Questions and Answers of Corporate Finance Principles And Practice

A mail-order firm processes 5,800 checks per day. Of these, 60 percent are for $49 and 40 percent are for $84. The $49 checks are delayed two days on average; the $84 checks are delayed three days on
Suppose a company is considering a switch from all cash to net 30, but the quantity sold is not expected to change. What is the NPV of the switch? Explain.In this case, Q′ − Q is zero, so the NPV
Thiewes Shoes begins each period with 100 pairs of hiking boots in stock. This stock is depleted each period and reordered. If the carrying cost per pair of boots per year is $3, what are the total
Suppose on April 2, 2021, Torrance, Inc., had 28 million shares outstanding and the company’s stock price closed the day before at $49.25 per share on the New York Stock Exchange. Further suppose
Suppose Firm A acquires Firm B, creating a new firm, Firm AB. Firm A’s and Firm B’s financial positions at the date of the acquisition are shown in Table 29.7.The book value of Firm B on the date
Suppose that 15 years ago Bill Evans started the Samurai Machinery (SM) Corp., which purchased plant and equipment costing $80,000. These have been the only assets of SM and the company has no debts.
U.S. Composite Corporation is attempting to increase its line of credit with First National State Bank. The director of credit management of First National State Bank uses the Z-score model to
The B.O. Drug Company is to be liquidated. Its liquidating value is $2.7 million. Bonds worth $1.5 million are secured by a mortgage on the B.O. Drug Company corporate headquarters building, which is
Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting
Suppose B.O. Drug Co. decides to reorganize under Chapter 11. Generally, senior claims are honored in full before various other claims receive anything. Assume that the going concern value of B.O.
Suppose the exchange rates for the British pound and Swiss franc are:The cross-rate is three francs per pound. Is this consistent? Explain how to go about making some money. The cross-rate should be
Suppose you have $1,000. Based on the rates in Figure 31.1, how many Japanese yen can you get? Alternatively, if a Porsche costs €100,000 (recall that € is the symbol for the euro), how many
Suppose the Japanese exchange rate is currently 105 yen per dollar. The inflation rate in Japan over the next three years will run, say, 2 percent per year, whereas the U.S. inflation rate will be 6
Suppose the exchange rate for Japanese yen, S0, is currently ¥120 = $1. If the interest rate in the United States is R US = 10 percent and the interest rate in Japan is R J = 5 percent, then what
Suppose your company imports computer motherboards from Singapore.The exchange rate is given in Figure 31.1. You have just placed an order for 30,000 motherboards at a cost to you of 146.50 Singapore
Suppose the spot exchange rate for the Hungarian forint is HUF 308.27. The inflation rate in the United States is 2.6 percent per year and is 4.5 percent in Hungary. What do you predict the exchange
Here is a quick check of your understanding of sources and uses: If accounts payable go up by $100, does this indicate a source or a use? What if accounts receivable go up by $100?Accounts payable
You have collected the following information for the Slowpay Company:Credit sales for the year just ended were $50,000 and cost of goods sold was $30,000. How long does it take Slowpay to collect on
Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change.a. Receivables average
All of Fun Toys’ cash inflows come from the sale of toys. Cash budgeting for Fun Toys starts with a sales forecast for the next year by quarter:Fun Toys’ fiscal year starts on July 1. Fun Toys’
The Bandon Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses
The Midland Company refines and trades gold. At the end of the year, it sold 2,500 ounces of gold for $1 million. The company had acquired the gold for $900,000 at the beginning of the year. The
The Midland Company is attempting to choose between two new products. Both products will provide additional cash flows over a four-year period and will initially cost $10,000. The cash flows from the
The Midland Company is considering expanding operations overseas. It is evaluating Europe and Japan as possible sites. Europe is considered to be relatively safe, whereas operating in Japan is seen
Critics have charged that compensation to top managers in the United States is too high and should be cut back. For example, focusing on large corporations, Larry Culp of General Electric was one of
The Cooney Corporation has fixed assets with a book value of $700 and an appraised market value of about $1,000. Net working capital is $400 on the books, but approximately $600 would be realized if
In July 2020, Kraft Heinz announced that it was writing off $2.9 billion due to the loss in value of several of its well-known brands, including Oscar Meyer and Maxwell House. We would argue that
Consider the following 2022 data for Atlantic Company, Inc., and Pacific Depot, Inc. (in billions except for price per share):1. Determine the profit margin, ROE, market capitalization, enterprise
Suppose a firm were to pay off some of its suppliers and short-term creditors.What would happen to the current ratio? Suppose a firm buys some inventory. What happens in this case? What happens if a
Suppose Hoffman grows at exactly the sustainable growth rate of 21.34 percent. What will the pro forma statements look like?At a 21.34 percent growth rate, sales will rise from $500 to $606.7. The
The most recent financial statements for Anderson Co. are shown here:Assets and costs are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent
Here is a variation on the receivables collection period. How long, on average, does it take for Prufrock Corporation to pay its bills? To answer, we need to calculate the accounts payable turnover
Suppose you find that a particular company generates $.40 in annual sales for every dollar in total assets. How often does this company turn over its total assets?The total asset turnover here is .40
The Sandar Co. has a debt-equity ratio of .5, a profit margin of 3 percent, a dividend payout ratio of 40 percent, and a capital intensity ratio of 1.What is its sustainable growth rate? If Sandar
The most recent financial statements for Hu, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales; debt and equity are not. No dividends are paid. Next year’s
Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 16 percent to $320 million. Current assets, fixed
In addition to common–size financial statements, common–base year financial statements are often used. Common–base year financial statements are constructed by dividing the current year account
The Iron River Company has an ROE of 11.05 percent and a payout ratio of 25 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its
Diane Badame, a financial analyst at Kaufman & Broad, a leading real estate firm, is thinking about recommending that Kaufman & Broad invest in a piece of land that costs $85,000.She is
Professional Artworks, Inc., is a firm that speculates in modern paintings. The manager is thinking of buying an original Picasso for $400,000 with the intention of selling it at the end of one year.
Suh-Pyng Ku has put $500 in a savings account at the First National Bank of Kent. The account earns 7 percent, compounded annually. How much will she have at the end of three years? The answer
Jay Ritter invested $1,000 in the stock of the SDH Company. The company pays a current dividend of $2, which is expected to grow by 20 percent per year for the next two years. What will the dividend
Fernando Zapetero, who recently won $20,000 in the lottery, wants to buy a car in five years. Fernando estimates that the car will cost $32,210 at that time. His cash flows are displayed in Figure
Bernard Dumas will receive $10,000 three years from now. Bernard can earn 8 percent on his investments, so the appropriate discount rate is 8 percent. What is the present value of his future cash
U.S. Secretary of State William Seward negotiated the purchase of Alaska from Russia in 1867. The United States paid $7.2 million in exchange for 586,412 square miles of new land. Opponents of the
Paige Ouimet wants to buy a tugboat today. Rather than paying immediately, she offers to pay $150,000 in three years. It will cost Tugboat Corp. $115,830 to build the tugboat immediately. The
You’ve been saving up to buy the Godot Company. The total cost will be $10 million. You currently have about $2.3 million. If you can earn 5 percent on your money, how long will you have to wait?
Kyle Mayer won the Kentucky State Lottery and will receive the following set of cash flows over the next two years:Kyle can currently earn 6 percent in his money market account, so the appropriate
Finance.com has an opportunity to invest in a new high-speed computer that costs $50,000. The computer will generate cash flows of $25,000 one year from now, $20,000 two years from now, and $15,000
Compute the future value of $4,250 continuously compounded for:a. 9 years at an APR of 12 percent.b. 5 years at an APR of 8 percent.c. 17 years at an APR of 5 percent.d. 10 years at an APR of 9
If an 8 percent annual percentage rate is compounded quarterly, what is the effective annual rate?Using Equation 4.7, we have:Referring back to our original example where C0 = $1,000 and r = 10%, we
Harry DeAngelo is investing $5,000 at an annual percentage rate of 12 percent per year, compounded quarterly, for five years. What is his wealth at the end of five years?Using Equation 4.8, his
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $20,000 per year forever. If the required return on this investment is 3.4 percent, how
Katharina Lewellen invested $1,000 at a continuously compounded rate of 10 percent for one year. What is the value of her wealth at the end of one year? From Equation 4.9 we have:This number can
Katharina’s husband, Jonathan, invested $1,000 at a continuously compounded rate of 10 percent for two years. The appropriate formula here is:Using the portion of the table of continuously
The Michigan State Lottery is going to pay you $100,000 at the end of four years. If the annual continuously compounded rate of interest is 8 percent, what is the present value of this payment?
Consider a perpetuity paying $100 a year. If the relevant discount rate is 8 percent, what is the value of the perpetuity today? Using Equation 4.10 we have:Now suppose that the discount rate falls
Popovich Corporation is about to pay a dividend of $3.00 per share. Investors anticipate that the annual dividend will rise by 6 percent a year forever. The applicable discount rate is 11 percent.
Danielle Caravello will receive a four-year annuity of $500 per year, with the first payment at Year 6. If the discount rate is 10 percent, what is the value of her annuity today? The timeline for
Harold and Helen Nash are saving for the college education of their newborn daughter, Susan. The Nashes estimate that college expenses will run $30,000 per year when their daughter reaches college in
Mark Young has won the state lottery, paying $50,000 a year for 20 years. He is to receive his first payment a year from now. The state advertises this as the Million Dollar Lottery because
Suppose you put $3,000 per year into a Roth IRA. The account earns 6 percent interest per year. How much will you have when you retire in 30 years? This question asks for the future value of an
Ann Chen receives an annuity of $450, payable once every two years. The annuity stretches out over 20 years. The first payment occurs at Year 2—that is, two years from today. The annual discount
Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be
In a previous example, Helen and Harold Nash planned to make 17 identical payments to fund the college education of their daughter, Susan. Alternatively, imagine that they planned to increase their
A common arrangement in real estate lending might call for a 5-year loan with, say, a 15-year amortization. What this means is that the borrower makes a payment every month of a fixed amount based on
A prestigious investment bank designed a new security that pays a quarterly dividend of $2.50 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the
The Trojan Pizza Company is contemplating investing $1 million in four new outlets in Los Angeles. Andrew Lo, the firm’s chief financial officer (CFO), has estimated that the investments will pay
M3 Pharmaceuticals is considering a drug project that costs $5.95 million today and is expected to generate end-of-year annual cash flows of $560,000 forever. At what discount rate would the company
Southern California Publishing Company is trying to decide whether to revise its popular textbook Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $325,000.
A five-year annuity of 10 $5,500 semiannual payments will begin nine years from now, with the first payment coming nine and a half years from now. If the discount rate is 8 percent compounded
You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate
You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at an APR of 10.4 percent compounded monthly. Because the clubs cost $3,850
What is the value of an investment that pays $75,000 every other year forever, if the first payment occurs one year from today and the discount rate is a 7 percent APR compounded daily? What is the
Stanley Jaffe and Sherry Lansing have purchased the rights to Corporate Finance: The Motion Picture. They will produce this major motion picture on either a small budget or a large budget. Here are
The Alpha Corporation is considering investing in a riskless project costing $100. The project receives $107 in one year and has no other cash flows. The discount rate on riskless investments is 2
A useful rule of thumb for the time it takes an investment to double with discrete compounding is the “Rule of 72.” To use the Rule of 72, you divide 72 by the rate to determine the number of
Suppose that the Kaufold Corporation has two alternative uses for a warehouse. It can store toxic waste containers (Project A) or electronic equipment (Project B). The cash flows are as follows:We
Hiram Finnegan, Inc. (HFI), applies a 12 percent discount rate to two investment opportunities. Project 12 2 Cash Flows (in millions) C₁ $70 15 Co - $20 - 10 C₂ $10 40 PV @12% of Cash Flows
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $3.8 million to open and
The Weber-Decker Co. just paid $1 million in cash for a building as part of a new capital budgeting project. This entire $1 million is an immediate cash outflow. However, assuming straight-line
The General Milk Company (GMC) is currently evaluating the NPV of establishing a line of chocolate milk. As part of the evaluation, the company paid a consulting firm $100,000 last year for a test
Suppose the Stiles Trading Company has an empty warehouse in Philadelphia that can be used to store a new line of electronic pinball machines. The company hopes to sell these machines to affluent
Your company currently produces and sells steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of
Suppose the Innovative Motors Corporation (IMC) is determining the NPV of a new convertible sports car. Some of the would-be purchasers are owners of IMC’s compact sedans.Are all cash flows from
We are considering the purchase of a $200,000 computer-based inventory management system. It will be depreciated straight-line to zero over its four-year life. It will be worth $30,000 at the end of
The Voetmann Consulting Corp. devotes one wing of its suite of offices to a library requiring a cash outflow of $100,000 a year in upkeep. A proposed capital budgeting project is expected to generate
The little-known monarchy of Gerberovia recently had a nominal interest rate of 300 percent and an inflation rate of 280 percent. According to Equation 6.7, the real interest rate is:How do we know
Burrows Publishing has purchased the rights to the next book of famed romantic novelist Barbara Musk. Still unwritten, the book should be available to the public in four years. Currently, romantic
Altshuler, Inc., generated the following forecast for a capital budgeting project:The CEO, David Altshuler, estimates inflation to be 10 percent per year over the next two years.In addition, he
Shields Electric forecasts the following nominal cash flows on a particular project:The nominal discount rate is 14 percent, and the inflation rate is forecast to be 5 percent. What is the value of
EOBII Publishers, a competitor of Burrows, recently bought a printing press for $2,000,000 to be depreciated to zero by the straight-line method over five years. This implies yearly depreciation of
A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are
Medavoy Co. is considering a new project that complements its existing business. The machine required for the project costs $3.7 million. The marketing department predicts that sales related to the
In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Do you think they were able to maintain this profit margin as
Sparkling Water, Inc., expects to sell 3.8 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.52 in real terms and will cost $.87 in real terms. Sales
Shado, Inc., is considering an investment of $750,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first
A firm is considering an investment in a new machine with a price of $10.9 million to replace its existing machine. The current machine has a book value of $3.8 million and a market value of $2.8
With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital,
Calligraphy Pens is deciding when to replace its old machine. The machine’s current salvage value is $2.8 million. Its current book value is $1.6 million. If not sold, the old machine will require

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