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corporate finance

Questions and Answers of Corporate Finance

In what respect is preferred stock similar to bonds, and in what respect is it similar to common stock?
Explain the following statement: “Whereas a bond contains a promise to pay interest, common stock provides an expectation but no promise of dividends.”
What is the significance of the par value on a preferred stock? What is the significance of the par value on a common stock?
What effect do you think each of the following factors should have on the interest rate that a firm must pay on a new issue of long-term debt? Indicate whether each factor would tend to raise lower,
Rank the following securities from lowest (1) to highest (8) in terms of their riskiness for an investor. All securities (except the Treasury bond) are for a given firm. If you think two or more
A sinking fund can be set up in one of two ways:(1) The corporation makes annual payments to the trustee, who invests the proceeds in securities (frequently government bonds) and uses the accumulated
Examine Table 2-2. Suppose Sydex sold 2 million shares of common stock, with the company netting $25 per share. Construct a statement of the equity accounts to reflect this sale.
It is often said that the primary purpose of the preemptive right is to allow individuals to maintain their proportionate share of the ownership and control of a corporation.a. How important do you
Should preferred stock be classified as debt or equity? Does it matter if the classification is being made by the firm’s (a) management, (b) creditors, or (c) equity investors?
Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 9 percent and $50 million of pure bonds with a coupon rate of 12 percent. Both bonds have the same
In 1936, the Canadian government raised $55 million by issuing bonds at a 3 percent annual rate of interest. Unlike most bonds issued today, which have a specific maturity date, these bonds can
The Swift Company is planning to finance an expansion. The principal executives of the company agree that an industrial company such as theirs should finance growth by issuing common stock rather
Four years ago, Ideal Solutions issued convertible preferred stock with a par value of $50 and a stated dividend of 8 percent. Each share of preferred stock can be converted to four shares of common
Filkins Farm Equipment needs to raise$4.5million for expansion, and it expects that five-year zero coupon bonds can be sold at a price of $567.44 for each $1,000 bond. a. How many $1,000 par value,
Suppose you own a call option that permits you to purchase 100 shares of the stock of Silicon Graphics for $15 per share any time during the next three months. Silicon Graphics has a current market
Suppose you own a put option that gives you the right to sell 200 shares of MMM Construction to another investor for $25 per share anytime during the next six months. MMM’s stock currently sells
Two textile companies, Meyer Manufacturing and Haugen Mills, began operations with identical balance sheets. One year later, both required additional manufacturing capacity, which could be obtained
The Cox Computer Company has grown rapidly during the past five years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan has risen to
Atlantic Coast Resources Company had the following balance sheet at the end of 2014:Atlantic Coast Resources is concerned about its book value per share, which is computed by dividing the total
Fibertech Corporation just received an invoice from a Japanese manufacturer. The invoice states that Fibertech must pay the Japanese company 5,500,000 yen (the Japanese currency) in 90 days. If
Gonzales Food Stores, a family-owned grocery store chain headquartered in El Paso, has hired you to make recommendations concerning financing needs for the following two situations.Part
What is a financial market? What is the role of a financial market?
Both physical stock exchanges and the OTC market are markets for trading stocks. Why do you think companies want to be listed on physical exchanges rather than stay OTC?
What types of companies enter the markets for initial public offerings? Why do companies choose to go public? Why not stay private?
How do you think each of the following would affect a company’s ability to attract new capital and the flotation (issuing) costs involved in doing so?a. The decision to list a company’s stock;
Why would management be interested in getting a wide distribution of its shares?
Microsoft and Intel qualify to be listed on the New York Stock Exchange, but both have chosen to be traded on the NASDAQ market. Can you think of reasons the companies would choose to be traded on
Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Barenbaum Inc., the terms were as follows:Price to public ……………………………..
Eagle Sports Products (ESP) is considering issuing debt to raise funds to finance its growth during the next few years. The amount of the issue will be between $35 million and $40 million. ESP has
The Taussig Company, whose stock price is currently $20.50, needs to raise $15 million by issuing common stock. Underwriters have informed Taussig’s management that it must price the new issue to
WonderWorld Widgets (WWW) needs to raise $75 million in debt. To issue the debt, WWW must pay its underwriter a fee equal to 3 percent of the issue. The company estimates that other expenses
The Sprite Toy Company needs to raise funds for a major expansion of its manufacturing operations. Sprite has determined that it will issue $100 million of financing, but it has not decided whether
Bluesky.com, which currently is a privately held corporation, is making plans for future growth. The company’s financial manager has recommended that Bluesky “go public” by issuing common stock
Campfire, Inc., a very successful manufacturer of camping equipment, is considering going public next month to raise funds to help finance the company’s future growth. The financial manager of
The problem requires you to use File C03 on the computer problem spreadsheet. Diction Publishing estimates that it needs $500,000 to support its expected growth. The underwriting fees charged by the
In what ways do financial intermediaries improve the standard of living in an economy?
The federal government (1) encouraged the development of the savings and loan industry, (2) virtually forced the S&L industry to make long-term, fixed- interest-rate mortgages, and (3) forced
Name some of the various types of financial intermediaries described in the chapter and indicate the primary reason(s) each was created.
How has deregulation of the financial services industry affected the makeup of financial 1intermediaries? How do you think intermediaries’ characteristics will change in the future?
How do banking organizations in the United States differ from banking organizations in other countries? Why are they different?
How would funds—that is, the money supply—in the United States be affected if the Federal Reserve increases reserve requirements? Give an example.
How is money created in a banking system that has fractional reserve requirements (i.e., a fractional reserve system)?
Describe the open market operations undertaken by the Federal Reserve. What type of trades would the Fed make if it wanted to increase interest rates?
Deposits in all financial institutions equal $2 trillion. The total reserves held by these institutions are $240 billion, $100 billion of which is in excess of reserve requirements.a. What is the
Through its open market operations, the Federal Reserve recently increased deposits at financial institutions by $90 billion. If the reserve requirement for all deposits is 8 percent, what is the
Compute the maximum change in total deposits that would result if deposits at financial institutions were initially decreased by $120 billion and the reserve requirement applicable to all deposits
The Federal Reserve has decided that interest rates need to be increased to maintain relatively low inflation in the economy. To accomplish this goal, the Fed has determined that the money supply
It has been determined that, in aggregate, financial institutions with depository accounts currently hold excess reserves equal to $3 billion—that is, they hold $3 billion more than is necessary to
According to statistics provided by the Federal Reserve, total reserves of commercial banks currently equal $1.63 trillion. Required reserves are $130 billion, so excess reserves total approximately
In recent years, the Fed has shown a willingness to decrease existing reserve requirements. Suppose that the transaction deposits at banks and other financial institutions total $900 billion and that
Assume that you recently graduated with a degree in finance and have just reported to work as an investment adviser at the firm of Balik and Kiefer Inc. Your first assignment is to explain the roles
Suppose that the reserve requirement is 15 percent for transaction deposits and 4 percent for nontransaction deposits. Compute the reserve requirement for a bank that has $340 billion deposited in
Explain why the return associated with an investment includes both the income paid by the issuer and the change in value associated with the investment.
Suppose a new, highly liberal Congress and presidential administration were elected. The first order of business for these bodies was to take away the independence of the Federal Reserve System and
Suppose interest rates on long-term Treasury bonds rose from 5 to 10 percent as a result of higher interest rates in Europe. What effect would this change have on the price of an average company’s
How are the values of financial assets affected by changes in interest rates?
Which would be of greater concern to those who hold short-term investments: interest rate price risk or reinvestment rate risk? Explain.
How does the Federal Reserve change the money supply in the United States? What action would the Fed take to increase interest rates? To decrease interest rates?
When investors expect interest rates to increase in the future, would they prefer to purchase short-term or long-term investments? Explain.
Yesterday Sanjay sold 1,000 shares of stock that he owned for $45 per share. When he purchased the stock two years ago, Sanjay paid $50 per share. Every three months during the time that he held the
Suppose the annual yield on a two-year Treasury bond is 7.5 percent, the yield on a one-year bond is 5 percent, r* is 3 percent, and the maturity risk premium is zero (0).a. Using the expectations
Assume that the real risk-free rate is 4 percent and the maturity risk premium is zero. If the nominal rate of interest on one-year bonds is 11 percent and on comparable-risk two-year bonds it is 13
The rate of inflation for the coming year is expected to be 3 percent, and the rate of inflation in Year 2 and thereafter is expected to remain constant at some level above 3 percent. Assume that the
Currently, the interest rate on one-year Treasury bonds is 2.2 percent, the rate on two-year Treasury bonds is 3.0 percent, and the rate on three-year Treasury bonds is 3.6 percent. These bonds are
Suppose economists have determined that the real risk-free rate of return is 3 percent and that inflation is expected to average 2.5 percent per year long into the future.A one-year Treasury note
Today is January 2, 2015, and according to the results of a recent survey, investors expect the annual interest rates for the years 2018 through 2020 to be:Year One-Year Rate2018 .........
Suppose current interest rates on Treasury securities are as follows:Maturity Yield1 year ................ 5.0%2 years ............... 5.53 years ............... 6.04 years ............... 5.5Using
Suppose you and most other investors expect the rate of inflation to be 7 percent next year, to fall to 5 percent during the following year, and then to remain at a rate of 3 percent thereafter.
Assume that the real risk-free rate of return, r*, is 3 percent and it will remain at that level far into the future. Also assume that maturity risk premiums on Treasury bonds increase from 0 percent
A bond issued by Zephyr Balloons currently has a market price equal to $1,080. The bond pays $120 interest annually.a. If you buy the bond and its price does not change during the year, what is the
Suppose inflation currently is about 2 percent. Last year, the Fed took action to maintain inflation at this level. Now, the economy is starting to grow too quickly, and reports indicate that
In an effort to better understand how her investments are affected by market factors, Michelle Delatorre, the professional tennis player introduced in the Integrative Problem in Chapter, has posed
The problem requires you to use File C05 on the computer problem spreadsheet.a. Assume today is January 2, and the expected inflation rates for the next five years are as follows: Year
Suppose that today’s Wall Street Journal reports the yield on Treasury bills maturing in 30 days is 3.5 percent, the yield on Treasury bonds maturing in 10 years is 6.5 percent, and the yield on a
The president of United Semiconductor Corporation made this statement in the company’s annual report: “United’s primary goal is to increase the value of the common stockholders’ equity over
Compared to the ownership structure of U.S. firms, which are “open” companies, what are some advantages of the ownership structure of foreign firms, many ofwhich are “closed” companies? Can
In general terms, how is value measured? What are the three factors that determine value? How does each factor affect value?
What is corporate governance? Does a firm’s corporate governance policy relate to whether it conducts business in an ethical manner? Explain.
Can a firm sustain its operations by maximizing stockholders’ wealth at the expense of other stakeholders?
Suppose you own 100 shares of General Motors stock, and the company earned $6 per share during the last reporting period. Suppose also that GM could either pay all of its earnings out as dividends
If you were starting a business, what tax considerations might cause you to prefer to set it up as a proprietorship or a partnership rather than as a corporation? Would you consider the average tax
Would the management of a firm in an oligopolistic industry or in a competitive industry be more likely to engage in “socially conscious” practices? Explain your reasoning.
Compared to purely domestic firms, what are some factors that make financial decision making more complicated for firms that operate in foreign countries?
Explain how the federal income tax structure affects the choice of financing (use of debt versus equity) of U.S. business firms.
The Ramjah Corporation had $200,000 of taxable income from operations this year.a. What is the company’s federal income tax bill for the year?b. Assume that the firm receives an additional $40,000
The Zocco Corporation has a taxable income of $365,000 from operations after all operating costs but before (1) interest charges of $50,000, (2) dividends received of $15,000, (3) dividends paid of
A few days ago, Deanna Watson purchased 100 shares of Microsoft common stock for$35per share. Deanna is single, and her taxable income (after all deductions and exemptions) is $75,000.Compute the
Compute the capital gains tax liability for each of the following cases: a. An individual sold a municipal bond for $1,150 two years after it was purchased for $950.b. An individual sold 100 shares
The Angell Company has earned $150,000 before taxes during each of the last 15 years, and it expects to earn $150,000 per year before taxes in the future. This year, however, the firm incurred a loss
The projected taxable income of the Glasgo Corporation, formed in 2015, is indicated in the following table. (Losses are shown in parentheses.) What is the corporate tax liability for each year? Use
Kate Brown has operated her small repair shop as a sole proprietorship for several years, but projected changes in her business’s income have led her to consider incorporating. Kate is married and
Margaret Considine has the following situation for the year 2015: salary of $60,000; dividend income of $10,000; interest on IBM bonds of $5,000; interest on State of Florida municipal bonds of
Lexy Ballinger and her four-year-old son currently live in an apartment owned by Lexy’s parents. Her parents charge her very little for rent—$200 per month for a luxurious two-bedroom townhouse.
Donald Jefferson and his wife, Maryanne, live in a modest house located in a Los Angeles suburb. Donald has a job at Pittsford Cast Iron that pays him $50,000 annually. In addition, he and Maryanne
Marty Kimble, who “retired” many years ago after winning a huge lottery jackpot, wants to start a new company that will sell authentic sports memorabilia. He plans to name the company Pro Athlete
Working with Michelle Delatorre, the tennis pro discussed in the Integrative Problems in Chapters 4 and 5, has required you to put in a great deal of overtime, so you have had little time to spend on
This problem requires you to rework Problem 6-7 using the information that follows. Use the spreadsheet model in File C06 to solve this problem.a. Suppose Kate decides to pay out (1) 50 percent or
Describe the changes in balance sheet accounts that would constitute sources of funds. What changes would be considered uses of funds?
Financial ratio analysis is conducted by four types of analysts: managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in
What are some steps that must be taken when using ratio analysis? What is the most important aspect of ratio analysis?

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