bond issue and compare them with those of the AMAT issue.
Problem 21 considered an arbitrage opportunity involving an American option. Suppose that this option was a European call. Show that there is a similar possible arbitrage profit.Problem 21Pintail’s
A bond’s credit rating provides a guide to its price. In the fall of 2017 Aaa bonds yielded 3.6% and Baa bonds yielded 4.3%. If some bad news causes a 10% five-year bond to be unexpectedly
The one-year spot interest rate is r1 = 5% and the two-year rate is r2 = 6%. If the expectations theory is correct, what is the expected one-year interest rate in one year’s time?
The following table shows the prices of a sample of Narnian Treasury strips in December 2018. Each strip makes a single payment of $1,000 at maturity.a. Calculate the annually compounded, spot
A 6% six-year bond yields 12% and a 10% six-year bond yields 8%. Calculate the six-year spot rate. Assume annual coupon payments. (Hint: What would be your cash flows if you bought 1.2 10% bonds?)
In November 2017, Treasury 4¾s of 2041 offered a semiannually compounded yield to maturity of 2.6%. Recognizing that coupons are paid semiannually, calculate the bond’s price.
You are contemplating membership in the St. Swithin’s and Ancient Golf Club. The annual membership fee for the coming year is $5,000, but you can make a single payment today of $12,750, which will
a. If the present value of $139 is $125, what is the discount factor?b. If that $139 is received in year 5, what is the interest rate?
In the five years preceding the end of 2016, the price of Amazon shares rose by 34% a year. If you had invested $100 in Amazon at the beginning of this period, how much would you have by the end of
In 2017, Leonardo da Vinci’s painting Salvator Mundi sold for a record $450.3 million. In 1958, it sold for $125, equivalent in purchasing power to about $1,060 at 2017 prices. The painting was
The Finance in Practice box in Section 1-2 describes three corporate practices that have been criticized as unethical. Select one of these and discuss at what point (if any) does the practice slide
Most managers have no difficulty avoiding blatantly dishonest actions. But sometimes there are gray areas, where it is debatable whether an action is unethical and unacceptable. Suggest an important
Do large blockholders increase company value? Does your answer depend on the structure of the financial system?
It is suggested that family control allows the firm to focus on the long term interests of the firm. What do you think are the offsetting disadvantages of family ownership?
True/false?a. In China, networks of companies are known as keiretsus.b. Dual-class equity prevents any one group of shareholders from maintaining control.c. Large firms in Germany have two boards of
Generally in most Anglo-Saxon economies, managers have an obligation to act in the interests of shareholders. In other countries, they may have wider obligations to society as a whole. What are the
True/ false?a. Direct holdings of equity by households are larger in Japan than in the United States.b. Bank financing of corporations is relatively important in Japan and continental Europe.c.
What are the government’s motives in a privatization?
True or false?a. Under purchase accounting any difference between the amount paid for the target’s assets and their book value is shown as goodwill in the merged company’s balance sheet.b. In a
Look again at Problem 7, which asked you to assume that the 6.5% interest rate was the opportunity cost of capital. Was that a reasonable assumption? What should the opportunity cost of capital
Suppose you are a wealthy individual paying 37% tax on interest income, 20% on dividends, and zero tax on municipal notes. What is the expected after-tax yield on each of the following investments?a.
What is a territorial corporate income tax system? How does it differ from the U.S. tax system that was in place before 2018? Explain why the U.S. system in 2017 and earlier forced U.S companies to
True or false?a. “Money market” refers to the system of electronic cash transfers between corporations and within the banking industry.b. The eurodollar market is a market for exchanging dollars
Polar Express Railroad keeps a $5 million inventory of spare parts on hand for repairing unexpected breakdowns and equipment failures. The inventory is held in one centralized warehouse at a storage
Take another look at Example 30.1. Suppose a rise in interest rates increases carrying cost per ton from $55 to $75. What is the effect on economic order quantity? Data from Example 30.1 FIGURE
Central banks pushed short-term interest rates down to extremely low levels in the financial crisis that started in 2008. Some Treasury bill rates in Europe were negative. Other things equal, how
True or false?a. Just-in-time inventory systems reduce the cost of managing inventory to zero.b. Companies hold larger inventories of finished goods when customer demand fluctuates unpredictably.c.
True or false?a. Companies with negative net working capital are usually in financial trouble.b. Principal payments on long-term debt are shown as current liabilities if due within the next 12
Take a look at Figure 30.1. Why do food stores hold large inventories? Why do railroads hold small inventories? Why do you think that pharmaceutical companies hold so much cash and securities? Answer
Table 29.18 shows the 2019 financial statements for the Executive Cheese Company. Annual depreciation is 10% of fixed assets at the beginning of the year, plus 10% of new investment. The company
Forecast growth rate a. What is the internal growth rate of Eagle Sport (see Problem 25) if the dividend payout ratio is fixed at 50% and the equity-to-asset ratio is fixed at two-thirds? b. What
What is the maximum possible growth rate for Archimedes (see Problem 24) if it maintains its return on equity, the payout ratio is set at 50% and a. No external debt or equity is to be issued?b.
The financial statements of Eagle Sport Supply are shown in Table 29.17. For simplicity, “Costs” include interest. Assume that Eagle’s assets are proportional to its sales.a. Find Eagle’s
Abbreviated financial statements for Archimedes Levers are shown in Table 29.16. If sales increase by 10% in 2018 and all other items, including debt, increase correspondingly, what must be the
Table 29.15 summarizes the 2019 income statement and endyear balance sheet of Drake?s Bowling Alleys. Drake?s financial manager forecasts a 10% increase in sales and costs in 2020. The ratio of sales
In fiscal 2017 and 2016, Est?e Lauder?s financial statements included the following items. What was its cash cycle? $ millons 2017 2016 $1,479 $1,264 Inventory Receivables 1,395 1,258 Payables
Table 29.11 shows Dynamic Mattress?s year-end 2016 balance sheet, and Table 29.12 shows its income statement for 2017. Work out the statement of cash flows for 2017. Group these items into sources of
If Microcharge’s customers take on average 60 days to pay their bills, what is its receivables turnover?
a. If a firm’s assets of $10,000 represent 200 days’ sales, what is its annual sales?b. What is its asset turnover ratio?
Table 28.8 gives abbreviated balance sheets and income statements for Walmart. At the end of fiscal 2017, Walmart had 2,960 million shares outstanding with a share price of $106. The company?s
A U.S. company has committed to pay 10 million kronor to a Swedish company in one year. What is the cost (in present value) of covering this liability by buying kronor forward? The Swedish interest
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