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Questions and Answers of Corporate Finance

Kartman Corporation is evaluating four real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is
Explain the NPV rule for stand-alone projects?
How can you interpret the difference between the cost of capital and the IRR?
How do you apply the payback rule?
Under what conditions will the IRR rule lead to the same decision as the NPV rule?
What is the most reliable way to choose between mutually exclusive projects?
For mutually exclusive projects, explain why picking one project over another because it has a larger IRR can lead to mistakes?
Explain why choosing the option with the highest NPV is not always correct when the options have different lives?
What issues should you keep in mind when choosing among projects with different lives?
Explain why picking the project with the highest NPV might not be optimal when you evaluate projects with different resource requirements?
Etobicoke Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first
Recall the Blackberry Presenter example from the chapter. Suppose the Blackberry Presenters will be housed in warehouse space that the company could have otherwise rented out for $200,000 per year
One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000
Big Rock Brewery currently rents a bottling machine for $50,000 per year, including all maintenance expenses. The company is considering purchasing a machine instead and is comparing two options:a.
You are a manager at Northern Fibre, which is considering expanding its operations in synthetic fibre manufacturing. Your boss comes into your office, drops a consultant's report on your desk, and
Buhler Industries is a farm implement manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight tractors. Buhler plans to use a cost of capital
Buckingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.75 million. Unfortunately, installing this machine will
Royal Mount Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation.
Anola Inc.'s projected receivables are 15% of sales and its payables are 15% of cost of goods sold (COGS), Forecast the required investment in net working capital for Anola Inc. assuming that sales
Atlantic Telecom reported net income of $250 million for the most recent fiscal year. The firm had CCA deductions of $100 million (assume reported depreciation was equal to this CCA), capital
Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in the Maritimes. Management is contemplating building an eighth retail store across town
Spherical Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. This equipment has a CCA rate of 25%, and Spherical's marginal corporate tax rate
What kind of real option does the XC-900 machine (see Problem 19) provide to Buckingham?
What is capital budgeting, and what is its goal?
Why do real options increase the NPV of the project?
Why is computing a project's effect on the firm's earnings insufficient for capital budgeting?
How are operating expenses and capital expenditures treated differently when calculating incremental earnings?
Why do we focus only on incremental revenues and costs, rather than all revenues and costs of the firm?
If depreciation expense is not a cash flow, why do we have to subtract it and add it back? Why not just ignore it?
Why does an increase in NWC represent a cash outflow?
Should we include sunk costs in the cash flows of a project? Why or why not?
Explain why it is advantageous for a firm to use the most accelerated depreciation schedule possible for tax purposes?
What are some of the major behavioral trading biases?
What does the dividend discount model say about valuing shares of stock?
What is the relationship between the NPV of reinvesting cash flows and the change in the price of the stock?
Explain the connection between the FCF valuation model and capital budgeting?
Stelco Steel plans to pay a dividend of $3 this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%. a. Assuming that Stelco's dividend payout
Victoria Enterprises expects free cash flows next year of $1 million. Its depreciation and capital expenditures will both be $300,000, and it expects its capital expenditures to always equal its
The present value of JECK Co.'s expected free cash flows is $100 million. If JECK has $30 million in debt, $6 million in cash, and 2 million shares outstanding, what is its share price?
1. Determine the annual incremental free cash flow associated with each expansion plan relative to the status quo (no expansion).2. Compute the IRR and payback period of each expansion plan. Which
What is a share of stock and what are dividends?
Why do we ignore interest payments on the firm's debt in the discounted free cash flow model?
What are some common valuation multiples?
What implicit assumptions are made when valuing a firm using multiples based on comparable firms?
State the efficient markets hypothesis?
What are several systematic behavioral biases that individual investors fall prey to?
How do you calculate the total return of a stock?
What are three ways that a firm can increase the amount of its future dividends per share?
Under what circumstances can a firm increase its share price by cutting its dividend and investing more?
What are the main limitations of the dividend-discount model?
What pieces of information are needed to forecast dividends?
What is the relation between capital budgeting and the discounted free cash flow model?
What is the reasoning behind using the average annual return as a measure of expected return?
What is meant by diversification, and how does it relate to common versus independent risk?
Which of the following risks of a stock are likely to be unsystematic, diversifiable risks and which are likely to be systematic risks? Which risks will affect the risk premium that investors will
Calculate the 95% confidence intervals for the S&P/ TSX Composite Index, the S&P 500 in CAD, and long-term Government of Canada bonds included in Figures 10.3 and 10.4?
Historically, which types of investments have had the highest average returns and which have been the most volatile from year to year?
Is systematic or unsystematic risk priced? Why?
For what purpose do we use the average and standard deviation of historical stock returns?
How does the standard deviation of historical returns affect our confidence in predicting the next period's return?
What is the relationship between risk and return for large portfolios? How are individual stocks different?
Do portfolios or the stocks in the portfolios tend to have the lower volatility?
Using the data in the following table, estimate the average return and volatility for each stock._____________________ Realized ReturnsYear _____________ Stock A ________ Stock B1998
You hear on the news that the S&P/ TSX Composite Index was down 2% today relative to the risk-free rate (the market's excess return was -2%). You are thinking about your portfolio and your
Fairmont Enterprises has an expected return of 15% and Laval News has an expected return of 20%. If you put 70% of your portfolio in Laval and 30% in Fairmont, what is the expected return of your
You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 50% of the money into Gold Finger (currently $25/ share), 25% of the money into
Stock A and B have the following returns:_________________ Stock A _______________ Stock B1 .......................... 0.10 ........................... 0.062 .......................... 0.07
What determines how much risk will be eliminated by combining stocks in a portfolio?
When do stocks have more or less correlation?
What does beta (ß) tell us?
What does the CAPM say about the required return of a security?
Why does a firm's capital have a cost?
How can you estimate the WACC to be used in a new line of business?
What types of additional costs does a firm incur when accessing external capital?
What is the best way to incorporate these additional costs into capital budgeting?
Why do we use market-value weights in the weighted average cost of capital?
How can you measure a firm's cost of debt?
What are the major tradeoffs in using the CAPM versus the CDGM to estimate the cost of equity?
Why do different companies have different WACCs?
What are the tradeoffs in estimating the market risk premium?
What inputs do you need to be ready to apply the WACC method?
When evaluating a project in a new line of business, which assumptions about the WACC method are most likely to be violated?
1. Calculate HydroTech's net debt.2. Compute HydroTech's equity and (net) debt weights based on the market value of equity and the book value of net debt.3. Calculate the cost of equity capital
What services does the underwriter provide in a traditional IPO?
Explain the mechanics of an auction IPO?
List and discuss four characteristics about IPOs that are puzzling?
For each of the characteristics, identify its relevance to financial managers?
What is the difference between a cash offer and a rights offer for an SEO?
What is the typical stock price reaction to an SEO?
Why might a company's management want to issue a bond with the Canada call provision?
Why would companies voluntarily choose to put restrictive covenants into a new bond issue?
Why would a call feature be valuable to a company issuing bonds?
What are the four categories of international bonds?
What happens if an issuer fails to live up to a bond covenant?
Why can bond covenants reduce a firm's borrowing costs?
Do bonds with a standard call feature have a higher or lower yield than otherwise identical bonds without a call feature? Why?
Will a drop in interest rates make it advantageous for a company to call a bond with a Canada call feature?
1. Natasha is an example of what kind of an investor?2. At each funding stage prior to the IPO (i.e., 1985, 2000, 2003, and 2006) calculate the pre-money and post-money valuation of the equity of the
According to the tradeoff theory, how is capital structure determined?
Why would managers in one industry choose different capital structures than those in another industry?

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