Questions and Answers of Corporate Finance Principles And Practice

How might FinTech-enabled micro-insurance principles be applied to promote green and sustainable finance outcomes in the developed world?
A number of other green/sustainable cryptocurrencies are available, including Bitcoin Green and Energy Coin. Pick one of these, or find another online. What are the similarities and differences as
What initiatives to accelerate and support the use of FinTech tools and techniques in green finance are you aware of in the jurisdiction(s) where you live and work? How successful are they?
How far do you believe green finance is now part of the mainstream of finance? To what extent is it embedded in your organization, and other organizations with which you are familiar?
What have senior policymakers, regulators and financial services executives in your jurisdiction said about green and sustainable finance? What have senior executives in your organization said?
A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by
There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $68. The price of Stock A next year will be $56 if the economy is in a recession, $78 if the economy is normal,
Suppose you are expecting to receive a million British pounds in six months, and you agree to a forward trade to exchange your pounds for dollars. Based on Figure 31.1, how many dollars will you get
Suppose Firm A acquires Firm B in a merger. Further, suppose Firm B’s shareholders are given one share of Firm A’s stock in exchange for two shares of Firm B’s stock. From a legal standpoint,
Look back at Example 27.2. A large bank is willing to provide the float reduction service for $175 per year, payable at the end of each year. The relevant discount rate is 8 percent. Should Lambo
Refer to Table 25.2 in the text to answer this question. Suppose you sell five March 2021 silver futures contracts on December 4, 2020, at the last price of the day. What will your profit or loss be
On April 1, Moon Chemical agreed to sell petrochemicals to the U.S. government in the future. The delivery dates and prices have been determined. Because oil is a basic ingredient in the production
Refer to Table 25.2 in the text to answer this question. Suppose you purchase a March 2021 cocoa futures contract on December 4, 2020, at the last price of the day. What will your profit or loss be
In June, Bernard Abelman anticipates a harvest of 50,000 bushels of wheat at the end of September. He has two alternatives:1. Write futures contracts against his anticipated harvest. The September
A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $64 per share. The current market price of the stock is $71. What is the minimum value of the
Suppose the Moulton Company has outstanding 1,000 shares of common stock and 100 bonds. Each bond has a face value of $1,000 at maturity. They are discount bonds and pay no coupons. At maturity, each
Going back to the Lufthansa convertible bonds, Lufthansa raised €600 million by issuing convertible subordinated debentures with a 2 percent coupon rate due in 2025. Each bond had a par value of
To see how warrants affect the value of the firm, imagine that Mr. Gould and Ms. Rockefeller are two investors who have together purchased six ounces of platinum. At the time they bought the
The Popov Company has been awarded the concessions at next year’s Olympic Games in Antarctica. Because the firm’s principals live in Antarctica and because there is no other concession business
The Regional Electric Company has $1,000 of extra cash. It can retain the cash and invest it in Treasury bills yielding 10 percent or it can pay the cash to shareholders as a dividend. Shareholders
Overnight Publishing Company (OPC) has $2.5 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm’s debt is held by
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm
On March 2, 2000, 3Com, a profitable provider of computer networking products and services, sold 5 percent of one of its subsidiaries, Palm, to the public via an initial public offering (IPO). 3Com
Suppose Vermont Electronics Company is thinking about relocating its plant to Mexico, where labor costs are lower. In the hope that it can stay in Vermont, the company has submitted an application to
Consider a firm whose debt has a market value of $40 million and whose stock has a market value of $60 million. The firm pays a 5 percent rate of interest on its new debt and has a beta of 1.41. The
For the firm in the previous problem, suppose the book value of the debt issue is $75 million. In addition, the company has a second debt issue on the market, a zero coupon bond with eight years left
D. D. Ronnelley Co. is a conglomerate firm with operations in publishing and computer software. It is considering whether to accept a new project in computer software. Noting that publishing is a
The preceding material can be further explained by the following example. We keep our one-factor model here but make three specific assumptions:1. All securities have the same expected return of 10
Locate the Treasury bond in Figure 8.5 maturing in November 2041. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread in
What is the end-of-year wealth if Vicki Bogan receives an APR of 24 percent compounded monthly on a $1 investment?Using Equation 4.6, her wealth is:The annual rate of return is 26.82 percent. This
Locate the Treasury bond in Figure 8.5 maturing in January 2027. What is its coupon rate? What is its bid price? What was the previous day’s asked price? Assume a par value of $10,000.Figure 8.5
Suppose the risk-free rate is 3.9 percent and the market portfolio has an expected return of 11.4 percent. The market portfolio has a variance of .0315. Portfolio Z has a correlation coefficient with
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9 percent and a standard deviation of 14 percent. The risk-free rate is 4.3 percent and the expected
Suppose the expected returns and standard deviations of Stocks A and B are E (RA) = .10, E(RB) = .12, σA = .39, and σB = .72.a. Calculate the expected return and standard deviation of a portfolio
Security F has an expected return of 9 percent and a standard deviation of 43 percent per year. Security G has an expected return of 12 percent and a standard deviation of 76 percent per year.a. What
Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has a beta of .80 and an expected return of 8.5 percent. If the risk-free rate is 3.2 percent and the market risk premium is
The stock of Aardvark Enterprises has a beta of 1.5 and that of Zebra Enterprises has a beta of .7. The risk-free rate is assumed to be 3 percent, and the difference between the expected return on
Consider the following possible returns both on the stock of Jelco, Inc., and on the market:Though the return on the market has only two possible outcomes (15% and −5%), the return on Jelco has
Mara Faccio is considering investing in the common stock of Merville Enterprises. In addition, Mara will either borrow or lend at the risk-free rate. The relevant parameters are:Suppose Mara chooses
Consider Supertech and Slowpoke. From our earlier calculations, we findthat the expected returns on these two securities are 17.5 percent and 5.5 percent, respectively.The expected return on a
We have already determined the expected returns and standard deviations for both Supertech and Slowpoke. In addition, we calculated the deviation of each possible return from the expected return for
You bought one of Cobalt Co.’s 4.9 percent coupon bonds one year ago for $1,008.50. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today when
A stock has had returns of 6 percent, 29 percent, 13 percent, −3 percent, 22 percent, and −17 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
You find a certain stock that had returns of 18 percent, −23 percent, 16 percent, and 9 percent for four of the last five years. If the average return of the stock over this period was 10.5
A stock has had returns of 12.79, 9.21, 14.68, 21.83, and −10.34 percent over the past five years, respectively. What was the holding period return for the stock?
In Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 3.9 percent.a. What was the average real return on the company’s
Suppose you bought a bond with a 6 percent coupon rate one year ago for $1,010. The bond sells for $1,025 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment
Full Boat Manufacturing has projected sales of $95 million next year. Costs are expected to be $52 million and net investment is expected to be $9 million. Each of these values is expected to grow at
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
Pagemaster Enterprises, the company examined in Example 9.4, has 1,000,000 shares of stock outstanding. The stock is selling at $10. What is the required return on the stock?The payout ratio is the
Pagemaster Enterprises just reported earnings of $2 million. The firm plans to retain 40 percent of its earnings in all years going forward. We also could say that 60 percent of earnings will be paid
Elixir Drug Company is expected to enjoy rapid growth from the introduction of its new back-rub ointment. The dividend for a share of Elixir’s stock a year from today is expected to be $1.15.
Suppose an investor is considering the purchase of a share of the Utah Mining Company. The stock will pay a $3 dividend a year from today. This dividend is expected to grow at 10 percent per year (g
Hampshire Products will pay a dividend of $4 per share a year from now. Financial analysts believe that dividends will rise at 6 percent per year for the foreseeable future. What is the dividend per
Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 720. Paul plans to raise the annual fee by 5 percent every
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
Bond P is a premium bond with a coupon rate of 9 percent. Bond D has a coupon rate of 5 percent and is currently selling at a discount. Both bonds make annual payments, have a par value of $1,000, a
Suppose the following bond quote for IOU Corporation appears in the financial page of today’s newspaper. Assume the bond has a face value of $1,000, it makes semiannual coupon payments, and the
You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 5.3 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in
If investors require a 10 percent real rate of return, and the inflation rate is 8 percent, what must be the approximate nominal rate? The exact nominal rate?First of all, the nominal rate is
Locate the Treasury bond in Figure 8.5 maturing in July 2026. What is its coupon rate? What is its bid price? What was the previous day’s asked price?The bond’s coupon rate is 1.875, or 1.875
Both a default-free, two-year government bond and a two-year corporate bond pay a 7 percent coupon. However, the government bond sells at par (or $l,000) and the corporate bond sells at $982.16. What
Suppose taxable bonds are currently yielding 8 percent, while at the same time, munis of comparable risk and maturity are yielding 6 percent. Which is more attractive to an investor in a 35 percent
Imagine that a long-term municipal bond selling at par is yielding 4.21 percent while a long-term Treasury bond selling at par yields 6.07 percent.2 Further suppose an investor is in the 24 percent
Suppose the Eight-Inch Nails (EIN) Company issues a $1,000 face value, five-year zero coupon bond. The initial price is set at $508.35. What is the yield to maturity using semiannual compounding?The
You’re looking at two bonds identical in every way except for their coupons and, of course, their prices. Both have 12 years to maturity. The first bond has a 10 percent coupon rate and sells for
A bond has a quoted price of $1,080.42. It has a face value of $1,000, a semiannual coupon of $30, and a maturity of five years. What is its current yield? What is its yield to maturity? Which is
In practice, bonds issued in the United States usually make coupon payments twice a year. So, if an ordinary bond has a coupon rate of 14 percent, the owner will receive a total of $140 per year, but
M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires an initial investment of $8.9 million. The company expects a total annual operating cash flow of
Herjavec Enterprises is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that the company can sell 20 units per year at $195,000 net
Halloween, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $6.9 million for the next 10 years. The discount rate for this project is 13 percent.
The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success.For $175,000 the manager can conduct a focus
Ang Electronics, Inc., has developed a new mesh network. If successful, the present value of the payoff (when the product is brought to market) is $29 million. If the mesh network fails, the present
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. What is the new NPV?Data From Previous Problem:You have been hired as a consultant for Pristine
What is the value today of a 15-year annuity that pays $950 a year? The annuity’s first payment occurs 6 years from today. The discount rate is 7 percent for Years 1 through 5 and 10 percent
Use the sustainable growth rate equations from the previous problem to answer the following questions. Simone, Inc., had total assets of $430,000 and equity of $260,000 at the beginning of the year.
Based on the results in Problem 27, show that the internal and sustainable growth rates can be calculated as shown in Equations 3.25 and 3.26.Problem 27EFN We define the following variables
Algernon, a small proprietorship owned by an unmarried individual, has a taxable income of $80,000. What is its tax bill? Its average tax rate? Its marginal tax rate?From Table 2.3, we see that the
In a previous example, Mark Young received $50,000 a year for 20 years from the state lottery. In that example, he was to receive the first payment in one year. Let us now assume that the first
Stuart Gabriel, a second-year MBA student, has been offered a job at $80,000 a year. He anticipates his salary will increase by 9 percent a year until his retirement in 40 years. Given a discount
Suppose a stock begins the year with a price of $25 per share and ends with a price of $35 per share. During the year, it paid a $2 dividend per share. What are its dividend yield, capital gains
Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing
Suppose the returns on common stock over a four-year period are .1370, .3580, .4514, and −.0888, respectively. The average, or mean, return over these four years is: R 1370 + .3580 +
Suppose the returns on common stocks are (in decimals) .1370, .3580, .4514, and −.0888, respectively. As we calculated in Example 10.2, the average return is .2144. The variance of this sample is
Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2020? Why do you think they were so high during this period? What
Calculate the geometric average return for S&P 500 large-cap stocks for a five-year period using the numbers given here.First, convert percentages to decimal returns, add 1, and then calculate
The Sharpe ratio is the average equity risk premium over a period of time divided by the standard deviation. From 1926 to 2020 the average risk premium (relative to Treasury bills)for large-company
Take a look back at Figure 10.4. There we showed the value of a $1 investment after 95 years. Use the value for the large-company stock investment to check the geometric average in Table 10.3.Table
Stock in JRJ Corporation sells for $20 per share and features cumulative voting. There are 10,000 shares outstanding. If three directors are up for election, how much does it cost to ensure yourself
World-Wide Enterprises (WWE) is a large conglomerate thinking of entering the widget business, where it plans to finance projects with a debt-value ratio of 25 percent (or a debt-equity ratio of
Bicksler Enterprises is considering a $10 million project that will last five years, with straight-line depreciation of $2 million per year. The cash revenues less cash expenses per year are $3.5
C. F. Lee, Inc., is considering a scale-enhancing project. The market value of the firm’s debt is $100 million and the market value of the firm’s equity is $200 million. The debt is considered
In September 2020, Australia’s Regional Express Ltd. announced that it had leased six Boeing 737-800 aircraft to fly the Sydney-Melbourne route.What do you suppose happens to the plane at the end
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.”
Benton is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The
Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 12.2 percent. Information about those factors is presented in the following

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