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corporate finance

Questions and Answers of Corporate Finance

On November 1, Turner Company borrowed $ 30,000. Turner signed a three- year installment note that calls for 12 quarterly payments and a 8 percent interest rate. How much cash will Turner pay each
On January 1, Harrison Enterprises borrowed $ 40,000 for three years. Harrison signed a noninterest-bearing note. Assuming that the market rate of interest is 9 percent on the date the note is made
Fouch Corporation wants to borrow $ 80,000 and use a noninterest- bearing note with a five- year life. If the market interest rate is 8 percent and the interest is compounded semiannually, what is
Fleak Corporation borrows money by issuing a three- year periodic and lump- sum payment note payable with a face value of $ 300,000 and a face rate of 7 percent that is paid annually. The market
Kerby Company will issue a $ 400,000, five-year, 7 percent periodic and lump- sum payment note when the market interest rate is 8 percent. The face rate of interest is paid semiannually. Determine
Romine Delivery Corporation is planning to issue $ 10,000,000 in 10-year, 10 percent bonds. The bonds are dated May 1, 2011, and interest is payable annually on May 1. If the bonds are sold on May 1,
Using the information in E14.7, how much cash will Romine Delivery Corporation receive if the bonds are issued to yield a 12 percent market rate of interest? How much interest expense will Romine
Determine the cash received from a $ 1,000,000 bond issue if the bonds were issued at each of the following prices: A. 93 7/8 B. 97 3/4 C. 102 3/8 D. 105 1/4
On December 1, the Weber Corporation plans to issue bonds with a face value of $ 8,000,000. The bonds mature in 10 years and have a face rate of 10 percent interest that is paid semiannually. If the
Knoepfle Corporation’s bonds have a face value of $ 11,000,000 and a call price of 103. On February 1, 2012, the bonds have a carrying value of $ 11,200,000 on Knoepfle’s books and a market
On October 1, Snyder Technologies plans to sign a capital lease for machinery with a fair market value of $ 152,865 for a six-year period. The company will make the first of seven $ 27,865 annual
Dietz Company’s capital expenditure budget calls for a $ 1,500,000 addition to an existing plant. The company plans to issue a three- year note and is debating whether to use a three- payment, 8
Klamm Company needs to borrow $ 200,000. It plans to sign an installment note with a 6 percent interest rate and make monthly payments for the next eight years. How much is the monthly payment
Glatt Enterprises needs to borrow $ 200,000. It plans to sign a noninterest-bearing note payable for eight years when the market rate of interest is 6 percent compounded quarterly. How much money
Clifton, Inc., needs to borrow some money. It prepares a eight- year periodic and lump- sum payment note with a face value of $ 200,000 and a face rate of interest of 7 percent paid semiannually. If
Refer to E14.17. Assume the market rate of interest is 8 percent. From E14.17: Clifton, Inc., needs to borrow some money. It prepares a eight- year periodic and lump- sum payment note with a face
For a lump-sum payment note: (a) Describe the cash outflows shown on the budgeted cash flow statement over the life of the note. (b) Describe the change in the interest expense shown on the budgeted
For a bond when the market rate of interest is greater than the face rate of interest: (a) Describe the cash outflows shown on the budgeted cash flow statement over the life of the note. (b)
For a bond when the market rate of interest is less than the face rate of interest: (a) Describe the cash outflows shown on the budgeted cash flow statement over the life of the note. (b) Describe
Giovinazzo Construction Company plans to buy a new dump truck that has a sticker price of $ 68,800. The dealer has offered to finance the truck on an installment note at 5 percent interest for 48
Brown Leasing Service recently purchased drilling equipment for $ 218,705 and wants to lease it to Huss Excavation Company. If Huss accepts, it will sign the lease agreement on May 1, 2011. The
Larkins is planning to issue debentures with a face value of $1,000,000 on September 1, 2011. The debentures mature in 10 years and have a face interest rate of 8 percent that is paid semiannually
Mutchler Corporation plans a $ 12,000,000 bond issue that has a carrying value of $ 11,232,125 as of September 1, 2011. For each of the following assumptions, describe cash flows that occur and the
Sriram Corporation’s capital expenditure budget calls for the construction of a new addition to the plant and the corporation’s controller plans to borrow $ 8,000,000 to finance a portion of the
Barden Company needs to borrow $ 500,000. It agrees to make monthly payments of principal and interest over the next 12 years. The bank agrees to loan Barden the money at 6 percent
Bullen needs to borrow $ 600,000. He agrees to sign a 15-year, noninterest- bearing note. The bank needs to earn 8 percent compounded quarterly. Bullen prepares its budgeted financial statements on
Sevcik Resort needs to acquire a new tour boat that costs $ 80,000 and is expected to be useful for approximately five years. There are three alternatives for financing the acquisition of the boat:
Nathan Company has completed its capital budgeting analysis that indicated a positive net present value. Accordingly it has decided to purchase new equipment with a list price of $ 800,000 and a
Each of the following $ 5,000,000 debt instruments is subject to a 10 percent market rate of interest. When measured on a common- size basis, which of the following is the most expensive debt to use?
Gramling Inc. is considering an investment in new operating equipment with a 15- year life. The new equipment will cost $ 300,000 and a one- time cost of $ 15,000 will be incurred to remove the old
XYZ Corporation plans to acquire a building (with a useful life of 10 years) by issuing a $ 5,000,000, 10-year, 3 percent note to the former owner of the building. XYZ will value the building and the
Hannan Company needs to borrow $ 15,000,000 to finance an addition to its manufacturing facilities. It has obtained an installment note at 8 percent interest for 15 years. Payments will be made
Ransopher Corporation needs to buy a new computer system. Dwell Computers has agreed to sell Ransopher a computer system and accept a 10-year, noninterest-bearing note payable. The market rate of
Why must a financial manager have an integrated understanding of the five basic finance functions? Why has the risk-management function become more important in recent years? Why is the corporate
What are the advantages and disadvantages of the different legal forms of business organization? Could the limited liability advantage of a corporation also lead to an agency problem? Why? prefer?
Can there be a difference between maximizing profit and maximizing shareholder wealth? If so, what could cause this difference? Which of the two should be the goal of the firm and its management?
Define a corporate stakeholder. Which groups are considered stakeholders? Would shareholders also be considered stakeholders? Compare, in terms of economic systems, the principle of maximizing
What is meant by an “agency cost” or “agency problem”? Do these interfere with maximizing shareholder wealth? Why or why not? What mechanisms minimize these costs/problems? Are executive
Are ethics critical to the financial manager’s goal of maximizing shareholder wealth? How are the two related? Is establishing corporate ethics policies and requiring employee compliance enough to
What are the key provisions of the Sarbanes-Oxley Act of 2002? How has this act changed the way corporate America conducts business?
a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership, under the following conditions. Assume that all earnings will be paid out as cash
Calculate the tax disadvantage to organizing a U.S. business as a corporation versus as a partnership under the following conditions. Assume that all earnings will be paid out as cash dividends.
Consider the following simple corporate example involving one stockholder and one manager. There are two mutually exclusive projects in which the manager may invest and two possible manager
What information (explicit and implicit) can be derived from financial statement analysis? Does the standardization required by GAAP add greater validity to comparisons of financial data between
Distinguish between the types of financial information contained in the various financial statements. Which statements provide information on a company’s performance over a reporting period, and
If you were a commercial credit analyst charged with the responsibility of making an accept/reject decision on a company’s loan request, with which financial statement would you be most concerned?
What is operating cash flow (OCF)? How is it calculated? What is free cash flow (FCF)? How is it calculated from operating cash flow (OCF)? Why do financial managers focus attention on the value of
Describe the common definitions of “inflows of cash” and “outflows of cash” used by analysts to classify certain balance sheet changes and income statement values. What three categories of
What precautions must one take when using ratio analysis to make financial decisions? Which ratios would be most useful for a financial manager’s internal financial analysis? For an analyst trying
How do analysts use ratios to analyze a firm’s financial leverage? Which ratios convey more important information to a credit analyst—those revolving around the levels of indebtedness or those
How is the DuPont system useful in analyzing a firm’s ROA and ROE? What information can be inferred from the decomposition of ROE into contributing ratios? What is the mathematical relationship
Provide a general description of the tax rates applicable to U.S. corporations. What is the difference between the average tax rate and the marginal tax rate? Which rate is relevant to financial
Given the balance sheets and selected data from the income statement of SMG Industries that follow, answer parts (a)â€“(c).a. Calculate the firmâ€™s operating cash flow (OCF) for the year
Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N).
Manufacturers Bank is evaluating Aluminum Industries, Inc., which has requested a $3 million loan. On the basis of the debt ratios for Aluminum, along with the industry averages and Aluminumâ€™s
Use the following information to answer the questions that follow.a. Use the DuPont system to compare the two heavy metal companies shown above (HMM and MS) during 2012. Which of the two has a higher
A common-size income statement for Aluminum Industriesâ€™ 2011 operations follows. Using the firmâ€™s 2012 income statement presented in Problem 2-4, develop the 2012 common-size income
Use the following financial data for Gretaâ€™s Gadgets, Inc., to determine the impact of using additional debt financing to purchase additional assets. Assume that an additional $1 million of
Tracey White, the owner of the Buzz Coffee Shop chain, has decided to expand her operations. Her 2012 financial statements follow. Tracey can buy two additional coffeehouses for $3 million, and she
The financial statements of Access Corporation for the year ended December 31, 2012, follow.aAccess Corporationâ€™s annual purchases are estimated to equal 75 percent of cost of goods sold.a The
Given the following financial statements, historical ratios, and industry averages, calculate the UG Company€™s financial ratios for 2012. Analyze its overall financial situation both in
Thomsonetics, Inc., a rapidly growing early stage technology company, had the pretax income noted below for calendar years 2010-2012. The firm was subject to corporate taxes consistent with the rates
Trish Foods, Inc. had pretax ordinary corporate income during 2012 of $2.7 million. In addition during the year, Trish Foods sold a group of non-depreciable business assets (in the 5-year
Define the following terms commonly used in bond valuation: (a) par value, (b) Maturity date, (c) Coupon, (d) Coupon rate, (e) Coupon yield, (f) Yield to maturity (YTM), and (g) Yield curve.
What is the difference between a pure discount bond and a bond that trades at a discount? If issuers successfully sell pure discount bonds in the market, investors must want them. Can you explain why
A firm issues a bond at par value. Shortly thereafter, interest rates fall. If you calculate the coupon rate, coupon yield, and yield to maturity for this bond after the decline in interest rates,
Twenty-five years ago, the U.S. government issued thirty-year bonds with a coupon rate of about 8%. Five years ago, the U.S. government sold ten-year bonds with a coupon rate of about 5%. Suppose
Explain why municipal bonds can offer lower interest rates than equally risky corporate bonds.
Explain why the yield-to-maturity on a junk bond is not a particularly good measure of the return you can expect if you buy it and hold it until maturity.
Go to stockcharts.com/freecharts/yieldcurve.html and click on the animated yield-curve graph (be sure JAVA is enabled on your browser). Answer the following questions: a. Is the yield curve typically
A best-selling author decides to cash in on her latest novel by selling the rights to the book’s royalties for the next six years to an investor. Royalty payments arrive once per year, starting one
An oil well produces 20,000 barrels of oil per year. Suppose the price of oil is $50 per barrel. You want to purchase the right to the oil produced by this well for the next five years. At a discount
A bond makes two $45 interest payments each year. Given that the bond’s par value is $1,000 and its price is $1,050, calculate the bond’s coupon rate and coupon yield.
Calculate the price of a 5-year, $1,000 par value bond that makes semiannual payments, has a coupon rate of 8 %, and offers a yield to maturity of 7 %. Recalculate the price assuming a 9 % YTM. What
A $1,000 par value bond makes annual interest payment of $75. If it offers a yield to maturity of 7.5 %, what is the price of the bond?
A $1,000 par value bond pays a coupon rate of 8.2 %. The bond makes semiannual payments, and it matures in four years. If investors require a 10 % return on this investment, what is the bond’s
Griswold Travel Inc. has issued 6-year bonds that pay $30 in interest twice each year. The par value of these bonds is $1,000 and they offer a yield to maturity of 5.5 %. How much are the bonds worth?
Bennifer Jewelers recently issued 10-year bonds that make annual interest payments of $50. Suppose you purchased one of these bonds at par value when it was issued, and right away market interest
You are evaluating two similar bonds. Both mature in 4 years, both have a $1,000 par value, and both pay a coupon rate of 10 %. However, one bond pays that coupon in annual installments, whereas the
A bond makes annual interest payments of $75. The bond matures in 4 years, has a par value of $1,000, and sells for $975.30. What is the bond’s yield to maturity (YTM)?
Johanson VI Advisors issued $1,000 par value bonds a few years ago with a coupon rate of 7 %, paid semiannually. After the bonds were issued, interest rates fell. Now with three years remaining
You have gathered the following data on three bonds:a. If the market's required return on all three bonds is 6%, what are the market prices of the bonds (you can assume annual interest payments). b.
The rate of inflation is 5 % and the real interest rate is 3 %. What is the nominal interest rate?
The nominal interest rate is 9 % and the inflation rate is 7 %. What is the real interest rate?
Suppose investors face a tax rate of 40 % on interest received from corporate bonds. Suppose AAA-rated corporate bonds currently offer yields of about 7 %. Approximately what yield would AAA-rated
You purchase a U.S. Treasury inflation-indexed bond at par value of $1,000. The bond offers a coupon rate of 6 % paid semiannually. During the first six months that you hold the bond, prices in the
What is the price of a zero-coupon bond that has a par value of $1,000? The bond matures in thirty years and offers a yield to maturity of 4.5 %. Calculate the price one year later when the bond has
A zero-coupon bond has a $1,000 face value, matures in 10 years, and currently sells for $781.20. a. What is the market's required return on this bond? b. Suppose you hold this bond for 1 year and
A corporate bond's price is listed at 102.801. It matures in 3 years, has a coupon rate of 5%, and pays interest semiannually. What is the bond's yield to maturity?
Refer back to Figure 4.5. a. What is the yield spread in basis points between the Citigroup bond maturing in May 2015 and the DirectTV bond maturing in March 2015? Does this spread make sense given
1. What is the YTM for this Proctor & Gambleâ€™s corporate bond?2. What is the coupon yield of this bond over the next year?3. If your required rate of return for a bond of this risk-class
How is preferred stock different from common stock?
The value of common stocks cannot be tied to the present value of future dividends because most firms don’t pay dividends. Comment on the validity, or lack thereof, of this statement.
A common fallacy in stock market investing is assuming that a good company makes a good investment. Suppose we define a good company as one that has experienced rapid growth (in sales, earnings, or
Why is it not surprising to learn that growth rates rarely show predictable trends?
The book value of a firm’s common equity is usually lower than the market value of the common stock. Why? Can you describe a situation in which the liquidation value of a firm’s equity might
Describe the role of the lead underwriter in a firm-commitment offering.
Why is the relationship between an investment banker and a firm selling securities somewhat adversarial?
Describe the basic structure of secondary markets. Be sure to differentiate between broker markets and dealer markets.
The C. Alice Stone Company’s common stock has paid a $3 dividend for so long that investors are now convinced that the stock will continue to pay that annual dividend forever. If the next dividend

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