Questions and Answers of Corporate Finance Core Principles and Applications

Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period?
For the company in the previous problem, suppose fixed assets are $720,000 and sales are projected to grow to $665,000. How much in new fixed assets are required to support this growth in sales?Data
In the previous problem, suppose the firm was operating at only 80 percent capacity in 2021. What is EFN now?Data in previous problem,The most recent financial statements for Crosby, Inc., follow.
The Fancy Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 22 percent. Assume all sales revenue is
Chauhan Restaurant is considering the purchase of a soufflé maker that costs $8,600. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method.
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $295,000. The company is an ongoing operation, but it expects competitive pressures
Hardwick Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1.75 million. The company can continue to rent the building to
Sheep Ranch Golf Academy is evaluating new golf practice equipment. The “Dimple-Max” equipment costs $135,000, has a three-year life, and costs $15,700 per year to operate. The relevant discount
Market Top Investors, Inc., is considering the purchase of a $425,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line
Shinoda Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $780,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is
Yang Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $1.5 million, and its economic life is five years. The machine will be fully
In each of the following cases, find the unknown variable. Accounting Break-Even 143,286 104,300 24,640 Unit Price $39 ? 92 Unit Variable Cost $30 27 ? Fixed Costs $
J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,000, including a set of eight chairs. The
Ayden’s Toys, Inc., purchased a $485,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for $19. The
Assume a firm is considering a new typical project that requires an initial investment with sales, variable costs, and fixed costs over its life. Will the project usually reach the accounting, cash,
The Mango Republic has liberalized its markets and is now permitting foreign investors. Tesla Manufacturing has analyzed starting a project in the country and has determined that the project has a
B&B has a new baby powder ready to market. If the firm goes directly to market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment
Take a look back at Figure 8.5. Notice the wide range of coupon rates. Why are they so different?Data in Figure 8.5 Maturity Coupon 7/15/2021 2.625 2/28/2022 1.125
Martinez, Inc., has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line
You are considering a new product launch. The project will cost $1.675 million, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 195
In Problem 18, suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project
Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says,
Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town
Hickock Mining is evaluating when to open a gold mine. The mine has 34,400 ounces of gold left that can be mined and mining operations will produce 4,300 ounces per year. The required return on the
What is the price of a 25-year, zero coupon bond paying $1,000 at maturity, assuming semiannual compounding, if the YTM is:a. 6 percent?b. 8 percent?c. 10 percent?
Uliana Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 6 percent coupon bonds on the market with a par value of $1,000 that sell for $967, make
The newspaper reported last week that Chen Enterprises earned $19.2 million this year. The report also stated that the firm’s return on equity is 12 percent. The firm retains 80 percent of its
Mitchell Mineral Water, Inc., will pay a quarterly dividend per share of $.95 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1 percent, forever.
Sorenson, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 3.2 percent, forever. The current stock
Mercury Satellite Corporation earned $25 million for the fiscal year ending yesterday. The firm’s policy is to pay out 40 percent of its earnings as dividends. The remaining 60 percent of earnings
Consider the following information:a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B and
Four years ago, Bling Diamond, Inc., paid a dividend of $1.95 per share. The company paid a dividend of $2.75 per share yesterday. Dividends will grow over the next five years at the same rate they
Consider Pacific Energy Company and Atlantic Energy, Inc., both of which reported earnings of $790,000. Without new projects, both firms will continue to generate earnings of $790,000 in perpetuity.
Consider the following information:a. Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio?b. What is the variance of this
FFDP Corp. has yearly sales of $43 million and costs of $14 million. The company’s balance sheet shows debt of $58 million and cash of $19 million. There are 1.85 million shares outstanding and the
Given that Bit Digital was up by about 3,688 percent for 2020, why didn’t all investors hold Bit Digital?
Given that Occidental Petroleum was down by about 58 percent for 2020, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
What was the arithmetic average annual return on large-company stocks from 1926 through 2020?a. In nominal terms?b. In real terms?
You purchased a zero coupon bond one year ago for $286.40. The market interest rate is now 6.1 percent. If the bond had 21 years to maturity when you originally purchased it, what was your total
Asset W has an expected return of 8.8 percent and a beta of .85. If the risk-free rate is 2.6 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
You bought a share of 3.1 percent preferred stock for $91.86 last year. The market price for your stock is now $95.63. What was your total return for last year?
You bought a stock three months ago for $74.83 per share. The stock paid no dividends. The current share price is $82.65. What is the APR of your investment? The EAR?
You want to create a portfolio equally as risky as the market and you have $1 million to invest. Given this information, fill in the rest of the following table: Asset Stock A Stock B Stock
You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset:a. Fill in the missing values in the table.b. Is the stock of Firm A
Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the
The market portfolio has an expected return of 11.3 percent and a standard deviation of 18 percent. The risk-free rate is 4.5 percent.a. What is the expected return on a well-diversified portfolio
Suppose you observe the following situation:Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate? Security Pete
Assume Stocks A and B have the following characteristics:The covariance between the returns on the two stocks is .003.a. Suppose an investor holds a portfolio consisting of only Stock A and
Maneet Gupta, the CFO of Ultra Bread, has decided to use an APT model to estimate the required return on the company’s stock. The risk factors she plans to use are the risk premium on the stock
What is the relationship between the one-factor model and the CAPM?
An all-equity firm is considering the following projects:The T-bill rate is 4 percent and the expected return on the market is 12 percent.a. Which projects have a higher expected return than the
You have recently been hired by Master Tools (MT) in its relatively new treasury management department. MT was founded eight years ago by Martha Masters. Martha found a method to streamline the
Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 11.3 percent and the cost of debt is 5.9 percent. The relevant tax rate is
In the previous problem, suppose the most recent dividend was $3.85 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two
Ursala, Inc., has a target debt-equity ratio of .65. Its WACC is 10.4 percent, and the tax rate is 23 percent.a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt?b. If
Titan Corporation has 5.4 million shares of common stock outstanding and 125,000 5.8 percent semiannual bonds outstanding, with a par value of $1,000 each. The common stock currently sells for $53
Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control its material supply. The current cash
Fields, Inc., has the following book value balance sheet:a. What is the debt-equity ratio based on book values?b. Suppose the market value of the company’s debt is $180 million and the market value
If a market is semistrong form efficient, is it also weak form efficient? Explain.
The shareholders of the Pineapple Company need to elect seven new directors. There are 750,000 shares outstanding currently trading at $64 per share. You would like to serve on the board of
An election is being held to fill four seats on the board of directors of a firm in which you hold stock. The company has 27,300 shares outstanding. If the election is conducted under cumulative
Home Corp. has interest-bearing debt with a market value of $65 million. The company also has 2.1 million shares that sell for $43 per share. What is the debt-equity ratio for this company based on
Edgehill, Inc., has 355,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 5.4 percent paid semiannually, and 27 years to maturity. The current YTM on the bonds is 4.6
The Day Company and the Knight Company are identical in every respect except that Day is unlevered. Financial information for the two firms appears here. All earnings streams are perpetuities.
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7.5 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these
Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,140. One-year interest rates are 9 percent. There
If we consider only the effects of taxes, what is the optimal capital structure?
The Bellwood Company is financed entirely with equity. The company is considering a loan of $3.4 million. The loan will be repaid in equal installments over the next two years and has an interest
Warsaw Manufacturing, Inc., plans to announce that it will issue $1.9 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5
Dickson, Inc., has a debt-equity ratio of 2.3. The firm’s weighted average cost of capital is 9 percent and its pretax cost of debt is 5.3 percent. The tax rate is 24 percent.a. What is the
In a world of corporate taxes only, show that the WACC can be written as WACC = R0 × [1 − TC(B/V)].
Maddux Corp. has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company
King, Inc., has debt outstanding with a face value of $4.3 million. The value of the firm if it were entirely financed by equity would be $17.9 million. The company also has 320,000 shares of stock
Knotts, Inc., an all-equity firm, is considering an investment of $1.32 million that will be depreciated according to the straight-line method over its four-year life. The project is expected to
Jimenez, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.2 percent and the risk-free rate is 3.4 percent. The company is currently considering a project that will cost
Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $40.a. Suppose you buy 10 contracts of the February 38 call option. How much will
For initial public offerings of common stock, 2020 was a relatively slow year, with about $61.7 billion raised by the process. Relatively few of the 163 firms involved paid cash dividends. Why do you
The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. The company currently has 235,000 outstanding shares selling at $106 each. The firm is contemplating
The net income of Progressive Corporation is $165,000. The company has 35,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $2.1 million. The
Mahomes Co. has a current period cash flow of $1.2 million and pays no dividends. The present value of the company’s future cash flows is $15.9 million. The company is entirely financed with equity
What is the intrinsic value of a call option? Of a put option? How do we interpret these values?
Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $2,400 and Project B has an NPV of $2,800. As a result of taking Project A, the
Cheryl Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Cheryl 35,000 at-the-money European call options on the company’s stock, which
Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $1.85 per gallon. Gasoline is currently selling on the wholesale market at $1.63 per
J&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next
Sardano and Sons is a large, publicly held company that is considering leasing a warehouse. One of the company’s divisions specializes in manufacturing steel, and this particular warehouse is the
You are in discussions to purchase an option on an office building with a strike price of $57 million. The building is currently valued at $55 million. The option will allow you to purchase the
A convertible bond with a par value of $1,000 has a conversion ratio of 15.7. What is the conversion price?
A convertible bond with a par value of $1,000 has a conversion price of $27.35. What is the conversion ratio of the bond?
Agawal, Inc., recently issued bonds with a conversion ratio of 15.2 and a par value of $1,000. If the stock price at the time of the bond issue was $46.34, what was the conversion premium?
Blue Steel Community Bank has the following market value balance sheet:a. What is the duration of the assets?b. What is the duration of the liabilities?c. Is the bank immune to interest rate risk?
Wilder Home Products, Inc., recently issued $2 million worth of 3 percent convertible debentures. Each convertible bond has a face value of $1,000. Each convertible bond can be converted into 18.4
You are long 10 gold futures contracts, established at an initial settle price of $1,810 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at
Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2022:The company predicts that 5 percent of its credit sales will never be collected, 35 percent
You are short 25 gasoline futures contracts, established at an initial settle price of $1.34 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline
Sexton Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers
The following is the sales budget for Lemonis, Inc., for the first quarter of 2022:Credit sales are collected as follows:65 percent in the month of the sale.20 percent in the month after the sale.15
What is the duration of a bond with four years to maturity and a coupon of 7.1 percent paid annually if the bond sells at par?
Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash and the amount: Assets Cash Accounts
What is the duration of a bond with two years to maturity if the bond has a coupon rate of 4.8 percent paid semiannually and the market interest rate is 4.3 percent?

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