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Questions and Answers of Corporate Finance

In the previous problem, suppose Levy has announced it is going to repurchase $10,400 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be
The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is
The company with the common equity accounts shown here has declared a 12 percent stock dividend at a time when the market value of its stock is $44 per share. What effects on the equity accounts will
In the previous problem, suppose the company instead decides on a five-for-one stock split. The firm’s 80-cent per share cash dividend on the new (post-split) shares represents an increase of 10
What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?
A put and a call have the same maturity and strike price. If they have the same price, which one is in the money? Prove your answer and provide an intuitive explanation.
T-bills currently yield 4.3 percent. Stock in Octagon Manufacturing is currently selling for $55 per share. There is no possibility that the stock will be worth less than $50 per share in one
What are the prices of a call option and a put option with the following characteristics? Stock price = $57 Exercise price = $55 Risk-free rate = 6% per year, compounded continuously Maturity = 3
What are the prices of a call option and a put option with the following characteristics? Stock price = $73 Exercise price = $70 Risk-free rate = 4% per year, compounded continuously Maturity = 8
What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you? Stock price = $47 Exercise price = $40 Risk-free rate = 6% per
You are given the following information concerning options on a particular stock: Stock price = $62 Exercise price = $65 Risk-free rate = 6% per year, compounded continuously Maturity = 6
In the previous problem, assume the risk-free rate is only 5 percent. What is the risk-neutral value of the option now? What happens to the risk-neutral probabilities of a stock price increase and a
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $73.a. Are the call options in the money? What is the intrinsic value of an RWJ
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firm’s assets is $15,800. The standard deviation of
Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $800, and Project B has an NPV of $1,300. As a result of taking Project A, the
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $25,000 that matures in one year. The current market value of the firm’s assets is $27,300. The standard
Suppose Sunburn Sunscreen (Problem 21) and Frostbite Thermalwear (Problem 23) have decided to merge. Since the two companies have seasonal sales, the combined firm’s return on assets will have a
Use the option quote information shown below to answer the questions that follow. The stock is currently selling for $111.a. Suppose you buy 10 contracts of the February 110 call option. How much
Trantum Industries has a zero coupon bond issue that matures in two years with a face value of $50,000. The current value of the company’s assets is $31,000, and the standard deviation of the
Fourer Corp. has a zero coupon bond that matures in five years with a face value of $90,000. The current value of the company’s assets is $74,000, and the standard deviation of its return on
Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $170 million,
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 is: C = S × e-dt × N(d1) – E ×
The put-call parity condition is altered when dividends are paid. The dividend adjusted put-call parity formula is: S × e-dt + P = E × e-Rt + C Where d is again the continuously compounded dividend
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 $77 or $93 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5.1 percent. a. Suppose the current
The price of Tara, Inc., 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 3.9 percent. a. Suppose the current
A put option and a call option with an exercise price of $55 and three months to expiration sell for $2.90 and $6.20, respectively. If the risk-free rate is 4.2 percent per year, compounded
A put option and a call option with an exercise price of $85 expire in four months and sell for $5.83 and $10.00, respectively. If the stock is currently priced at $88.13, what is the annual
What are some of the characteristics of a firm with a long cash cycle?
What are the costs of shortages? Describe them.
In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?
1. Operating and Cash Cycles What impact did this change in payables policy have on BlueSky’s operating cycle? Its cash cycle?2. Operating and Cash Cycles What impact did the announcement have on
Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs. a. A dividend is paid with funds received from a sale
The following is the sales budget for Shleifer, Inc., for the first quarter of 2010:Credit sales are collected as follows: 65 percent in the month of the sale 20 percent in the month after the
Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2010:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its
Following are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount.
You place an order for 300 units of inventory at a unit price of $135. The supplier offers terms of 2/10, net 45. a. How long do you have to pay before the account is overdue? If you take the full
Essence of Skunk Fragrances, Ltd., sells 3,800 units of its perfume collection each year at a price per unit of $425. All sales are on credit with terms of 1/10, net 40. The discount is taken by 60
A bank offers your firm a revolving credit arrangement for up to $70 million at an interest rate of 1.80 percent per quarter. The bank also requires you to maintain a compensating balance of 5
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as:Sales for the first quarter of the year after this one are projected at $170 million. Accounts receivable at the
McConnell Corp. has a book net worth of $16,500. Long-term debt is $7,800. Net working capital, other than cash, is $1,900. Fixed assets are $20,700. How much cash does the company have? If current
Rework Problem 19 assuming: a. Wildcat maintains a minimum cash balance of $30 million. b. Wildcat maintains a minimum cash balance of $10 million. Based on your answers in (a) and (b), do you think
DeAngelo Bank offers your firm a 9 percent discount interest loan for up to $20 million, and in addition requires you to maintain a 4 percent compensating balance against the amount borrowed. What is
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, and the letter N for no change. a. The
The Litzenberger Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $285. Litzenberger has a 45-day collection
Consider the following financial statement information for the Zamboni Icers Corporation:Calculate the operating and cash cycles. How do you interpret your answer?
Lewellen Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter. a. Calculate payments to suppliers
The Thakor Corporation€™s purchases from suppliers in a quarter are equal to 75 percent of the next quarter€™s forecasted sales. The payables period is 60 days. Wages, taxes, and
1. IPO Pricing The Eyetech IPO was underpriced by about 54 percent. Should Eyetech be upset at Merrill Lynch over the underpricing?2. IPO Pricing In the previous question, would it affect your
Teardrop, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and no debt. The stock sells for $65 per share, but the book value per share is $20. Net income
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:Stock price ................................
In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $73 per share? (Assume the PE ratio remains constant.) What is the NPV of this
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 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
The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $22.10 for each of the 8 million shares sold. The initial offering price was $24 per share, and the
What distinguishes a Eurobond from a foreign bond? Which particular feature makes the Eurobond more popular than the foreign bond?
The exchange rate for the Australian dollar is currently A$1.40. This exchange rate is expected to rise by 10 percent over the next year.a. Is the Australian dollar expected to get stronger or
You observe that the inflation rate in the United States is 2.7 percent per year and that T-bills currently yield 3.8 percent annually. What do you estimate the inflation rate to be in: a. Australia,
Lakonishok Equipment has an investment opportunity in Europe. The project costs €15 million and is expected to produce cash flows of €2.9 million in year 1, €4.2 million in year 2, and €4.5
Betancourt International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 21,000 solaris, debt in the amount of 8,000 solaris, and equity of 13,000
In the previous problem, assume the equity increases by 1,100 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet
From our discussion of the Fisher effect in Chapter 5 , we know that the actual relationship between a nominal rate, R , a real rate, r , and an inflation rate, h , can be written as: 1 + r = (1 +
Use the information in Figure 20.1 to answer the following questions:a. Which would you rather have, $100 or £100? Why?b. Which would you rather have, 100 Swiss francs (SF) or £100?
Use the information in Figure 20.1 to answer the following questions:a. What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a premium or a discount?
Use Figure 20.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 3.8 percent. What must the six-month risk-free
What does it mean to maximize value?
What does the term sustainability mean?
Investment Bankers Association (IBA) has an agreement with Northern Airlines to underwrite an equity issue with a market value equal to $11 million.a. If IBA’s underwriting fee is 5 percent and its
Anderson Anchor Corporation needs to raise $54 million to support its expansion plans. Anderson’s investment banker normally charges 10 percent of the market value to handle an equity issue. If the
Global Gum Company (GGC) has decided to issue $150 million in common stock to raise funds to finance future growth. GGC’s stock currently sells for $25 per share.a. How many shares of stock does
What would happen to the standard of living in the United States if people lost faith in our financial markets? Why?
What would happen to the standard of living in the Unites States if people lost faith in the safety of our financial institutions? Why?
Suppose it is now January 1, 2015, and you just sold an investment that you own for $12,500. You purchased the investment four years ago for $10,500. During the time you held the investment, it paid
One year ago, Melissa purchased 50 shares of common stock for $20 per share. During the year, the value of her stock decreased to $18 per share. If the stock did not pay a dividend during the year,
Suppose today is January 2, 2015, and investors expect the annual risk-free interest rates in 2019 and 2020 to be: Year
Following are the yields on selected Treasury securities: Maturity Yield 5 years 3.1% 6 years 2.9 7years 2.6 Using the
The following yields on U.S Treasury securities were published in The Wall street Journal on May 30, 2014:Plot a yield curve based on these data. Discuss how each term structure theory can explain
What does double taxation of corporate income mean?
What does it mean to maximize the value of a corporation?
What is the difference between stock price maximization and profit maximization? What conditions might promote profit maximization but not lead to stock price maximization?
Psyre Company reported NO1 equal to $150,000 this year. Examination of the company's balance sheet and income statement shows that the tax rate was 40 percent, the depreciation expense was $40,000,
Barbell Corporation's income statement reports that the company's "bottom line" was $180,000 last year. The statement also shows that the company had depreciation and amortization expenses equal to
What four financial statements appear in most annual reports?
Premier Primer Pumps (PPP) sells sump pumps for $2,500 each. The variable costs associated with the manufacture of each pump are $1,750, and fixed operating costs are $150,000 annually. PPP normally
Analysts have evaluated the Sivar Silver Company and discovered that if sales are $800,000 the following will exist: Degree of operating leverage (DOL) 4.0X Degree of financial
Gordon’s plants has the following partial income statement for 2015:What is the degree of financial leverage for Gordon’s? What does this value mean?
Why is a cash budget important even when the firm has plenty of cash in the bank?
The current risk-free rate of return, rRF, is 4 percent and the market risk pre-mium, RPM, is 5 percent. If the beta coefficient associated with a firm's stock is 2.0, what should be the stock's
If the risk-free rate of return, rRF, is 4 percent and the market return, rM, is expected to be 12 percent, what is the required rate of return for a stock with a beta, 13, equal to 2.5?
Following is information for two stocks:Which investment has the greater relative risk?
ZR Corporation’s stock has a beta coefficient equal to 1.8 and a required rate of return equal to 16 percent. If the expected return on the market is 10 percent, what is the risk free rate of
Marvin has investments with the following characteristics in his portfolio:What is the expected return of Marvin’s portfolio of investment?
Suppose rRF = 8%, rM = 11%, and rB = 14%.a. Calculate stock B’s beta,b. If stock B’s beta were 1.5, what would be B’s new required rate of return?
What shape would be the probability distribution have for (a) completely certain returns and (b) complete uncertain returns?
Explain the following statement: “a stock held as a part of portfolio is generally less risky than the same stock held in isolation.
To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even some of the cash flows
The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, r: PVP=PMT/r. what is the sum, or future value, of the perpetuity of PMT dollars per year?
Based on the following probability distribution, what is the security's expected return?
What is the expected return of the following investment? Probability Payoff 0.3
Susan's investment portfolio currently contains three stocks that have a total value equal to $100,000. The beta of this portfolio is 1.5. Susan is considering investing an additional $50,000 in a

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