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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

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
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,
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
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
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
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
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
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!
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
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
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
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
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
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.
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
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
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’
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
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.
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
Repeat the analysis from parts a and b in Problem 34 using Starbucks Corporation (SBUX) instead. Specifically, use Starbucks’ 2012 fiscal data, filed in September 2012. Based on the DuPont
Some balance sheet information is shown here (all values in millions of dollars) (see MyFinanceLab for the data in Excel format):a. What change in the book value of the company’s equity took place
Find online the annual report for Green Mountain Coffee Roasters (GMCR) for 2012, filed in September 2012.a. Which auditing firm certified the financial statements?b. Which officers of Green Mountain
This is your second interview with a prestigious brokerage firm for a job as an equity analyst. You survived the morning interviews with the department manager and the vice president of equity.
Define compounding and discounting.
You have $500 and a bank is offering 8% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
You expect to have $1,100 in one year. A bank is offering loans at 10% interest per year. How much can you borrow today?
Suppose you invest $25,000 in an account paying 9% interest per year.a. What is the balance in the account after 5 years? How much of this balance corresponds to “interest on interest”?b. What is
Calculate the future value of $3,000 ina. 5 years at an interest rate of 8% per year.b. 10 years at an interest rate of 8% per year.c. 5 years at an interest rate of 16% per year.*d. Why is the
What is the present value of $12,000 receiveda. 6 years from today when the interest rate is 5% per year?b. 12 years from today when the interest rate is 8% per year?c. 20 years from today when the
Your brother has offered to give you either \($15,000\) today or \($20,000\) in 12 years. If the interest rate is 8% per year, which option is preferable?
Your daughter is three years old now and will be going to college in 15 years. You would like to have \($450,000\) in a savings account to fund her education at that time. If the account promises to
You are thinking of retiring. Your retirement plan will pay you either \($320,000\) immediately on retirement or \($530,000\) ten years after the date of your retirement. Which alternative should you
You are planning to invest $85,000 in an account earning 7% per year for retirement.a. If you put the $85,000 in an account at age 25, and withdraw it 40 years later, how much will you have?b. If you
Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $20,000 in
What is the intuition behind the fact that an infinite stream of cash flows has a finite present value?
Why would you prefer to keep the amount you could spend on the lottery rather than possibly double the amount through the draw?
You plan to deposit $800 in a bank account now and $600 at the end of one year. If the account earns 5% interest per year, what will the balance be in the account right after you make the second
You have just received a windfall from an investment you made in a friend’s business. She will be paying you $10,000 at the end of this year, $20,000 at the end of next year, and $30,000 at the end
You want to endow a scholarship that will pay $5,000 per year forever, starting one year from now. If the school’s endowment discount rate is 6%, what amount must you donate to endow the
How would your answer to Problem 12 change if you endow it now, but it makes the first award to a student 10 years from today?
You figure that the total cost of college will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of four years of college
Assume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will be paid 45 years from now). If your discount rate is 7%, compounded
You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first investment made one year from now. You think you can earn 10% per year on your
You are thinking about buying a savings bond. The bond costs $100 today and will mature in 10 years with a value of $200. What annual interest rate will the bond earn?
You have an investment account that started with $2,000 ten years ago and which now has grown to $10,000.a. What annual rate of return have you earned (you have made no additional contributions to
You have an investment opportunity that requires an initial investment of $15,000 today and will pay $20,000 in one year. What is the rate of return of this opportunity?
You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an interest rate of 8%. If the bond initially costs $500, what is the payment every year?
You are thinking of purchasing a house. The house costs $3,500,000. You have $500,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price.
You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65.Today is your 22nd birthday, and you decide, starting today and continuing on
You receive a $10,000 check from your grandparents for graduation. You decide to save it toward a down payment on a house. You invest it earning 10% per year and you think you will need to have
A local bank is running the following advertisement: “For just $1000 we will pay you $100 forever!” The fine print says that for a $1000 deposit, the bank will pay $100 every year in perpetuity,
You are thinking of making an investment in a new factory. The factory will generate revenues of $1 million per year for as long as you maintain it. You expect that the maintenance costs will start
What is the difference between annual percentage rate and effective annual rate?
Can the nominal interest rate available to an investor be negative? (Hint Consider the interest rate earned from saving cash “under the mattress.”) Can the real interest rate be negative?
How do interest rates represent the opportunity cost of using money now?
You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $50,000 every six years, starting six years from now. What is the present value
Suppose the interest rate is 12% APR with monthly compounding. What is the present value of an annuity that pays $500 every four months for ten years?
You make monthly payments on your car loan. It has a quoted APR of 8% (quarterly compounding). What percentage of the outstanding principal do you pay in interest each month?
Suppose Capital One is advertising a 20-month, 6% APR motorcycle loan. If you need to borrow $12,000 to purchase your dream Harley-Davidson, what will your monthly payment be?
You have just taken out a $28,000 car loan with a 12% APR, compounded monthly. The loan is for eight years. When you make your first payment in one month, how much of the payment will go toward the
In 2010, interest rates were 6.85% and the rate of inflation was 15.3% in the Virgin Islands. What was the real interest rate in 2010? How would the purchasing power of your savings have changed over
If the rate of inflation is 8%, what nominal interest rate is necessary for you to earn a 2% real interest rate on your investment?
Assume the inflation rate is 5% APR, compounded annually. Would you rather earn a nominal return of 8% APR, compounded semiannually, or a real return of 4% APR, compounded quarterly?
You are pleased to see that you have been given a 7% raise this year. However, you read on the Wall Street Journal Web site that inflation over the past year has been 3%. How much better off are you
Which has greater interest rate risk, a 20-year U.S. Treasury bond or a 20-year BB corporate bond?
Explain the relationship between interest rates and bond prices.
What is the risk-free interest rate for a five-year maturity?The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years) YTM 3 4 5 8.23% 8.50% 8.67% 8.95% 9.05%
In the Global Financial Crisis box in Section 6.2, Bloomberg.com reported that the three-month Treasury bill sold for $100.002556 per $100 face value. What is the yield to maturity of this bond,
Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for $1034.74.a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?b. If
Suppose a seven-year, $1,000 bond with annual coupons has a price of $930 and a yield to maturity of 8%. What is the bond’s coupon rate?
Suppose a five-year, $1,000 bond with a 10% coupon rate and semiannual coupons is trading with a yield to maturity of 8.5%.a. Is this bond currently trading at a discount, at par, or at a premium?
What was the price of this bond when it was issued?Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7%
Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?Suppose that General Motors Acceptance Corporation issued a bond
Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?Suppose that General Motors Acceptance Corporation issued a bond
Your company currently has $1000 par, 6% coupon bonds with 10 years to maturity and a price of $1078. If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set? Assume
Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when
What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?Consider the following bonds. Bond Coupon Rate (annual payments) Maturity (years) A 0% B 0% C 4% D
Which of the bonds A-D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuition explanation for your answer.Consider the following
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%.You hold the bond for five years before selling it.a. If the bond’s yield to maturity is 6% when you sell it, what is
HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments).

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