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Questions and Answers of
Corporate Finance
How would you describe the behavior of market interest rates and bond returns over the last 50 years? Do swings in market interest rates have any bearing on bond returns? Explain.
A 9%, 20-year bond is callable in 12 years at a call price of $1,090. The bond is currently priced in the market at $923.68. What is the issue's current yield?
Caleb buys an 8.75% corporate bond with a current yield of 5.6%. When he sells the bond 1 year later, the current yield on the bond is 6.6%. How much did Caleb make on this investment?
In early January 2010, you purchased $30,000 worth of some high-grade corporate bonds. The bonds carried a coupon of and mature in 2024. You paid a price of 94.125 when you bought the bonds. Over the
Buck buys a 7.5% corporate bond with a current yield of 4.8%. How much did he pay for the bond?
Sara Nixon is looking for a fixed-income investment. She is considering two bond issues:a. A Treasury with a yield of 5%b. An in-state municipal bond with a yield of 4% Sara is in the 33% federal tax
The chart shows the number of global corporate bond issues for which Standard & Poor's issued ratings upgrades or downgrades every year from 1981 to 2014.a. What is the trend in the number of ratings
You are considering the purchase of a $1,000 par value bond with an 6.5% coupon rate (with interest paid semiannually) that matures in 12 years. If the bond is priced to provide a required return of
You notice in the WSJ a bond that is currently selling in the market for $1,070 with a coupon of 11% and a 20-year maturity. Using annual compounding, calculate the promised yield on this bond.
You are evaluating an outstanding issue of $1,000 par value bonds with an 8.75% coupon rate that mature in 25 years and make quarterly interest payments. If the current market price for the bonds is
What is the price of a zero-coupon ($1,000 par value) bond that matures in 20 years and has a promised yield of 9.5%?
A bond has a Macaulay duration equal to 9.5 and a yield to maturity of 7.5%. What is the modified duration of this bond?
You have the opportunity to purchase a 25-year, $1,000 par value bond that has an annual coupon rate of 9%. If you require a YTM of 7.6%, how much is the bond worth to you?
Three years ago you purchased a 10% coupon bond that pays semiannual coupon payments for $975. What would be your bond equivalent yield if you sold the bond for current market price of $1,050?
A $1,000 par value bond with a 7.25% coupon rate (semiannual interest) matures in seven years and currently sells for $987. What is the bond's yield to maturity and bond equivalent yield?
a. Regarding the short-term trading opportunity:1. What basic trading principle is involved in this situation?2. If Marlene's expectations are correct, what will the price of this bond be in two
For each pair of funds listed below, select the one that is likely to be less risky. Briefly explain your answer.a. Growth versus growth-and-income fundsb. Equity-income versus high-grade corporate
The All-State Mutual Fund has the following five-year record of performance:Find this no-load fund's five-year (2012-2016) average annual compound rate of return. Also find its three-year (2014-2016)
You've uncovered the following per-share information about a certain mutual fund:On the basis of this information, find the fund's holding period return for 2014, 2015, and 2016. (In all three cases,
Listed below is the 10-year, per-share performance record of Larry, Moe, & Curley's Growth Fund, as obtained from the fund's May 30, 2016, prospectus.Use this information to find LM&C's holding
The Well-Managed Closed-End Fund turned in the following performance for the year 2016.a. Based on this information, what was the NAV-based HPR for the WMCEF in 2016?b. Find the percentage (%)
Refer to the table below:_____________Fund A _______Fund BBeta .................. 1.8 .................. 1.1Investor A ........ 20% ................ 80%Investor B ........ 80% ................
Your portfolio has a beta equal to 1.3. It returned 12% last year. The market returned 10%; the risk-free rate is 2%. Calculate Treynor's measure for your portfolio and the market. Did you earn a
During the year just ended, Anna Schultz's portfolio, which has a beta of 0.90, earned a return of 8.6%. The risk-free rate is currently 3.3%, and the return on the market portfolio during the year
Your portfolio returned 13% last year, with a beta equal to 1.5. The market return was 10%, and the risk-free rate 4%. Did you earn more or less than the required rate of return on your portfolio?
Chee Chew's portfolio has a beta of 1.3 and earned a return of 12.9% during the year just ended. The risk-free rate is currently 4.2%. The return on the market portfolio during the year just ended
John Reardon purchased 100 shares of Tomco Corporation in December 2016 at a total cost of $1,762. He held the shares for 15 months and then sold them, netting $2,500. During the period he held the
On January 1, 2017, Simon Love's portfolio of 15 common stocks had a market value of $264,000. At the end of May 2017, Simon sold one of the stocks, which had a beginning-of-year value of $26,300,
Using the Facebook stock option quotations in Figure 14.1, find the option premium, the time value, and the stock index breakeven point for the following puts and calls.a. The August put with a
In Table 14.2, notice that among the options expiring in one month, the option with the highest time value is the one with a strike price of $70. Likewise, among the options expiring in three months,
Dorothy Santosuosso does a lot of investing in the stock market and is a frequent user of stock-index options. She is convinced that the market is about to undergo a broad retreat and has decided to
Nick Fitzgerald holds a well-diversified portfolio of high-quality, large-cap stocks. The current value of Fitzgerald's portfolio is $735,000, but he is concerned that the market is heading for a big
Repeat the analysis of problem 14.17 assuming that the volatility of the stock's return is 40%. Intuitively, would you expect this to cause the call price to rise or fall? By how much does the call
Suppose that a call option with a strike price of $45 expires in one year and has a current market price of $5.16. The market price of the underlying stock is $46.21, and the risk-free rate is 1%.
Look at the Facebook option quotes in Figure 14.1, and focus on the call and put options with a strike price of $80. Can you use put-call parity to infer what the market price of Facebook stock must
Repeat the analysis of problem 14.7, but this time focus on the Facebook call and put options in Figure 14.1 that have a strike price of $87.50. If you use put-call parity to find the price of
In the beginning of this chapter you read about Neil Dana, who exercised his option to buy six million shares. In that transaction, Mr. Dana spent $3.6 million to acquire stock valued at $229
Why are both hedgers and speculators important to the efficient operation of a futures market?
Briefly define each of the following:a. Settlement priceb. Daily price limitc. Volumed. Maximum daily price rangee. Delivery month
As it turns out, you were correct when you purchased four contracts for feeder cattle at 88.8, as the spot price on cattle rose to 101.2 on the delivery date given in your contracts. How much money
The accompanying table shows a series of transactions in a savings account. The account pays 6% simple interest, and the account owner withdraws interest as soon as it is paid. Create a new table
Consider the streams of income given in the following table.a. Find the present value of each income stream, using a 1% discount rate, then repeat those calculations using an 8% discount rate.b.
Using a financial calculator or an Excel spreadsheet, calculate the following.a. The present value of $500 to be received four years from now, using an 11% discount rate.b. The present value of the
Using a financial calculator or spreadsheet, calculate the following.a. The future value of a $350 deposit left in an account paying 6% annual interest for 10 years.b. The future value at the end
Using a financial calculator or spreadsheet, calculate the future value in seven years of $10,000 invested today in an account that pays a stated annual interest rate of 6%, compounded monthly.
The following table describes the characteristics of five annuities. Calculate the future value of each annuity given its characteristics.
If you deposit $1,000 into an account at the end of each of the next 10 years and the account pays an annual interest rate of 2%, how much will be in the account after 10 years?
Assume you can earn 9% on the investments described below. How much money would each investment provide for you after six years?a. Invest $5,000 as a lump sum today.b. Invest $2,000 at the end of
The following table lists the lump sum payout, the timing of that payout, and the discount rate associated with five different investments. Calculate the present value of each investment.
1. What are the advantages and disadvantages of changing the company organization from a sole proprietorship to an LLC? 2. What are the advantages and disadvantages of changing the company
Penguin Pucks, Inc., has current assets of $5,100, net fixed assets of $23,800, current liabilities of $4,300, and long-term debt of $7,400. What is the value of the shareholders' equity account for
The 2008 balance sheet of Saddle Creek, Inc., showed current assets of $2,100 and current liabilities of $1,380. The 2009 balance sheet showed current assets of $2,250 and current liabilities of
Jetson Spacecraft Corp. shows the following information on its 2009 income statement: sales = $196,000; costs = $104,000; other expenses = $6,800; depreciation expense = $9,100; interest expense =
Prepare a 2009 balance sheet for Bertinelli Corp. based on the following information: cash = $195,000; patents and copyrights = $780,000; accounts payable = $405,000; accounts receivable =
Corporation Growth has $88,000 in taxable income, and Corporation Income has $8,800,000 in taxable income.What is the tax bill for each firm? Suppose both firms have identified a new project that
During 2009, Raines Umbrella Corp. had sales of $730,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $580,000, $105,000, and $135,000, respectively. In
Papa Roach Exterminators, Inc., has sales of $586,000, costs of $247,000, depreciation expense of $43,000, interest expense of $32,000, and a tax rate of 35 percent. What is the net income for this
In Problem 19, suppose Raines Umbrella Corp. paid out $25,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued
Dahlia Industries had the following operating results for 2009: sales = $22,800; cost of goods sold = $16,050; depreciation expense = $4,050; interest expense = $1,830; dividends paid = $1,300. At
Consider the following abbreviated financial statements for Parrothead Enterprises:a. What is owners' equity for 2008 and 2009?b. What is the change in net working capital for 2009?c. In 2009,
Draw up an income statement and balance sheet for this company for 2008 and 2009.
For 2009, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
Suppose the firm in Problem 2 paid out $73,000 in cash dividends. What is the addition to retained earnings?In problem 2Papa Roach Exterminators, Inc., has sales of $586,000, costs of $247,000,
Suppose the firm in Problem 3 had 85,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What are the dividends per share figure?In problem 2Papa Roach
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $7 million. The machinery can be sold to the Romulans today for $4.9 million. Klingon's current balance sheet shows net
The Renata Co. had $236,000 in 2009 taxable income. Using the rates from Table 2.3 in the chapter, calculate the company's 2009 income taxes.
The 2008 balance sheet of Maria's Tennis Shop, Inc., showed long-term debt of $2.6 million, and the 2009 balance sheet showed long-term debt of $2.9 million. The 2009 income statement showed an
The 2008 balance sheet of Maria's Tennis Shop, Inc., showed $740,000 in the common stock account and $5.2 million in the additional paid-in surplus account. The 2009 balance sheet showed $815,000
Given the information for Maria's Tennis Shop, Inc., in Problems 11 and 12, suppose you also know that the firm's net capital spending for 2009 was $940,000, and that the firm reduced its net working
Dimeback, Inc., is obligated to pay its creditors $7,300 during the year. What is the market value of the shareholders' equity if assets have a market value of $8,400? What if assets equal $6,700?
Earnhardt Driving School's 2008 balance sheet showed net fixed assets of $3.4 million, and the 2009 balance sheet showed net fixed assets of $4.2 million. The company's 2009 income statement showed
SDJ, Inc., has net working capital of $1,370, current liabilities of $3,720, and inventory of $1,950. What is the current ratio? What is the quick ratio?
Tortoise, Inc., had a cost of goods sold of $28,834. At the end of the year, the accounts payable balance was $6,105. How long on average did it take the company to pay off its suppliers during the
Prepare the 2008 and 2009 common-size balance sheets for Just Dew It.
Prepare the 2009 common-base year balance sheet for Just Dew It.
Prepare the 2009 combined common-size, common-base year balance sheet for Just Dew It.
A company has net income of $218,000, a profit margin of 8.70 percent, and an accounts receivable balance of $132,850. Assuming 70 percent of sales are on credit, what are the company's days' sales
The Ashwood Company has a long-term debt ratio of .45 and a current ratio of 1.25. Current liabilities are $875, sales are $5,780, profit margin is 9.5 percent, and ROE is 18.5 percent. What is the
In response to complaints about high prices, a grocery chain runs the following advertising campaign: "If you pay your child $3 to go buy $50 worth of groceries, then your child makes twice as much
Sherwood Inc.'s net income for the most recent year was $13,168. The tax rate was 34 percent. The firm paid $3,605 in total interest expense and deducted $2,382 in depreciation expense. What was the
Holliman Corp. has current liabilities of $365,000, a quick ratio of .85, inventory turnover of 5.8, and a current ratio of 1.4. What is the cost of goods sold for the company?
Prince Albert Canning PLC had a net loss of £13,482 on sales of £138,793 (both in thousands of pounds). What was the company's profit margin? Does the fact that these figures are quoted in a
Prepare the 2009 statement of cash flows for Smolira Golf Corp.
Smolira Golf Corp. has 25,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2009 was $43. What is the price-earnings ratio? What are the dividends per
Ortiz Lumber Yard has a current accounts receivable balance of $431,287. Credit sales for the year just ended were $3,943,709. What is the receivables turnover? The days' sales in receivables? How
The Blue Moon Corporation has ending inventory of $407,534, and cost of goods sold for the year just ended was $4,105,612. What is the inventory turnover? The days' sales in inventory? How long on
Bach Corp. had additions to retained earnings for the year just ended of $430,000. The firm paid out $175,000 in cash dividends, and it has ending total equity of $5.3 million. If the company
Based only on the following information for Bennington Corp., did cash go up or down? By how much? Classify each event as a source or use of cash.Decrease in
Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93 indicates that for every
For the year just ended, Ypsilanti Yak Yogurt shows an increase in its net fixed assets account of $835. The company took $148 in depreciation expense for the year. How much did the company spend on
Y3K, Inc., has sales of $5,276, total assets of $3,105, and a debt-equity ratio of 1.40. If its return on equity is 15 percent, what is its net income?
Firm A and firm B have debt-total asset ratios of 35% and 30% and returns on total assets of 12% and 11%, respectively. Which firm has a greater return on equity?
Crystal Lake, Inc., has a total debt ratio of 0.63. What is its debt-equity ratio? What is its equity multiplier?
Braam Fire Prevention Corp. has a profit margin of 6.80 percent, total asset turnover of 1.95, and ROE of 18.27 percent. What is this firm's debt-equity ratio?
1. Using the financial statements provided for S&S Air, calculate each of the ratios listed in the table for the light aircraft industry.2. Mark and Todd agree that a ratio analysis can provide a
Consider the following simplified financial statements for the Phillips Corporation (assuming no income taxes):Phillips has predicted a sales increase of 15 percent. It has predicted that every item
The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales
Based on the following information, calculate the sustainable growth rate for Kaleb's Kickboxing:Profit margin = 8.2%Capital intensity ratio = .75Debt-equity ratio = .40Net income = $43,000Dividends
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 2.50Profit margin = 7.8%Equity multiplier = 1.80Payout ratio = 60%
Seaweed Mfg., Inc., is currently operating at only 95 percent of fixed asset capacity. Current sales are $550,000. How fast can sales grow before any new fixed assets are needed?
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