Questions and Answers of Corporate Finance Principles And Practice

Suppose the stock of the Quatram Company, a publisher of college textbooks, has a beta of 1.3. The firm is 100 percent equity financed. Quatram is considering a number of capital budgeting projects
Suppose Alpha Air Freight is an all-equity firm with a beta of 1.21. The market risk premium is 9.5 percent and the risk-free rate is 5 percent. We can determine the expected return on the common
Consider a tree-growing company, Rapid Cedars, Inc., that is currently all equity and has a beta of .8. The firm has decided to move to a capital structure of one part debt to two parts equity.
The Weinstein Corporation has a target capital structure of 80 percent equity and 20 percent debt. The flotation costs for equity issues are 20 percent of the amount raised; the flotation costs for
Shinedown Company needs to raise $95 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company
Ginger Industries stock has a beta of 1.08. The company just paid a dividend of $.85, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.3 percent, and
Happy Times, Inc., wants to expand its party stores into the Southeast.In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s
A call provision permits a company to repurchase or call an entire bond issue at some price during a predetermined period. Common sense tells us that a call provision has positive value to the
Fujita, Inc., has no debt outstanding and a total market value of $222,000. Earnings before interest and taxes, EBIT, are projected to be $18,000 if economic conditions are normal. If there is strong
Suppose the market value of the J. J. Sprint Company is $1,000. The company currently has no debt and each of J. J. Sprint’s 100 shares of stock sells for $10. A company such as J. J. Sprint with
Propositions I and II Luteran Motors, an all-equity firm, has expected earnings of $10 million per year in perpetuity. The firm pays all of its earnings out as dividends, so the $10 million also may
In the previous question, suppose the corporate tax rate is 22 percent. What is EBIT in this case? What is the WACC? Explain.Data From previous QuestionMM Sugar Skull Corp. uses no debt. The weighted
In September 2020, Australia’s Regional Express Ltd. announced that it had leased six Boeing 737-800 aircraft to fly the Sydney-Melbourne route.Why wouldn’t Regional Express Ltd. purchase the
In September 2020, Australia’s Regional Express Ltd. announced that it had leased six Boeing 737-800 aircraft to fly the Sydney-Melbourne route.Why would the lessors be willing to buy planes from
This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense
The Water Products Company has a corporate tax rate, TC, of 21 percent and expected earnings before interest and taxes (EBIT) of $1 million each year. Its entire earnings after taxes are paid out as
Divided Airlines is currently an unlevered firm. The company expects to generate $126.6 in earnings before interest and taxes (EBIT) in perpetuity. The corporate tax rate is 21 percent, implying
Navarro Corp. has no debt but can borrow at 5.9 percent. The firm’s WACC is currently 9.20 percent and the tax rate is 21 percent.a. What is the company’s cost of equity?b. If the company
Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $16 million before interest per year in perpetuity, with each company
Tool Manufacturing has an expected EBIT of $57,000 in perpetuity and a tax rate of 21 percent. The firm has $134,000 in outstanding debt at an interest rate of 5.35 percent and its unlevered cost of
Tempest Corporation expects an EBIT of $37,700 every year forever. The company currently has no debt and its cost of equity is 11 percent. The tax rate is 22 percent.a. What is the current value of
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all-equity firm, has 16,000 shares of stock outstanding, currently worth $35
Joylin, Inc., has equity with a market value of $15.4 million and debt with a market value of $5.9 million. Treasury bills that mature in one year yield 4 percent per year and the expected return on
In Problem 2, suppose instead that you assume the company has a market-to-book ratio of 1.0 before recapitalization and the stock price changes according to MM. How would this affect your answer?Data
The Knight Corporation plans to be in business for one more year. It forecasts a cash flow of either $100 or $50 in the coming year, each occurring with 50 percent probability. The firm has no other
Ms. Pagell is an owner-entrepreneur running a computer services firm worth $1 million. She currently owns 100 percent of the firm. Because of the need to expand, she must raise another $2 million.
Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week,
Edwards Construction currently has debt outstanding with a market value of $87,000 and a cost of 11 percent. The company has EBIT of $9,570 that is expected to continue in perpetuity. Assume there
Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies’ economists agree
Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between
The J. Lowes Corporation, which currently manufactures staples, is considering a $1 million investment in a project in the aircraft adhesives industry. The corporation estimates unlevered aftertax
Pompeii Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 40 percent and makes interest payments of $42,000 at the end of each
If Smolinski, Inc., were an all-equity company, it would have a beta of 1.05. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 11 percent and Treasury
The CFO of Kendrick Enterprises is evaluating a 10-year, 5.8 percent loan with gross proceeds of $5.3 million. The interest payments on the loan will be made annually. Flotation costs are estimated
Williams, Inc., has compiled the following information on its financing costs:The company is in the 21 percent tax bracket and has a target debt-equity ratio of 60 percent. The target short-term
National Electric Company (NEC) is considering a $41 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that
Longhorn, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and the tax rate is 21 percent. The required return on the firm’s levered
Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $145 million. The
First and Goal Corporation’s stock returns have a covariance with the market portfolio of .0487. The standard deviation of the returns on the market portfolio is 20 percent and the expected market
Estefan Industries has a new project available that requires an initial investment of $4.9 million. The project will provide unlevered cash flows of $925,000 per year for the next 20 years. The
Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $20.5 million in perpetuity. The current required return on the firm’s equity is 10.5 percent and the firm
Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company’s unlevered equity is 13.1 percent and the pretax cost of the firm’s debt is 6.4 percent. Sales revenue
Calculator Graphics, Inc. (CGI), has a target payout ratio of .30. Last year’s earnings per share were $10, and in accordance with the target, CGI paid dividends of $3 per share last year. However,
Bruin Industries just issued $365,000 of perpetual 6 percent debt and used the proceeds to repurchase stock. The company expects to generate $151,000 of earnings before interest and taxes in
Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .40, but the industry target debt-equity ratio is
On Tuesday, December 8, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Tuesday, January 16, to shareholders of record as of Tuesday, January 2. When is
Last month, Central Virginia Power Company, which had been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was “temporarily suspending
Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It
The company with the common equity accounts shown here has declared a stock dividend of 15 percent when the market value of its stock is $64 per share. What effects on the equity accounts will the
You own 1,000 shares of stock in Avondale Corporation. You will receive a dividend of $3.45 per share in one year. In two years, the company will pay a liquidating dividend of $62 per share. The
In the previous problem, suppose you want only $1,500 total in dividends the first year. What will your homemade dividend be in two years?Data from previous problemYou own 1,000 shares of stock in
The Sharpe Co. just paid a dividend of $2.30 per share of stock.Its target payout ratio is 40 percent. The company expects to have earnings per share of $6.95 one year from now.a. If the adjustment
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies.Gecko pays no dividend, whereas Gordon has an expected dividend yield
Why is underpricing not a great concern with bond offerings?
In 1980, a certain assistant professor of finance bought 12 initial public offerings of common stock. He held each of these for approximately one month and then sold them. The investment rule he
The Chen Company has 70,000 shares of stock that each sells for $55. Suppose the company issues 9,000 shares of new stock at the following prices: $55, $30, and $20. What is the effect of each of the
A company’s stock currently sells for $93 per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit $20 and three rights.a. What is the
Cheung Corp.’s stock is currently selling at $43 per share. There are 1.3 million shares outstanding. The firm is planning to raise $2.9 million to finance a new project.What are the ex-rights
Kaleidescope Entertainment is considering buying a machine that costs $625,000. The machine will be depreciated over five years by the straight-line method and will be worthless after five years. The
Montclair Manufacturing is considering leasing some equipment. The annual lease payment would be $420,000 per year for six years. The appropriate interest rate is 6 percent and the company is in the
Wolfson Corporation has decided to purchase a new machine that costs $2.1 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax
An asset costs $825,000 and will be depreciated in a straightline manner over its three-year life. It will have no salvage value. The corporate tax rate is 22 percent and the appropriate interest
Automobiles are often leased, and several terms are unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $49,500. This is the base
Return to the case of the diagnostic scanner discussed in Problems 1 through 6. Suppose the entire $4.3 million purchase price of the scanner is borrowed. The rate on the loan is 8 percent and the
High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model
Suppose Mr. Optimist holds a one-year call option on TIX common stock.It is a European call option and can be exercised at $150. Assume that the expiration date has arrived. What is the value of the
Ms. Pessimist believes that BMI will fall from its current $160 per-share price. She buys a put. Her put option contract gives her the right to sell a share of BMI stock at $150 one year from now. If
Suppose shares of stock in Smolira Corp. are selling for $110. A call option on Smolira with one year to maturity and a $110 strike price sells for $15. A put with the same terms sells for $5.
Consider Private Equipment Company (PEC). On April 19, the PEC April 49 call option had a closing value of $4. The stock itself was selling at $50. On April 19, the option had 199 days to expiration
Exoff Oil Corporation is considering the purchase of an oil field in a remote part of Alaska. The seller has listed the property for $10,000 and is eager to sell immediately. Initial drilling costs
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.35 million. Over the past five years, the price of land in the area has increased 7 percent per
Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend-paying common stock, with a strike price of $55 and one year until expiration. Currently, the
Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,940 per ounce, the
Stock options are not always restricted to the highest-ranking executives. Starbucks, the coffee chain, has pushed options down to the lowest-level employees. To quote its founder, Howard Schultz,
Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $350,000, his 3-year contract states that his compensation will
Utility companies often face a decision to build new plants that burn coal, oil, or both. If the prices of both coal and oil are highly volatile, how valuable is the decision to build a plant that
Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now, the company will know whether
There is a European put option on a stock that expires in two months. The stock price is $76 and the standard deviation of the stock returns is 60 percent. The option has a strike price of $80 and
In the previous problem, assume that the exercise style on the option is American rather than European. What is the price of the option now?
The stock price of RW Company is $20. Suppose this company can issue subordinated debentures at 10 percent. It also can issue convertible bonds at 6 percent with a conversion value of $800. The
Muscles Fitness Center, Inc., issued convertible bonds with a conversion price of $70. The bonds are available for immediate conversion. The current price of the company’s common stock is $67 per
You own a callable, convertible bond with a conversion ratio of 23.17 and a par value of $1,000. The stock is currently selling for $54 per share. The issuer of the bond has announced a call at a
General Modems has five-year warrants that currently trade in the open market. Each warrant gives its owner the right to purchase one share of common stock for an exercise price of $65.a. Suppose the
Vital Silence Corp. has just issued a 30-year callable, convertible bond with a coupon rate of 5 percent and annual coupon payments. The bond has a conversion price of $78. The company’s stock is
Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 800,000 shares of stock. The company currently has 4.8 million shares of stock and convertible bonds with a face value
Through Fire, Inc., an all-equity firm, has 12 shares of stock outstanding.Yesterday, the firm’s assets consisted of 13 ounces of platinum, currently worth $1,030 per ounce. Today, the company
The capital structure of Ricketti Enterprises, Inc., consists of 25 million shares of common stock and 1.7 million warrants. Each warrant gives its owner the right to purchase one share of common
You have been hired to value a new 25-year callable, convertible bond. The bond has a 4.9 percent coupon rate, payable annually. The conversion price is $135 and the stock currently sells for $36.47.
Tracy Wang owns a mortgage banking company. On March 1, she made a commitment to lend a total of $1 million to various homeowners on May 1. The loans are 20-year mortgages carrying a 12 percent
Margaret Boswell is another mortgage banker. Her firm faces problems similar to those facing Tracy’s firm. However, she tackles the problems through the use of advance commitments, a strategy that
The Physical Bank of New York has the following market value balance sheet:The bank has $1,000 million of assets and $900 million of liabilities. Its equity is the difference between the two: $100
Refer to Table 25.2 in the text to answer this question. Suppose today is December 4, 2020, and your firm produces breakfast cereal and needs 180,000 bushels of corn in March 2021 for an upcoming
What is the duration of a bond with three years to maturity and a coupon of 5.3 percent paid annually if the bond sells at par?
ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit rating in the debt
Ted and Alice Hansel have a son who will begin college 12 years from today. School expenses of $55,000 will need to be paid at the beginning of each of the four years that their son plans to attend
You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000 and the 1-year and 11-year spot interest rates are 6 percent
Suppose you have $5,000 on deposit. One day, you write a check for $1,000 to pay for books and you deposit $2,000. What are your disbursement, collection, and net floats?After you write the $1,000
Instead of eliminating the float, suppose Lambo can reduce it to one day. What is the maximum Lambo should be willing to pay for this? If Lambo can reduce the float from three days to one day, then
In our example concerning the Atlantic Corporation’s proposed lockbox system, suppose Pacific Bank wants a $20,000 fixed fee (paid annually) in addition to the 25 cents per check. Is the system
Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. Therefore, it is considering using a lockbox system offered by

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