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Questions and Answers of
Corporate Finance
Mexican Motors' market cap is 200 billion pesos. Next year's free cash flow is 8.5 billion pesos. Security analysts are forecasting that free cash flow will grow by 7.5% per year for the next
Which of the following should be treated as incremental cash flows when deciding whether to invest in a new manufacturing plant? The site is already owned by the company, but existing buildings would
In the early 1990s, the California Air Resources Board (CARB) started planning its "Phase 2" requirements for reformulated gasoline (RFG). RFG is gasoline blended to tight specifications designed to
Here are some historical data on the risk characteristics of Dell and McDonald's: Dell McDonald's β (beta) ............................................. 1.25 ................... .45 Yearly
In which of the following situations would you get the largest reduction in risk by spreading your investment across two stocks?The two shares are perfectly correlated.There is no correlation.There
A portfolio contains equal investments in 10 stocks. Five have a beta of 1.2; the remainder has a beta of 1.4. What is the portfolio beta?a. 1.3.b. Greater than 1.3 because the portfolio is not
Look back at the calculation for Heinz and Exxon in Section 8-1. Recalculate the expected portfolio return and standard deviation for different values of x1 and x2, assuming the correlation
Look back at Table 7.5 shown below.a. What is the beta of a portfolio that has 40% invested in Ford and 60% in Pfizer?b. Would you invest in this portfolio if you had no superior information about
The following table shows the sensitivity of four stocks to the three Fama-French factors. Estimate the expected return on each stock assuming that the interest rate is 2%, the expected risk premium
In footnote 4 we noted that the minimum-risk portfolio contained an investment of 84.9% in Heinz and 15.1% in Exxon Mobil. Prove it.
Use the long-term data on security returns in Sections 7-1 and 7-2 to calculate the historical level of the Sharpe ratio of the market portfolio.
Suppose that the Treasury bill rate is 6% rather than 2%. Assume that the expected return on the market stays at 10%. Use the betas in Table 8.2.a. Calculate the expected return from Pfizer.b. Find
An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 20% of the new wells will be dry holes. Even if a new well strikes oil, there is still uncertainty
The Cambridge Opera Association has come up with a unique door prize for its December 2016 fund-raising ball: Twenty door prizes will be distributed, each one a ticket entitling the bearer to receive
On the London Metals Exchange the price for copper to be delivered in one year is $9,000 a ton. (Payment is made when the copper is delivered.) The risk-free interest rate is .5% and the expected
Suppose the current price of gold is $1,500 an ounce. Hotshot Consultants advises you that gold prices will increase at an average rate of 12% for the next two years. After that the growth rate will
Calculate the year-by-year book and economic profitability for investment in polyzone production, as described in Chapter 11. Use the cash flows and competitive spreads shown in Table 11.2, and
Here are alphas and betas for Intel and Conagra for the 60 months ending February 2012. Alpha is expressed as a percent per month. Alpha Beta Intel ................... 0.97 ........... 1.08 ConAgra
In 2011 Beta Corporation earned gross profits of $760,000. a. Suppose that it is financed by a combination of common stock and $1 million of debt. The interest rate on the debt is 10%, and the
In 2010 the Pandora Box Company made a rights issue at €5 a share of one new share for every four shares held. Before the issue there were 10 million shares outstanding and the share price was
Here is a further vocabulary quiz. Briefly explain each of the following: a. Zero-stage vs. first- or second-stage financing. b. Carried interest. c. Rights issue. d. Road show. e. Best-efforts
In 2012 Entergy paid a regular quarterly dividend of $.83 per share. a. Match each of the following dates. (A1) January 27 ................. (B1) Record date (A2) February 6 ................. (B2)
Here are key financial data for House of Herring, Inc.: Earnings per share for 2015 .................................. $5.50 Number of shares outstanding .......................... 40 million Target
Look at some real companies with different types of assets. What operating problems would each encounter in the event of financial distress? How well would the assets keep their value?
Here are book and market value balance sheets of the United Frypan Company (UF):Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a
The Bunsen Chemical Company is currently at its target debt ratio of 40%. It is contemplating a $1 million expansion of its existing business. This expansion is expected to produce a cash inflow of
Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 9.7%:WACC = (1 - Tc)rD D/V + rE E/V= (1 - .35)(.085)(.40) + .125(.60) = .097Goldensacks Company is advising Nevada
The WACC formula seems to imply that debt is "cheaper" than equity-that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.
The U.S. government has settled a dispute with your company for $16 million. It is committed to pay this amount in exactly 12 months. However, your company will have to pay tax on the award at a
It is possible to buy three-month call options and three-month puts on stock Q. Both options have an exercise price of $60 and both are worth $10. If the interest rate is 5% a year, what is the stock
In October 2011, a 15-month call on the stock of Amazon.com, with an exercise price of $230, sold for $46.97. The stock price was $230. The risk-free interest rate was 3%. How much would you be
a. In Section 21-3 we calculated the risk (beta) of a six-month call option on Apple stock with an exercise price of $400. Now repeat the exercise for a similar option with an exercise price of $370.
Calculate and compare the risk (betas) of the following investments: (a) A share of Apple stock; (b) A one-year call option on Apple; (c) A one-year put option; (d) A portfolio consisting of a share
Take another look at our two-step binomial trees for Apple, for example, in Figure 21.2. Use the replicating-portfolio or risk-neutral method to value six-month call and put options with an exercise
Imagine that Apple's stock price will either rise by 33.3% or fall by 25% over the next six months (see Section 21-1). Recalculate the value of the call option (exercise price = $400) using (a) The
Redo the example in Figure 22.8, assuming that the real option is a put option allowing the company to abandon the R&D program if commercial prospects are sufficiently poor at year 2. Use put-call
Describe each of the following situations in the language of options: a. Drilling rights to undeveloped heavy crude oil in Northern Alberta. Development and production of the oil is a negative-NPV
Look at Table 25.1. How would the initial break-even operating lease rate change if rapid technological change in limo manufacturing reduces the costs of new limos by 5% per year?Table 25.1
Phoenix Motors wants to lock in the cost of 10,000 ounces of platinum to be used in next quarter's production of catalytic converters. It buys three-month futures contracts for 10,000 ounces at a
In March 2012, 12 month futures on the Australian S&P/ASX 200 Index traded at 4,244. Spot was 4,276. The interest rate was 3.90%, and the dividend yield was about 5%. Were the futures fairly priced?
The following table shows 2012 gold futures prices for varying contract lengths. Gold is predominantly an investment good, not an industrial commodity. Investors hold gold because it diversifies
In September 2017 swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5% against Euribor (the short-term interest rate for euro loans). Euribor at the time was 4.1%. Suppose
A gold-mining firm is concerned about short-term volatility in its revenues. Gold currently sells for $1,600 an ounce, but the price is extremely volatile and could fall as low as $1,520 or rise as
"Northern Refineries does not avoid risk by selling oil futures. If prices stay above $3.20 a gallon, then it will actually have lost by selling oil futures at that price." Is this a fair comment?
Residents of the northeastern United States suffered record-setting low temperatures throughout November and December 2021. Spot prices of heating oil rose 25%, to over $7 a gallon. a. What effect
In January 2012, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later she sells the shares for 550 pesos each.
Table 28.11 shown below gives abbreviated balance sheets and income statements for Estée Lauder Companies. Calculate the following ratios:a. Return on assets.b. Operating profit margin.c.
As you can see, someone has spilled ink over some of the entries in the balance sheet and income statement of Transylvania Railroad (Table 28.12). Can you use the following information to work out
Here are some data for five companies in the same industry:You have been asked to calculate a measure of times-interest-earned for the industry. Discuss the possible ways that you might calculate
Look again at Table 28.11. Calculate a common-size balance sheet and income statement for Estée Lauder.Table 28.11
Look again at Table 28.11. At the end of fiscal 2011 Estée Lauder had 197 million shares outstanding 21 with a share price of $105. The company's weighted-average cost of capital was about
A firm has a long-term debt-equity ratio of .4. Shareholders' equity is $1 million. Current assets are $200,000, and total assets are $1.5 million. If the current ratio is 2.0, what is the ratio of
Table 29.15 on the next page shows Dynamic Mattress's year-end 2010 balance sheet, and Table 29.16 shows its income statement for 2011. Work out the statement of cash flows for 2011. Group these
a. Use the Dynamic Mattress model (Tables 29.8 - 29.10) and the spreadsheets on the book's website at www.mhhe.com/bma to produce pro forma income statements, balance sheets, and statements of cash
The financial statements of Eagle Sport Supply are shown in Table 29.17. For simplicity, "Costs" include interest. Assume that Eagle's assets are proportional to its sales.a. Find Eagle's required
Table 29.18 shows the 2013 financial statements for the Executive Cheese Company. Annual depreciation is 10% of fixed assets at the beginning of the year, plus 10% of new investment. The company
Here is a forecast of sales by National Bromide for the first four months of 2013 (figures in $ thousands):On the average 50% of credit sales are paid for in the current month, 30% are paid in the
Each of the following events affects one or more tables in Sections 29-2 to 29-3. Show the effects of each event by adjusting the tables listed in parentheses:a. Dynamic repays only $10 million of
Table 29.11 summarizes the 2014 income statement and end-year balance sheet of Drake's Bowling Alleys. Drake's financial manager forecasts a 10% increase in sales and costs in 2015. The ratio of
Abbreviated financial statements for Archimedes Levers are shown in Table 29.12 on the next page. If sales increase by 10% in 2014 and all other items, including debt, increase correspondingly, what
What is the maximum possible growth rate for Archimedes (see Problem 8) if the payout ratio is set at 50% and(a) No external debt or equity is to be issued?(b) The firm maintains a fixed debt ratio
In fiscal 2010 and 2011 Caterpillar's financial statements included the following items. What was Caterpillar's cash conversion cycle?$
A firm is considering several policy changes to increase sales. It plans to increase the variety of goods it keeps in inventory, but this will increase inventory by $100,000. It will offer more
What effect will each of the following have on the cash conversion cycle? a. The inventory turnover falls from 80 to 60 days. b. Customers are given a larger discount for cash transactions. c. The
Reliant Umbrellas has been approached by Plumpton Variety Stores of Nevada. Plumpton has expressed interest in an initial purchase of 5,000 umbrellas at $10 each on Reliant's standard terms of 2/30,
Describe the important changes that have occurred in stock markets over the last decade?
Explain how the bid-ask spread is determined today?
Suppose the following orders are received by an exchange for Cisco stock: • Limit Order: Buy 200 shares at $25 • Limit Order: Sell 200 shares at $26 • Limit Order: Sell 100 shares at $25.50 •
Suppose that in 2016, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income,
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2013, and this equipment was
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco's costs and expenses had been the same fraction of revenues in 2013-2016 as they were in 2012. What
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their cash flow statement: a. How much
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. From 2012 to 2016, what was the total cash flow from operations that Mydeco generated? b. What fraction of the
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Use the data from the balance sheet and cash flow statement in 2012 to determine the following: a. How much cash
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from the notes to their financial
For fiscal year end 2015, Walmart Stores, Inc. (WMT) had revenue of $485.65 billion, gross profit of $120.57billion, and net income of $16.36 billion. Costco Wholesale Corporation (COST) had revenue
At the end of 2015, Apple had cash and short-term investments of $41.60 billion, accounts receivable of $35.89 billion, current assets of $89.38 billion, and current liabilities of $80.61
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compare accounts payable days in 2012 and 2016. b. Did this change in accounts payable days improve or worsen
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. By how much did Mydeco increase its debt from 2012 to 2016? b. What was Mydeco's EBITDA/Interest coverage ratio
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. How did Mydeco's book debt-equity ratio change from 2012 to 2016?b. How did Mydeco's market debt-equity ratio
Use the data in Problem 8 to determine the change, from 2012 to 2015, in GE's a. Book debt-equity ratio? b. Market debt-equity ratio?
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. Compute Mydeco's PE ratio each year from 2012 to 2016. In which year was it the highest?b. What was Mydeco's
In early-2015, United Airlines (UAL) had a market capitalization of $24.8 billion, debt of $12.8 billion, and cash of $5.5 billion. United also had annual revenues of $38.9 billion. Southwest
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydeco's ROE each year from 2012 to 2016. b. Compute Mydeco's ROA each year from 2012 to 2016. c. Which
Consider the following potential events that might have taken place at Global Conglomerate on December 30, 2015. For each one, indicate which line items in Global's balance sheet would be affected
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Was Mydeco able to improve its ROIC in 2016 relative to what it was in 2012?
For fiscal year 2015, Costco Wholesale Corporation had a net profit margin of 2.05%, asset turnover of 3.48, and a book equity multiplier of 3.15. a. Use this data to compute Costco's ROE using the
For fiscal year 2015, Walmart Stores Inc. (WMT) had total revenues of $484.65 billion, net income of $16.36 billion, total assets of $203.49 billion, and total shareholder's equity of $81.39
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). a. Which auditing firm certified these financial statements? b. Which officers
What was the change in Global Conglomerate's book value of equity from 2014 to 2015 according to Table 2.1? Does this imply that the market price of Global's shares increased in 2015? Explain.
Use EDGAR to find Qualcomm's 10-K filing for 2015. From the balance sheet, answer the following questions: a. How much did Qualcomm have in cash and short-term investments? b. What were Qualcomm's
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their balance sheet: a. How much cash did
In early 2012, General Electric (GE) had a book value of equity of $116 billion, 10.6 billion shares outstanding, and a market price of $17 per share. GE also had cash of $84 billion, and total debt
In early-2015, Abercrombie & Fitch (ANF) had a book equity of $1390 million, a price per share of $25.52, and 69.35 million shares outstanding. At the same time, The Gap (GPS) had a book equity of
Throughout the 1990s, interest rates in Japan were lower than interest rates in the United States. As a result, many Japanese investors were tempted to borrow in Japan and invest the proceeds in the
Your firm spends $5000 every month on printing and mailing costs, sending statements to customers. If the interest rate is 0.5% per month, what is the present value of eliminating this cost by
Ten years ago Diana Torres wrote what has become the leading Tort textbook. She has been receiving royalties based on revenues reported by the publisher. These revenues started at $1 million in the
Figure 5.4 shows that Johnson and Johnson's five-year borrowing rate is 1.9% and Xerox's is 4.0%. Which would you prefer? $500 from Johnson and Johnson paid today or a promise that the firm will pay
Your uncle Fred just purchased a new boat. He brags to you about the low 7% interest rate (APR, monthly compounding) he obtained from the dealer. The rate is even lower than the rate he could have
In the summer of 2008, at Heathrow Airport in London, "Best of the best" (BB), a private company, offered a lottery to win a Ferrari or 90,000 British pounds, equivalent at the time to about
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