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Questions and Answers of Corporate Finance

Krell Industries has a share price of $22.00 today. If Krell is expected to pay a dividend of $0.88 this year and its stock price is expected to grow to $23.54 at the end of the year, what is
NoGrowth Corporation currently pays a dividend of $0.50 per quarter, and it will continue to pay this dividend forever. What is the price per share of NoGrowth stock if the firm’s equity cost of
Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if the firm’s equity cost of capital is 11%?
Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate.a. What is the expected growth rate of Dorpac’s
Laurel Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on
DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects that have an
Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a 3%
Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off
Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate’s earnings are
Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm
Zoom Enterprises expects that one year from now it will pay a total dividend of $5 million and repurchase $5 million worth of shares. It plans to spend $10 million on dividends and repurchases every
AFW Industries has 200 million shares outstanding and expects earnings at the end of this year of $700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using
Suppose Cisco Systems pays no dividends but spent $5 billion on share repurchases last year. If Cisco’s equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time.a. If the stock is trading at $55 in three months, what will be the payoff of
Maynard 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 Maynard’s dividend
Assume that you have shorted the call option in Problem 2.a. If the stock is trading at $55 in three months, what will you owe?b. If the stock is trading at $35 in three months, what will you owe?c.
If you own 15,000 shares of stock of Nike and it pays a dividend of $0.27 per share, then what is the total dividend you will receive?
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time.a. If the stock is trading at $8 in six months, what will be the payoff of the
Ovit, Inc., has preferred stock with a price of $20 and a dividend of $1.50 per year. What is its dividend yield?
Assume that you have shorted the put option in Problem 4.a. If the stock is trading at $8 in three months, what will you owe?b. If the stock is trading at $23 in three months, what will you owe?c.
You are long both a call and a put on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $45. Plot the value of this
You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short
A forward contract is a contract to purchase an asset at a fixed price on a particular date in the future. Both parties are obligated to fulfill the contract. Explain how to construct a forward
You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against a fall in the price of the
What is the maximum value that a call option and a put option can have?
Why is an American option with a longer time to expiration generally worth more than an otherwise identical option with a shorter time to expiration?
Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10.
You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $20 per share and the one-year risk-free interest rate is 8%. A one-year put on
Express the position of an equity holder in terms of put options.
Express the position of a debt holder in terms of put options.
Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million
If companies in the same industry as TargetCo (from Problem 1) are trading at multiples of 14 times earnings, what would be one estimate of an appropriate premium for TargetCo?
You are invested in GreenFrame, Inc. The CEO owns 3% of GreenFrame and is considering an acquisition. If the acquisition destroys $50 million of GreenFrame’s value, but the present value of the
Loki, Inc., and Thor, Inc., have entered into a stock-swap merger agreement whereby Loki will pay a 40% premium over Thor’s premerger price. If Thor’s premerger price per share was $40 and
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $35 per share and LE is trading for $25 per share, implying a premerger value of LE of $4 billion. If the
Let’s reconsider part (b) of Problem 1. The actual premium that your company will pay for TargetCo when it completes the transaction will not be 20%, because on the announcement the target price
ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.50. Assume
BAD Company’s stock price is $20, and the firm has 2 million shares outstanding. You believe you can increase the company’s value if you buy it and replace the management. Assume that BAD has a
You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater’s stock price is $20, and it has 2 million shares outstanding. You believe that if you
You have just landed in London with $500 in your wallet. Stopping at the foreign exchange booth, you see that pounds are being quoted at $1.95/£. For how many pounds can you exchange your $500?
Your firm needs to pay its French supplier €500,000. If the exchange rate is €0.65/$, how many dollars will you need to make the exchange?
Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $100,000 in three months time when the
You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of
You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur one year in the future. The spot exchange rate is and the forward rate is S =
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in India and is expecting a 400 million rupee cash inflow in one year. (The currency of India is the rupee). The
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etemadi's corporate finance department and are responsible for deciding whether to undertake the
Etemadi Amalgamated, the U.S. manufacturing company in Problem 7, is still considering a new project in Portugal. All information presented in Problem 7 is still accurate, except the spot rate is now
You work for a U.S. firm, and your boss has asked you to estimate the cost of capital for countries using the euro. You know that S = $1.20/€ and F1= $1.157/€. Suppose the dollar WACC for your
Maryland Light, a U.S. manufacturer of light fixtures, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 11%. You are in the corporate treasury department, and
The dollar cost of debt for Healy Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen
Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in Germany. You are in Manzetti€™s corporate finance department and are responsible for
Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 100 million Ethiopian
Tailor Johnson, the menswear company with a subsidiary in Ethiopia described in Problem 13, is considering the tax benefits resulting from deferring repatriation of the earnings from the subsidiary.
Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. Tax law in the Unites States requires U.S. corporations to pay taxes on their foreign
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S.
Assume that in the original Ityesi example in Table 23.2, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping other costs the same,
Identify the major components included in the definition of liabilities established by the FASB.
(a) What is meant by executory contract?(b) Do these contracts fit the definition of liabilities included in this chapter?
Distinguish between current and noncurrent liabilities.
At what amount should liabilities generally be reported?
Under what circumstances is a short-term loan classified among the long-term liabilities on the balance sheet?
How does the international standard for classification of short-term obligations to be refinanced differ from U.S. GAAP?
What is a line of credit?
Why is it important to use present value concepts in properly valuing long-term liabilities?
When money is borrowed and monthly payments are made, how does one determine the portion of the payment that is interest and the portion that is principal?
Distinguish between (a) Secured and unsecured bonds, (b) Collateral trust and debenture bonds,(c) Convertible and callable bonds, (d) Coupon and registered bonds, (e) Municipal and corporate bonds,
What is meant by market rate of interest, stated or contract rate, and effective or yield rate? Which of these rates changes during the lifetime of the bond issue?
What amortization method for premiums and discounts on bonds is recommended by APB Opinion No. 21? Why? When can the alternative method be used?
List three ways that bonds are commonly retired prior to maturity. How should the early extinguishment of debt be presented on the income statement?
What purpose is served by issuing callable bonds?
What are the distinguishing features of convertible debt securities? What questions relate to the nature of this type of security?
How does the accounting for convertible debt under IAS 32 differ from the accounting prescribed by U.S. GAAP?
The conversion of convertible bonds to common stock by an investor may be viewed as an exchange involving no gain or loss or as a transaction for which market values should be recognized and a gain
What is meant by refinancing or refunding a bond issue? When may refinancing be advisable?
Briefly explain the “fair value option” allowable under SFAS No. 159.
Why did the FASB decide to allow the fair value option?
What provision of SFAS No. 159 prevents companies from using hindsight to selectively enhance reported results using the fair value option?
Why is off-balance-sheet financing popular with many companies? What problems are associated with the use of this method of financing?
How can a variable interest entity (VIE) be used as a vehicle for off-balance-sheet financing?
What is a joint venture, and how can a joint venture be a form of off-balance-sheet financing?
What distinguishes a troubled debt restructuring from other debt restructurings?
What is the recommended accounting treatment for bond restructurings effected as (a) An asset swap?(b) An equity swap?(c) A modification of terms?
Using the following information, compute (1) Working capital and (2) Current ratio.Deferred sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
The company has the following three loans payable scheduled to be repaid in February of next year. As of December 31 of this year, compute (1) Total current liabilities and (2) Total noncurrent
The company arranged a line of credit for $500,000 on January 1. The commitment fee is 0.05% (five one-hundredths of 1%) of the total credit line. In addition, the company must pay interest of 5.9%
Florence Clark purchased a house for $300,000. She paid cash of 10% of the purchase price and signed a mortgage for the remainder. She will repay the mortgage in monthly payments for 30 years, with
Refer to Practice 12-4. What is the present value of Florence’s monthly mortgage payments after 12 payments have been made?
The company intends to issue 20-year bonds with a face value of $1,000. The bonds carry a coupon rate of 9%, and interest is paid semiannually. On the issue date, the market interest rate for bonds
The company intends to issue 10-year bonds with a face value of $1,000. The bonds carry a coupon rate of 13%, and interest is paid semiannually. On the issue date, the market interest rate for bonds
Bonds with a face value of $1,000 were issued for $1,025. Make the necessary journal entry on the books of the issuer.
Bonds with a face value of $1,000 were issued for $920. Make the necessary journal entry on the books of the issuer.
The company had planned to issue bonds with a face value of $100,000 on January 1. Because of regulatory delays, the bonds were not issued until February 1. The bonds have a coupon rate of 9%, which
On January 1, the company issued 10-year bonds with a face value of $200,000. The bonds carry a coupon rate of 10%, and interest is paid semiannually. On the issue date, the market interest rate for
On January 1, the company issued 10-year bonds with a face value of $200,000. The bonds carry a coupon rate of 10%, and interest is paid semiannually. On the issue date, the market interest rate for
The company has bonds outstanding with a face value of $50,000 and an unamortized premium of $2,350 at the beginning of the year and $2,000 as of the end of the year. Sales (all for cash) were
The company has outstanding bonds payable with a total face value of $100,000. On July 1, the company redeemed the bonds by purchasing them on the open market for a total of $102,700. Make the
The company issued convertible bonds with a total face value of $100,000 for $111,000. If the bonds had been issued without the conversion feature, their issuance price would have been $101,000.
The company has convertible bonds with a total face amount of $100,000 and a carrying value of $98,500. The bonds are converted into 2,000 shares of $1 par common stock. Each share of stock had a
The company has one asset, a bond (called Bond B) that it purchased (on the day it was issued) as an investment, and one liability, one of its own bonds (called Bond X) that the company issued to
Consider the following information:Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,000Interest expense . . . . . . . . . . . . .

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