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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

Problems with IRR Suppose you are offered $7,000 today but must make the following payments:Year Cash Flows ($)0 $ 7,000 1 −3,700 2 −2,400 3 −1,500 4 −1,200a. What is the IRR of this offer?b.
NPV versus IRR Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent.Year Deepwater
Problems with Profitability Index The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects:Year Cash Flow (I) Cash Flow (II)0 −$30,000
Problems with IRR Cutler Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year Cash Flow 0 −$ 85,000,000 1 125,000,000 2 −15,000,000a. If the company
Comparing Investment Criteria Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not
Profitability Index versus NPV Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies
Comparing Investment Criteria Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 10 percent.Year AZM Mini-SUV AZF
Comparing Investment Criteria The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows:Year Project A Project B Project C 0 −$150,000 −$300,000
Comparing Investment Criteria Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for Tokyo Rubber Company is 10 percent.Year Dry
Comparing Investment Criteria Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for Nagano Golf is 15 percent.Project A: Nagano
NPV and Multiple IRRs You are evaluating a project that costs $75,000 today.The project has an inflow of $155,000 in one year and an outflow of $65,000 in two years. What are the IRRs for the
Payback and NPV An investment under consideration has a payback of six years and a cost of $434,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain.
Multiple IRRs This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? ( Hint: Search
NPV Valuation The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a
Calculating IRR 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 $2,400,000
NPV and IRR Butler International Limited is evaluating a project in Erewhon.The project will create the following cash flows:Year Cash Flow 01 23 4−$950,000 285,000 345,000 415,000 255,000 All cash
Calculating IRR Consider two streams of cash flows, A and B . Stream A ’s first cash flow is $8,900 and is received three years from today. Future cash flows in Stream A grow by 4 percent in
Calculating Incremental Cash Flows Darin Clay, the CFO of MakeMoney.com, has to decide between the following two projects:Year Project Million Project Billion 0 −$1,200 −$Io 1 Io + 160 Io + 400 2
Problems with IRR McKeekin Corp. has a project with the following cash flows:Year Cash Flow 0 $20,000 1 −26,000 2 13,000 What is the IRR of the project? What is happening here?
As you have already seen, Excel does not have a function to calculate the payback period.We have shown three ways to calculate the payback period, but there are numerous other methods as well. The
Bond Ratings 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
Municipal Bonds Why is it that municipal bonds are not taxed at the federal level, but are taxable across state lines? Why is it that U.S. Treasury bonds are not taxable at the state level? (You may
Treasury Market Take a look back at Figure 8.4. Notice the wide range of coupon rates. Why are they so different?
Interest Rate Risk All else being the same, which has more interest rate risk, a longterm bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a
Valuing Bonds What is the price of a 15-year, zero coupon bond paying $1,000 at maturity if the YTM is:a. 5 percent?b. 10 percent?c. 15 percent?
Valuing Bonds Microhard has issued a bond with the following characteristics:Par: $1,000 Time to maturity: 15 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the
Bond Yields Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 6.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value,
Coupon Rates Rhiannon Corporation has bonds on the market with 11.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,060. The bonds make semiannual payments. What must the coupon
Valuing Bonds Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond
Bond Yields A Japanese company has a bond outstanding that sells for 92 percent of its ¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and matures in 21 years. What is
Calculating Real Rates of Return If Treasury bills are currently paying 4.5 percent and the inflation rate is 2.1 percent, what is the approximate real rate of interest? The exact real rate?
Inflation and Nominal Returns Suppose the real rate is 2.4 percent and the inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill?
Nominal and Real Returns An investment offers a 14 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 10 percent. What does Alan
Using Treasury Quotes Locate the Treasury bond in Figure 8.4 maturing in February 2037. What is its coupon rate? What is its bid price? What was the previous day’s asked price?
Using Treasury Quotes Locate the Treasury bond in Figure 8.4 maturing in November 2039. Is this a premium or a discount bond? What is its current yield?What is its yield to maturity? What is the
Zero Coupon Bonds You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 7 percent, and 25 years to maturity. If you hold the bond for the entire year, how
Bond Price Movements Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani
Interest Rate Risk Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years
Interest Rate Risk The Faulk Corp. has a 6 percent coupon bond outstanding.The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and
Bond Yields Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current
Bond Yields Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual
Accrued Interest You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of
Accrued Interest You purchase a bond with a coupon rate of 5.9 percent and a clean price of $1,053. If the next semiannual coupon payment is due in four months, what is the invoice price?
Finding the Bond Maturity Argos Corp. has 9 percent coupon bonds making annual payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How many years do these bonds
Using Bond Quotes 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 and the current date is April
Interest on Zeroes Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money.The required return on the bonds will
Zero Coupon Bonds Suppose your company needs to raise $45 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re
Components of Bond Returns Bond P is a premium bond with a 9 percent coupon.Bond D is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 7
Valuing Bonds The Morgan Corporation has two different bonds currently outstanding.Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then
Treasury Bonds The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004:9.125 May 09 100:03 100:04 –– –2.15 Why would anyone buy this Treasury bond with a negative
Real Cash Flows 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 600.Paul plans to raise the annual fee by 6
Companies often buy bonds to meet a future liability or cash outlay. Such an investment is called a dedicated portfolio since the proceeds of the portfolio are dedicated to the future liability. In
You are Kim’s assistant, and she has asked you to prepare a memo to Dan describing the effect of each of the following bond features on the coupon rate of the bond. She would also like you to list
How many of the coupon bonds must East Coast Yachts issue to raise the $50 million?How many of the zeroes must it issue?After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter
In 20 years, what will be the principal repayment due if East Coast Yachts issues the coupon bonds? What if it issues the zeroes? After Dan’s EFN analysis for East Coast Yachts (see the Mini Case
What are the company’s considerations in issuing a coupon bond compared to a zero coupon bond?After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided
Suppose East Coast Yachts issues the coupon bonds with a make-whole call provision.The make-whole call rate is the Treasury rate plus .40 percent. If East Coast calls the bonds in seven years when
Are investors really made whole with a make-whole call provision?After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided to expand the company’s
After considering all the relevant factors, would you recommend a zero coupon issue or a regular coupon issue? Why? Would you recommend an ordinary call feature or a make-whole call feature?
Price − Earnings Ratio What are the three factors that determine a company’s price−earnings ratio?
Stock Valuation Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term
Stock Values The Starr Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely.If investors require a
Stock Values The next dividend payment by ECY, Inc., will be $3.20 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. If ECY stock currently sells for $63.50
Stock Values White Wedding Corporation will pay a $2.65 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a return of
Stock Valuation Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required
Stock Valuation Suppose you know that a company’s stock currently sells for$72 per share and the required return on the stock is 11.5 percent. You also know that the total return on the stock is
Stock Valuation Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required
Valuing Preferred Stock Ayden, Inc., has an issue of preferred stock outstanding that pays a $5.90 dividend every year, in perpetuity. If this issue currently sells for$87 per share, what is the
Growth Rate The newspaper reported last week that Bennington Enterprises earned $34 million this year. The report also stated that the firm’s return on equity is 16 percent. Bennington retains 80
Stock Valuation and PE The Germinating Flower Co. has earnings of $1.75 per share. The benchmark PE for the company is 18.What stock price would you consider appropriate? What if the benchmark PE
Stock Valuation Universal Laser, Inc., just paid a dividend of $3.10 on its stock.The growth rate in dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a 15
Nonconstant Growth 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
Nonconstant Dividends Bucksnort, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $3 per share for each
Nonconstant Dividends Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, the company pledges to maintain a constant 5 percent
Differential Growth Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent
Differential Growth Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 18 percent over the following year, and then 8
Negative Growth Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require
Finding the Dividend Mau Corporation stock currently sells for $58.32 per share.The market requires a return of 11.5 percent on the firm’s stock. If the company maintains a constant 5 percent
Valuing Preferred Stock Fifth National Bank just issued some new preferred stock.The issue will pay an annual dividend of $8 in perpetuity, beginning five years from now. If the market requires a
Using Stock Quotes You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What is the annual dividend? What was the closing price for this
Taxes and Stock Price You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividend of $2.25 per share. You will receive a$2.40 dividend two years from now. You will
Nonconstant Growth and Quarterly Dividends Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $.80 at the end of each of the next 12 quarters.Thereafter, the dividend will grow
Finding the Dividend Briley, 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 4 percent, forever. The
Finding the Required Return Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The
Dividend Growth Four years ago, Bling Diamond, Inc., paid a dividend of $1.35 per share. Bling paid a dividend of $1.77 per share yesterday. Dividends will grow over the next five years at the same
Price–Earnings Ratio Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported earnings of $950,000. Without new projects, both firms will continue to generate earnings of
Growth Opportunities The Stambaugh Corporation currently has earnings per share of $9.40. The company has no growth and pays out all earnings as dividends.It has a new project that will require an
Growth Opportunities Rite Bite Enterprises sells toothpicks. Gross revenues last year were $7.5 million, and total costs were $3.4 million. Rite Bite has 1 million shares of common stock outstanding.
Growth Opportunities California Real Estate, Inc., expects to earn $71 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16 million
Stock Valuation and PE Ramsay Corp. currently has an EPS of $2.35, and the benchmark PE for the company is 21.Earnings are expected to grow at 7 percent per year.a. What is your estimate of the
Stock Valuation and EV FFDP Corp. has yearly sales of $28 million and costs of$12 million. The company’s balance sheet shows debt of $54 million and cash of$18 million. There are 950,000 shares
Stock Valuation and Cash Flows Eberhart Manufacturing has projected sales of$145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of
Capital Gains versus Income Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to
Stock Valuation Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains
Growth Opportunities Lewin Skis, Inc., today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firm makes no new investments and returns the
Nonconstant Growth This one’s a little harder. Suppose the current share price for the firm in the previous problem is $78.43 and all the dividend information remains the same. What required return
Growth Opportunities Burklin, Inc., has earnings of $18 million and is projected to grow at a constant rate of 5 percent forever because of the benefits gained from the learning curve. Currently, all
Larissa has been talking with the company’s directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the company’s
Investment Selection Given that eGain Communications was up by almost 412 percent for 2011, why didn’t all investors hold eGain Communications?
Investment Selection Given that First Solar was down by 74 percent for 2011, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?

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