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corporate finance

Questions and Answers of Corporate Finance

Of the $10,000 invested in a two-stock portfolio, 30 percent is invested in Stock A and 70 percent is invested in Stock B. If Stock A has a beta equal to 2.0 and the beta of the portfolio is 0.95,
Suppose that if rRF = 5% and rM = 12%. What is the appropriate required rate of return for a stock that has a beta coefficient equal to 1.5?
The McDaniel Company's financing plans for next year include the sale of long-term bonds with a 10 percent coupon. The company believes it can sell the bonds at a price that will provide a yield to
Maness Industries plans to issue some $100 par preferred stock with an 11 percent dividend. The stock is selling on the market for $97.00, and Maness must pay flotation costs of 5 percent of the
Hybrid Hydro Plants, Inc., which has a marginal tax rate equal to 34 percent, has preferred stock that pays a constant dividend equal to $15 per share. The stock currently sells for $125. If the
The common stock of Omega Corporation is currently selling for $50 per share. It is expected that Omega will pay a dividend equal to $5 per share this year. In addition, analysts have indicated that
Magnificent Metal Mining (MMM) expects to generate $60,000 in earnings that will be retained for reinvestment in the firm this year. If MMM’s capital structure consists of 25 percent debt and 75
In what sense does the marginal cost of capital schedule represent a series of average costs?
What impact do investors’ expectations about inflation have on a firm’s cost of debt? Is the firm’s cost of equity affected? Explain.
Suppose a firm invest in projects that are much riskier than its average investments. Do you think the firm’s weighted average cost of capital will be affected? Explain
Are there conditions under which a firm might be better off if were to choose a machine with a rapid payback rather than one with larger NPV? Explain.
HQ Company is considering a 1-for-3 reverse stock split. HQ's stock is currently selling for $3 per share. a. What will the price of the stock be after the stock split? b. HQ plans to pay a
Absolute Corporation currently has $50 million in liabilities and common equity in combination. The firm has no preferred stock. After careful evaluation, the CFO constructed the following table to
When selecting securities for portfolio investments, corporate treasures must consider the trade -off between risk and returns. Is it true that most treasurers are willing to assume a fairly high
What type of information can investors get from stock and bond quotation?
Suppose that the last dividend paid by a company was $ 2.20, dividends are expected to grow at a constant rate equal to 5 percent forever, and stockholders require 16 percent to invest in similar
Define personal financial planning. What types of decisions are involved in a personal financial plan?
What are the three elements of planning to protect your assets? Define each element.
How does each element of financial planning affect your cash flows?
What are the six steps in developing a financial plan?
How do your financial goals fit into your financial plan? Why should goals be realistic? What are three time frames for goals? Give an example of a goal for each time frame.
How do your current financial position and goals relate to your creation of alternative financial plans?
Why might you need to revise your financial plan?
List some information available on the Internet that might be useful for financial planning. Describe one way you might use some of this information for financial planning purposes.
What is an opportunity cost? What might be some of the opportunity costs of spending $10 each week on the lottery?
How can an understanding of personal finance benefit you?
What are the six key components of a financial plan?
How is your net worth calculated? Why is it important?
What factors influence income? Why is an accurate estimate of expenses important in budget planning? How do tax laws affect the budgeting process?
What is liquidity? What two factors are considered in managing liquidity? How are they used?
Julia brings home $1,600 per month after taxes. Julia's rent is $350 per month, her utilities are $100 per month, and her car payment is $250 per month. Julia is currently paying $200 per month to
Julia is considering trading in her car for a new one. Her new car payment will be $325 per month, and her insurance cost will increase by $60 per month. Julia determines that her other car-related
Mia has $3,000 in assets, a finance company loan for $500, and an outstanding credit card balance of $135. Mia's monthly cash inflows are $2,000, and she has monthly expenses of $1,650. What is Mia's
At the beginning of the year, Arianne had a net worth of $5,000. During the year she set aside $100 per month from her paycheck for savings and borrowed $500 from her cousin that she must pay back in
Anna has just received a gift of $500 for her graduation, which increased her net worth by $500. If she uses the money to purchase a video player how will her net worth be affected? If she invests
Jason's car was just stolen, and the police informed him that they will probably be unable to recover it. His insurance will not cover the theft. Jason has a net worth of $3,000, all of which is
Sandy and Phil have recently married and are both in their early 20s. In establishing their financial goals, they determine that their three long-term goals are to purchase a home, to provide their
Help the Sampsons summarize their current financial position, their goals, and their plans for achieving their goals by filling out the following worksheets
How do you think people who do not create a budget may deal with cash deficiencies? How can this affect their personal relationships?
Name three classifications of assets. Briefly define and give examples of each.
What are bonds? What are stocks? What are mutual funds? Describe how each of these provides a return on your investment.
When does your net worth increase? Will the purchase of additional assets always increase your net worth? Why or why not?
What three financial characteristics can be monitored by analyzing your personal balance sheet?
Define cash inflows and cash outflows and identify some sources of each. How are net cash flows determined?
What is the liquidity ratio? What does it indicate? How is the debt to asset ratio calculated? What does a high debt ratio indicate? How is your savings rate determined? What does it indicate?
Describe how wealth is built over time. How do your personal cash flow statement and your personal balance sheet assist in this process?
Explain in logical terms why values of assets such as homes and stocks may decline during a weak economy.
Explain in logical terms why a weak economy can cause the net worth of individuals to decline
Identify some factors that affect cash inflows.
What is a budget? What is the purpose of a budget? How can a budget help when you are anticipating cash shortages or a cash surplus?
How do you assess the accuracy of your budget? How can finding forecasting errors improve your budget?
How should unexpected expenses be handled in your budget? How might these expenses affect your budget for a specific month? Over time?
Ryan and Nicole (from problem 9) have the following liabilities:Mortgage......... $ 43,500Car loan......... 2,750Credit card balance....... 165Student loans......... 15,000Furniture loan (6
Ryan and Nicole would like to trade in one of their cars with a fair market value of $ 7,000 for a new one with a fair market value of $ 21,500. The dealer will take their car and provide a $ 15,000
Based on the information in Problems 9 and 10, what is Ryan and Nicole’s liquidity ratio? What is their debt to asset ratio? Comment on each ratio. In Problems 10Mortgage......... $ 43,500Car
Jason and Mia are in their early 20s and have been married for three years. They are eager to purchase their first house, but they do not have sufficient money for a down payment. Mia’s Uncle Chris
Angela makes a budget based on her personal cash flow statement. In two months, she must pay $ 375 for tags and taxes on her car. How will this payment affect her net cash flow for that month?
Jarrod is a college student. All of Jarrod’s disposable income is used to pay his college related expenses. While he has no liabilities (Jarrod is on a scholarship), he does have a credit card that
Jarrod has an old TV worth about $ 100. Jarrod’s other assets total about $ 150. What is Jarrod’s debt to asset ratio? What does this indicate about Jarrod’s financial position?
Ryan and Nicole have the following assets: Fair Market Value Home............ $ 85,000 Cars........... 22,000 Furniture........... 14,000 Stocks ........... 10,000 Savings
Using the information in the case, prepare a personal cash flow statement for the Sampsons.Personal Cash Flow StatementCash Outflows Include categories for cash outflows as follows:
Based on their personal cash flow statement, will the Sampsons be able to meet their savings goals? If not, how do you recommend that they revise their personal cash flow statement in order to
Prepare a personal balance sheet for the Sampsons.Personal Balance Sheet
What is the Sampsons’ net worth? Based on the personal cash flow statement that you prepared in question 1, do you expect that their net worth will increase or decrease in the future? Why?
What formula is used to determine the present value of an annuity? What does the present value of an annuity indicate?
Define compounding. How is it used in financial planning?
Describe some instances when deter-mining the present value of an amount is useful.
In questions a through d, indicate whether you would use the table for determining the future value of a single sum ( FVIF ), the present value of a single sum ( PVIF ), the future value of an
Kyle has $ 1,000 in cash received for high school graduation gifts from various relatives. He wants to invest it in a certificate of deposit (CD) so that he will have a down payment on a car when he
Amy and Vince want to save $ 7,000 so that they can take a trip to Europe in four years. How much must they save each month to have the money they need if they can get 8% on their savings?
Lena has just become eligible to participate in her company’s retirement plan. Her company does not match contributions, but the plan does average an annual return of 12%. Lena is 40 and plans to
Stacey would like to have $ 1 million available to her at retirement. Her investments have an average annual return of 11%. If she makes contributions of $ 300 per month, will she reach her goal when
Jesse has just learned that she won $ 1 million in her state lottery. She has the choice of receiving a lump- sum payment of $ 312,950 or $ 50,000 per year for the next 20 years. Jesse can invest
Jen spends $ 10 per week on lottery tickets. If she takes the same amount that she spends on lottery tickets and invests it each week for the next five years at 10%, how much will she have in five
Kirk can take his $ 1,000 income tax refund and invest it in a 36- month certificate of deposit at 7%, or he can use the money to purchase a home entertainment system and put $ 30 a month in a bank
Cindy and Jack have always practiced good financial habits, in particular, developing and living by a budget. They are currently in the market to purchase a new car and have budgeted $ 300 per month
Sandra wants to deposit $ 100 each year for her son. If she places it in a savings account that pays 5%, what amount will be in the account in 20 years?
Luis wants to know how much he will have available to spend on his trip to Belize in three years if he deposits $ 3,000 today at an interest rate of 9%.
How much will you have in 36 months if you invest $ 75 a month at 10% interest?
Cheryl wants to have $ 2,000 in spending money to take on a trip to Disney World in three years. How much must she deposit now in a savings account that pays 5% to have the money she needs in three
Juan would like to give his newly born grandson a gift of $ 10,000 on his 18th birth-day. Juan can earn 7% interest on a certificate of deposit. How much must he deposit now in order to achieve his
Winners of the Georgia Lotto drawing are given the choice of receiving the winning amount divided equally over 20 years or as a lump- sum cash option amount. The cash option amount is determined by
Michelle is attending college and has a part- time job. Once she finishes college, Michelle would like to relocate to a metropolitan area. She wants to build her savings so that she will have a
Twins Jessica and Joshua, both 25, graduated from college and began working in the family restaurant business. The first year, Jessica began putting $ 2,000 per year in an individual retirement
Help the Sampsons determine how much they will have for their children€™s education by calculating how much $ 3,600 in annual savings will accumulate if they earn interest of (a) 5% and (b) 7%.
What is the impact of the higher interest rate of 7% on the Sampsons’ accumulated savings?
What is the impact of the higher savings of $ 4,800 on their accumulated savings?
If the Sampsons set a goal to save $ 70,000 for their children€™s college education in 12 years, how would you determine the yearly savings necessary to achieve this goal? How much would
Why is it important to under-stand the tax consequences of your financial decisions?
What are itemized deductions? How do itemized deductions relate to standard deductions? Provide some examples of itemized deductions.
What is an exemption? How many exemptions may a taxpayer claim?
What is the difference between a tax deduction and a tax credit? Which is more valuable?
Distinguish between interest income and dividend income. Does their treatment differ for tax purposes?
List the four classifications of deductible medical expenses. Are your total medical expenses deductible?
Do investors in a low tax bracket or a high tax bracket benefit to a greater degree from the long- term capital gains tax? Explain.
What are FICA taxes? Describe the two portions of FICA and explain what they pay for. Who pays FICA?
What is the purpose of income tax? Who administers the federal tax system?
How are FICA taxes for self- employed individuals handled?
Who typically files Form 1040EZ? Which tax form do most other individual taxpayers file?
What are the five filing statuses? Briefly describe how your filing status is determined. What parts of the tax form are affected by your filing status?

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