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Questions and Answers of Corporate Finance

Steady Streams Company went public a month ago. Its owner, Winnie McAbby, briefly learned about the signalling effects f dividends and of maintaining a consistent payout history. Accordingly, she is
Marcus purchased 500 shares worth $10,000 of Design Co., a well-established company that provides outsourcing for technological research. On January 8, 2015, Design Co. declared a $2.50 dividend per
For the company in problem 19.2, show how the equity accounts will change in each case.a. Hexagon declares a four-for-one stock split. How many shares are outstanding now? What is the new par value
Roll Corp. (RC) currently has 260,000 shares of stock outstanding that sell for $78 per share. Assuming no market imperfections or tax effects exist, what will the share price be after a. RC has a
In problem 19.5, suppose that Levy has announced it will repurchase $22,800 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What
In problem 19.8, suppose the company instead decides on a five-for-one stock split. The firm’s $0.45 per share cash dividend on the new (post-split) shares represents an increase of 10 percent over
Again Inc. is proposing a rights offering. There are 450,000 shares outstanding at $90 each. There will be 80,000 new shares offered at $84 each.a. What is the new market value of the company?b. How
Hothouse Mfg. is considering a rights offer. The company has determined that the ex rights price will be $61. The current price is $68 per share, and there are 10 million shares outstanding. The
Show that the value of a right can be written asValue of a right = PRO − PX = (PRO − PS)/(N + 1)Where PRO, PS, and PX stand for the rights-on price, the subscription price, and the ex rights
Wuttke Corp. wants to raise $4,125,000 via a rights offering. The company currently has 750,000 shares of common stock outstanding that sell for $45 per share. Its underwriter has set a subscription
The Clifford Corp. has announced a rights offer to raise $28 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
Stone Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly
The Woods Co. and the Garcia Co. have both announced IPOs at $40 per share. One of these is undervalued by $8, and the other is overvalued by $5, but you have no way of knowing which is which. You
In Problem 20.5, if the OSC filing fee and associated administrative expenses of the offering are $900,000, how many shares need to be sold? In Problem 20.5 The St. Anger Corp. needs to raise $35
Raggio Inc. has 100,000 shares of stock outstanding. Each share is worth $80, so the company’s market value of equity is $8,000,000. Suppose the firm issues 20,000 new shares at the following
Raeo Corp. bonds trade at 100 today. The bonds pay semiannual interest on January 1 and July 1. The coupon on the bonds is 7 percent. How much will you pay for a Raeo bond if today is?a. April 1?b.
Bobcaygeon Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 7 percent, payable annually. The one-year interest rate is 7 percent. Next year, there is a 40
Old Business Ventures Inc. has an outstanding perpetual bond with a 11 percent coupon rate that can be called in one year. The bonds make annual coupon payments. The call premium is set at $150 over
In 2012, Whit by Enterprises issued $5 million in bonds. At issue, the bonds carried a yield of 80 basis points above comparable Government of Canada bonds yielding 7.35 percent. When Whit by
An outstanding issue of Executive Airlines debentures has a call provision attached. The total principal value of the bonds is $170 million, and the bonds have an annual coupon rate of 8 percent. The
Margret Kimberly, CFO of Georgia Strait Associates, is considering whether or not to refund the two currently outstanding corporate bonds of the firm. The first one is a 7 percent perpetual bond with
What is a junk bond? What are some of the controversies created by junk-bond financing?
Describe the following types of bonds.a. Floating-rate.b. Deep discount.c. Income.
a. In an efficient market, callable and non-callable bonds will be priced so that there will be no advantage or disadvantage to the call provision. Comment.b. If interest rates fall, will the price
Which of the following are characteristics of public issues, and which are characteristics of direct financing?a. OSC registration.b. Higher interest cost.c. Higher fixed cost.d. Quicker access to
What is a Canada plus call? How does it remove the issuer’s incentive to call debt?
How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.
Recently several companies have issued bonds with 100-year maturities. Critics charge that the issuers are really selling equity in disguise. What are the issues here? Why would a company want to
You own a lot in Montreal that is currently unused. Similar lots have recently sold for $1.9 million. Over the past five years, the price of land in the area has increased 12 percent per year, with
In Problem 23.13, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of
Suppose the firm in Problem 23.21 is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard
Kate is interested in buying a European call option written on EastJet Airlines Ltd., a non–dividend paying common stock, with a strike price of $75 and one year until expiration. Currently
In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black€“Scholes option pricing model with dividends isAll of the variables are the same
The put–call parity condition is altered when dividends are paid. The dividend-adjusted put–call parity formula isS × e−dt + P = E × e−Rt + CWhere d is again the continuously compounded
In the chapter we noted that the delta for a put option is N(d1) − 1. Is this the same thing as −N(−d1)?
The price of Ervin Corp. stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent. a. Suppose the current
A stock is currently selling for $47 per share. A call option with an exercise price of $45 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year,
Gary Levin is the CEO of Mountain brook Trading Company. The board of directors has just granted Gary 30,000 at-the-money European call options on the company’s stock, which is currently trading at
Jessica Lazarus has just been named the new CEO of BluBell Fitness Centers Inc. In addition to an annual salary of $375,000, her three-year contract states that her compensation will include 15,000
Sardano Corp. is a large, publicly held company that is considering leasing aware-house. One of the company’s divisions specializes in manufacturing steel, and this particular warehouse is the only
Flaherty Corp. has just issued a 30-year, callable, convertible bond with 6 percent annual coupon payments. The bond has a conversion price of $130. The company’s stock is selling for $26 per
Rob Stevens is the CEO of Isner Construction Inc. and owns 950,000 shares of stock. The company currently has 6 million shares of stock and convertible bonds with a face value of $40 million
Omega Airline’s capital structure consists of 3.2 million shares of common stock and zero-coupon bonds with a face value of $18 million that mature in six months. The firm just announced that it
An analyst has informed you that at the issuance of a company€™s convertible bonds, one of the two following sets of relationships existed:Assume the bonds are available for immediate conversion.
Christine Guthrie was recently hired by S&S Air Inc. to assist the company with its short-term financial planning and to evaluate the company’s performance. Christine graduated from university
Indicate the impact of the following corporate actions on cash, using the letter I for an increase, the letter D for a decrease, or the letter N when no change occurs.a. A dividend is paid with funds
Here are the most recent statements of financial position for Country Kettles Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:
Calgary Compressor and Pnew Brunswick Pneumatic are competing manufacturing firms. Their financial statements are printed here.a. How are the current assets of each firm financed?b. Which firm has
McConnell Corp. has a book net worth of $10,380. Long-term debt is $7,500. Net working capital, other than cash, is $2,105. Fixed assets are $15,190. How much cash does the company have? If current
Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, or the letter N for no change.a. Receivables average
Indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, the letter D for a decrease, or the letter N for no change.a. The terms
The following is the sales budget for Shleifer Inc. for the first quarter of 2016:Credit sales are collected as follows:65 percent in the month of the sale.20 percent in the month after the sale.15
In a typical month, the Jeremy Corp. receives 80 cheques totaling $156,000. These are delayed four days on average. What is the average daily float?
Bird’s Eye Treehouses Inc. has determined that a majority of its customers are located in the Winnipeg area. It therefore is considering using a lockbox system offered by a bank in Manitoba. The
Cow Chips Inc., a large fertilizer distributor based in Saskatchewan, is planning to use a lockbox system to speed up collections from its customers on the east coast. A local bank branch will
Purple Feet Wine Inc. receives an average of $16,000 in cheques per day. The delay in clearing is typically three days. The current interest rate is 0.018 percent per day.a. What is the company’s
No More Pencils Inc. disburses cheques every two weeks that average $93,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an
Richmond Ltd. was founded 20 years ago by its president, Daniella Richmond. The company originally began as a mail-order company but has grown rapidly in recent years, in large part due to its
You place an order for 400 units of inventory at a unit price of $125. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full
Happy Times currently has an all-cash policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The
The Tate Corp. has annual sales of $34 million. The ACP is 33 days. What is the average investment in accounts receivable as shown on the balance sheet?
Kyoto Joe Inc. sells earnings forecasts for Japanese securities. Its credit terms are 2/10, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average
A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? What will happen to this effective rate ifa. The discount is
Lipman Inc. has an ACP of 39 days. Its average daily investment in receivables is $47,500. What are annual credit sales? What is the receivables turnover?
Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which
Evan Inc. has offered $620 million cash for all of the common stock in Tanner Corporation. Based on recent market information, Tanner is worth $585 million as an independent operation. If the merger
Consider the following pre-merger information about a bidding firm (firm B) and a target firm (firm T). Assume that both firms have no debt outstanding:Firm B has estimated that the value of the
Consider the following pre-merger information about firm A and firm B:Assume that firm A acquires firm B via an exchange of stock at a price of $22 for each share of B€™s stock. Both A and
Show that the NPV of a merger can be expressed as the value of the synergistic benefits, ΔV, less the merger premium.
Harolds PLC has a market value of £400 million and 30 million shares outstanding. Selfishes Department Store has a market value of £160 million and 18 million shares outstanding. Harolds is
Consider the following pre-merger information about firm X and firm Y:Assume that firm X acquires firm Y by paying cash for all the shares outstanding at a merger premium of $5 per share. Assuming
In Problem 30.3, suppose the fair market value of James€™s fixed assets is $12,000 versus the $7,100 book value shown. Jurion pays $17,000 for James and raises the needed funds through an issue
In Problem 30.5, construct the balance sheet for the new corporation, assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Mining€™s
The shareholders of Flannery Company have voted in favour of a buyout offer fromStultz Corporation. Information about each firm is given here: Flannery’s shareholders will receive one share of
The A&Z Real Estate Co. is to be liquidated. The book value of its assets is $52 billion. Bonds with a face value of $28 billion are secured by a mortgage on the company’s Toronto and New York
You are evaluating the proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF25 million. The cash flows from the project would be SF7.2 million per
In Problem 32.15, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solar is per Canadian dollar, what does the balance sheet
Use the information in Figure 32.1B to answer the following questions:a. Which would you rather have, CDN$100 or £100? Why?b. Which would you rather have, 100 Swiss francs (SF) or £100?
Use the information in Figure 32.1A and 32.1C to answer the following questions:a. What is the six-month forward rate for the Japanese yen, in yen per Canadian dollar? Is the yen selling at a premium
Suppose the spot exchange rate for the U.S. dollar is CDN$1.18 and the six-month forward rate is CDN$1.13.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP holds,
Use Figure 32.1A and 32.1C to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in Canada is 1.9 percent. What must the six-month risk-free
The treasurer of a major Canadian firm has CDN$30 million to invest for three months. The annual interest rate in Canada is 0.21 percent per month. The interest rate in the United Kingdom is 0.57
Suppose the current exchange rate for the Polish zloty is Z3.14. The expected exchange rate in three years is Z3.23. What is the difference in the annual inflation rates for Canada and Poland over
Nina Corp. uses no debt. The WACC is 9 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT?
In question 16.10 suppose the corporate tax rate is 35 percent. What is EBIT in this case? What is the WACC? Explain.In Problem 16.10Nina Corp. uses no debt. The WACC is 9 percent. If the current
Weston Industries has a debt-to-equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent. a. What is Weston’s cost of equity
Repeat (a) and (b) in problem 16.1 assuming Money has a tax rate of 35 percent.In Problem 16.1a. Calculate EPS under each of the three economic scenarios before any debt is issued. Also calculate the
Suppose the company in problem 16.1 has a market-to-book ratio of 1.0. a. Calculate ROE under each of the three economic scenarios before any debt is issued. Also calculate the percentage changes in
In problem 16.4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?In Problem 16.4Rolston Corp. is comparing two different
Ignoring taxes in problem 16.6, what is the price per share of equity under plan I? Plan II? What principle is illustrated by your answers?In Problem 16.6Kolby Corp. is comparing two different
Sally McKenzie is the founder and CEO of McKenzie Restaurants Inc., a regional company. Sally is considering opening several new restaurants. Sam Thornton, the company€™s CFO, has been put in
Consider an economy with three investor groups. The personal tax rates on interest income are 12 percent, 21 percent, and 35 percent, respectively, for these three groups. The corporate tax rate is
Assume that there are three groups of investors with the following tax rates on interest income:The required rate of return after corporate tax on all-equity financed projects is 9.1 percent. The
Consider an economy in which there are four groups of people:The required rate of return after corporate tax on all-equity financed projects is 8 percent. Interest income is taxable at the individual
The Accounting Standards Board (AcSB) and the International Accounting Standards Board have identified the goal of comparability of financial statements as one toward which all companies should
What is benchmarking? What should a company that wishes to use benchmarking look for in establishing benchmarks?
What are the major goals of each of the following types of ratios? a. Liquidity ratios b. Asset management ratios c. Solvency ratios d. Profitability ratios e. Market analysis ratios
How would you expect a recession to affect asset management ratios?
What is a “red flag” with respect to financial statement analysis?
Identify whether each of the following items would be classified as: • Income from continuing operations (C) • Income from discontinued operations (D) • A change in accounting prin a. $2,500

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