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Questions and Answers of
Corporate Finance
Both Bond Sam and Bond Dave have 9 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest
Bond J is a 4 percent coupon bond. Bond K is a 12 percent coupon bond. Both bonds have nine years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise
One More Time Software has 9.2 percent coupon bonds on the market with nine years to maturity. The bonds make semiannual payments and currently sell for 106.8 percent of par. What is the current
Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent.a.
Suppose your company needs to raise $30 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're evaluating two issue
Bond P is a premium bond with a 12 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have five years to
The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period
The McKeegan Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays
Consider the prices in the following three Treasury issues as of May 15, 2007:The bond in the middle is callable in February 2008. What is the implied value of the call feature?
When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former
You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $900 a month in a stock account in real dollars and $450 a month in a bond account in real
Kiss the Sky Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,045. At this price, the bonds yield 7.5 percent. What must the coupon rate be on
Suppose the real rate is 3 percent and the inflation rate is 4.7 percent. What rate would you expect to see on a Treasury bill?
Say you own an asset that had a total return last year of 11.4 percent. If the inflation rate last year was 4.8 percent, what was your real return?
Locate the Treasury issue in Figure 7.4 maturing in November 2027. Is this a note or a bond? What is its coupon rate? What is its bid price? What was the previous day's asked price?Figure 7.4
Seether Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8 percent coupon bonds on the market that sell for $930, make semiannual payments, and
You purchase a bond with an invoice price of $968. The bond has a coupon rate of 7.4 percent, and there are four months to the next semiannual coupon date. What is the clean price of the bond?
You purchase a bond with a coupon rate of 6.8 percent and a clean price of $1,073. If the next semiannual coupon payment is due in two months, what is the invoice price?
River Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
Suppose the following bond quotes for IOU Corporation appear in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is
You want to have $1.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 11 percent and the inflation rate is 3.8 percent. What real amount
Staind, Inc., has 7.5 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8.75 percent, what is the current bond price?
Ackerman Co. has 9 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $934, what is its YTM?
Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
If Treasury bills are currently paying 7 percent and the inflation rate is 3.8 percent, what is the approximate real rate of interest? The exact real rate?
Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 14 percent return on the
Bread, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $4 per share for each of the next five years, and
Eva Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 8 percent per year
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today's newspaper. What was the closing price for this stock that appeared in yesterday's paper? If the
Consider four different stocks, all of which have a required return of 19 percent and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.35 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each company's stock
The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. If investors
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company
Far Side Corporation is expected to pay the following dividends over the next four years: $11, $8, $5, and $2. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends
Marcel Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 6 percent thereafter. If the required
E-Eyes.com Bank just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity, beginning 20 years from now. If the market requires a 6.4 percent return on this
Thirsty Cactus Corp. just paid a dividend of $1.25 per share. The dividends are expected to grow at 28 percent for the next eight years and then level off to a 6 percent growth rate indefinitely. If
Chartreuse County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next 11 years before leveling off at 6 percent into perpetuity. The
Storico Co. just paid a dividend of $2.45 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until
This one's a little harder. Suppose the current share price for the firm in the previous problem is $63.82 and all the dividend information remains the same. What required return must investors be
Keenan Co. is expected to maintain a constant 5.2 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.3 percent, what is the required return on the company's
Suppose you know that a company's stock currently sells for $47 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided
Apocalyptica Corp. pays a constant $9.75 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on
1. Assuming the company continues its current growth rate, what is the value per share of the company's stock?2. To verify their calculations, Carrington and Genevieve have hired Josh Schlessman as a
Mahjong, Inc., has identified the following two mutually exclusive projects:Year ______Cash Flow (A) ________Cash Flow (B)0 ................. -$43,000 ................... -$43,0001
Consider the following two mutually exclusive projects:Year ______Cash Flow (X) ___________Cash Flow (Y)0 ............... -$15,000 .......................... -$15,0001 ................... 8,150
Light Sweet Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year _____________Cash Flow0 .................... -$45,000,0001 ......................
The Weiland Computer Corporation is trying to choose between the following two mutually exclusive design projects:Year ________Cash Flow (I) ____________Cash Flow (II)0 .................. -$53,000
An investment has an installed cost of $684,680. The cash flows over the four-year life of the investment are projected to be $263,279, $294,060, $227,604, and $174,356. If the discount rate is
Slow Ride Corp. is evaluating a project with the following cash flows:Year ___________Cash Flow0 .................... -$16,0001 ........................ 6,1002 ........................ 7,8003
An investment under consideration has a payback of seven years and a cost of $724,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this
A project has the following cash flows:Year ___________Cash Flow0 ........................ $58,0001 ......................... -34,0002 ......................... -45,000What is the IRR for this
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year __________Cash Flow0 .................. -$750,0001 .....................
Buy Coastal, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?Year
An investment project costs $15,000 and has annual cash flows of $4,300 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5
You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be depreciated straight-line to zero
A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. Is this a good project if the required return is 8 percent? What if it's 20 percent? At what discount rate
What is the payback period for the following set of cash flows? Year ______Cash Flow 0 .............. -$6,400 1 ................. 1,600 2 ................. 1,900 3 ................. 2,300 4
What is the IRR of the following set of cash flows? Year ___________Cash Flow 0 ...................... -$19,500 1 .......................... 9,800 2 ........................ 10,300 3
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year ____________Cash
An investment project provides cash inflows of $765 per year for eight years. What is the project payback period if the initial cost is $2,400? What if the initial cost is $3,600? What if it is
A firm evaluates all of its projects by applying the IRR rule. If the required return is 16 percent, should the firm accept the following project?Year __________Cash Flow0 ………………..
1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.2. Based on your analysis, should
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $6 million in anticipation of using
In the previous problem, suppose the project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project.
Dog Up! Franks is looking at a new sausage system with an installed cost of $560,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the
Your firm is contemplating the purchase of a new $720,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at
In the previous problem, suppose your required return on the project is 20 percent and your pretax cost savings are $300,000 per year. Will you accept the project? What if the pretax cost savings are
You are evaluating two different silicon wafer milling machines. The Techron I costs $290,000, has a three-year life, and has pretax operating costs of $67,000 per year. The Techron II costs
Alson Enterprises needs someone to supply it with 185,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It
Geary Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $560,000 is estimated to result in $210,000 in annual pretax cost savings.
Dangerfield Industrial Systems Company (DISC) is trying to decide between two different conveyor belt systems. System A costs $430,000, has a four-year life, and requires $110,000 in pretax annual
Suppose in the previous problem that DISC always needs a conveyor belt system; when one wears out, it must be replaced. Which project should the firm choose now?Previous problemDangerfield Industrial
Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $2,400,000 five years ago; if
In the previous problem, suppose you were going to use a three-year MACRS depreciation schedule for your manufacturing equipment, and you could keep working capital investments down to only $25,000
Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $.50 and lasts 1,000 hours. A
A proposed new investment has projected sales of $830,000. Variable costs are 60 percent of sales, and fixed costs are $181,000; depreciation is $77,000. Prepare a pro forma income statement assuming
Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year Unit
A proposed cost-saving device has an installed cost of $610,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
To solve the bid price problem presented in the text, we set the project NPV equal to zero and found the required price using the definition of OCF. Thus the bid price represents a financial
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $650,000; the new one will cost $780,000. The new machine will be depreciated straight-line to zero over
Consider the following income statement:Sales.....................$824,500Costs......................538,900Depreciation.............126,500EBIT..............................?Taxes
A proposed new project has projected sales of $108,000, costs of $51,000, and depreciation of $6,800. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches
A piece of newly purchased industrial equipment costs $1,080,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
Consider an asset that costs $548,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
A five-year project has an initial fixed asset investment of $270,000, an initial NWC investment of $25,000, and an annual OCF of - $42,000. The fixed asset is fully depreciated over the life of the
The debate regarding CFLs versus incandescent bulbs (see Problems 25-27) has even more wrinkles. In no particular order: 1. Incandescent bulbs generate a lot more heat than CFLs. 2. CFL prices will
Summer Tyme, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $3.9 million. The fixed asset will be depreciated straight-line to zero over
Consider a project with the following data: accounting break-even quantity = 15,500 units; cash break-even quantity = 13,200 units; life = five years; fixed costs = $140,000; variable costs = $24 per
In the previous problem, suppose fixed costs are $130,000. What is the operating cash flow at 58,000 units? The degree of operating leverage?
A proposed project has fixed costs of $73,000 per year. The operating cash flow at 8,000 units is $87,500. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise
Consider a four-year project with the following information: initial fixed asset investment = $490,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32;
You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $750 per set and have a variable cost of $330 per set. The company has spent $150,000 for a marketing study that
Hybrid cars are touted as a "green" alternative; however, the financial aspects of hybrid ownership are not as clear. Consider the 2006 Honda Accord Hybrid, which had a list price of $5,450
Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $3,200,000 investment in threading equipment to get the project
We are evaluating a project that costs $724,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected
A project has the following estimated data: price = $57 per unit; variable costs = $32 per unit; fixed costs = $9,000; required return = 12 percent; initial investment = $18,000; life = four years.
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