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principles corporate finance

Questions and Answers of Principles Corporate Finance

Suppose you currently have $5000 in your savings account, and your bank pays interest at a rate of 0.5% per month. If you make no further deposits or withdrawals, how much will you have in the
Your firm spends $5000 every month on printing and mailing costs, sending statements to customers.If the interest rate is 0.5% per month, what is the present value of eliminating this cost by sending
You have just entered an MBA program and have decided to pay for your living expenses using a credit card that has no minimum monthly payment. You intend to charge $1000 per month on the card for the
Your credit card charges an interest rate of 2% per month. You have a current balance of$1000, and want to pay it off. Suppose you can afford to pay off $100 per month. What will your balance be at
You have decided to buy a perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If you initially put $1000 into the bond, what is the payment every
You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The
You would like to buy the house and take the mortgage described in Problem Appendix
You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon
You have just made an offer on a new home and are seeking a mortgage. You need to borrow$600,000.a. The bank offers a 30-year mortgage with fixed monthly payments and an interest rate of 0.5% per
Suppose you take the 30-year mortgage described in Problem 39, part (a). How much will you still owe on the mortgage after 15 years?Appendix
You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment
You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are Appendix
Today is your 30th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the
You realize that the plan in Problem 42 has a flaw. Because your income will increase over your lifetime, it would be more realistic to save less now and more later. Instead of putting the same
You have just turned 30 years old, have just received your MBA, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as follows: Every
You estimate that to live comfortably in retirement, you will need $100,000 per year starting at the end of the first year of retirement and ending on your 100th birthday. You will contribute the
Problem 45 is not very realistic because most retirement plans do not allow you to specify a fixed amount to contribute every year. Instead, you are required to specify a fixed percentage of your
You have an investment opportunity that requires an initial investment of $5000 today and will pay $6000 in one year. What is the IRR of this opportunity?Appendix
Suppose you invest $2000 today and receive $10,000 in five years.a. What is the IRR of this opportunity?b. Suppose another investment opportunity also requires $2000 up front, but pays an equal
You are shopping for a car and read the following advertisement in the newspaper: “Own a new Spitfire! No money down. Four annual payments of just $10,000.” You have shopped around and know that
You bought some stock a year ago at \($80\) per share and sold it today at \($95\) per share. It pays a \($2\) per share dividend today. What was your realized return?
Repeat Problems 1 and 2 assuming instead that the stock fell $12 to $68.a. Is your capital gain different? Why or why not?b. Is your dividend yield different? Why or why not?
You have just purchased a share of stock for \($35\). The company is expected to pay a dividend of \($1.50\) per share in exactly one year. If you want to earn a 12% return on your investment, what
Use the data in SBUX_GOOG.xlsx on MFL to answer the following questions:a. What is the return for SBUX over the period without including its dividends? With the dividends?b. What is the return for
Ten annual returns are listed in the following table.a. What is the arithmetic average return over the 10-year period?b. What is the geometric average return over the 10-year period?c. If you
Using the data in the following table, calculate the return for investing in this stock from January 1 to December 31.Prices are after the dividend has been paid (see MyFinanceLab for the data in
What was your dividend yield from investing in the stock in Problem 11? What was your capital gain?
Explain the difference between the arithmetic average return you calculated in Problem 13a and the geometric average return you calculated in Problem 13b. Are both numbers useful? If so, explain why.
Calculate the 95% prediction intervals for the four different investments included in Figures 11.3 and 11.4.
If returns of S&P 500 stocks are normally distributed, what range of returns would you expect to see 95% of the time? Base your answer on Figures 11.3 and 11.4.
You observe a portfolio for ten years and determine that its average return is 15% and the standard deviation of its returns is 25%. Can you be 95% confident that this portfolio will not lose more
Using the data in Critical Thinking Question 6, calculate the following:a. The expected overall payoff of each bankb. The standard deviation of the overall payoff of each bank
You are considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times
Today is July 31, 2013, and you have just started your new job with a financial planning firm. In addition to studying for all your license exams, you have been asked to review a portion of a
What is the security market line?
What is the most important difference between a corporation and all other organizational forms?Appendix
What does the phrase limited liability mean in a corporate context?Appendix
Which organizational forms give their owners limited liability?Appendix
What are the main advantages and disadvantages of organizing a firm as a corporation?Appendix
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
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
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
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
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
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
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■
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.
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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,
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
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
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.
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
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

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