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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

Hunter Corporation expects an EBIT of $31,480 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 21 percent. a. What is the current
The Bellwood Company is financed entirely with equity. The company is considering a loan of $3.1 million. The loan will be repaid in equal installments over the next two years and has an interest
Harris, Inc., has equity with a market value of $18.5 million and debt with a market value of $7.3 million. Treasury bills that mature in one year yield 4 percent per year and the expected return on
The Veblen Company and the Knight Company are identical in every respect except that Veblen is unlevered. The market value of Knight Company’s 6 percent bonds is $1.6 million. Financial information
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
Taco Salad Manufacturing, Inc., plans to announce that it will issue $1.6 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6
Dickson, Inc., has a debt-equity ratio of 2.3. The firm’s weighted average cost of capital is 10 percent and its pretax cost of debt is 6 percent. The tax rate is 24 percent. a. What is
In a world of corporate taxes only, show that the WACC can be written as WACC = R0 × [1 − TC(B/V)].
Sunrise, Inc., has no debt outstanding and a total market value of $245,000. Earnings before interest and taxes, EBIT, are projected to be $19,000 if economic conditions are normal. If there is
Bandon Manufacturing intends to issue callable, perpetual bonds with annual coupon payments and a par value of $1,000. The bonds are callable at $1,175. One-year interest rates are 9 percent. There
New Business Ventures, Inc., has an outstanding perpetual bond with a 9 percent coupon rate that can be called in one year. The bond makes annual coupon payments and has a par value of $1,000. The
Assets, Inc., plans to issue $5 million of bonds with a coupon rate of 7 percent, a par value of $1,000, semiannual coupons, and 30 years to maturity. The current market interest rate on these bonds
Edgehill, Inc., has 325,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 6 percent paid semiannually, and 13 years to maturity. The current YTM on the bonds is 5.6
Away Corp. has interest-bearing debt with a market value of $55 million. The company also has 1.6 million shares that sell for $43 per share.What is the debt-equity ratio for this company based on
Highway 65, Inc., is going to elect 12 board members next month. Betty Brown owns 11.6 percent of the total shares outstanding. How confident can she be of having one of her candidate friends elected
The shareholders of Solar Power Corp. need to elect four new directors to the board. There are 14.3 million shares of common stock outstanding and the current share price is $15.25. If the company
An election is being held to fill three seats on the board of directors of a firm in which you hold stock. The company has 19,600 shares outstanding. If the election is conducted under cumulative
The shareholders of the Mango Company need to elect seven new directors. There are 850,000 shares outstanding currently trading at $61 per share. You would like to serve on the board of directors;
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
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .40. It’s considering building a new $60 million manufacturing
Breckenridge Corp. has a debt-equity ratio of .65. The company is considering a new plant that will cost $137 million to build. When the company issues new equity, it incurs a flotation cost of 8
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
Floyd Industries stock has a beta of 1.15. The company just paid a dividend of $.75 and the dividends are expected to grow at 4.5 percent per year. The expected return on the market is 11 percent
Macfarlane, Inc., recently issued new securities to finance a new TV show. The project cost $30 million and the company paid $1.9 million in flotation costs. In addition, the equity issued had a
The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 40,000 bonds with a coupon rate of 4.9 percent and a current price quote of 106.5;
Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.85 million at the end of the first year, and these savings will grow at a rate of 3 percent per year
Southern Alliance Company needs to raise $75 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
Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .65. The flotation cost for new equity is 6 percent and the flotation cost for debt is 2 percent.
Titan Mining Corporation has 6.4 million shares of common stock outstanding and 175,000 6.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $53
Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 17,000 4.9 percent coupon bonds outstanding, $2,000 par value, 20
Kose, Inc., has a target debt-equity ratio of .38. Its WACC is 10.1 percent and the tax rate is 25 percent. a. If the company’s cost of equity is 12 percent, what is its pretax cost of
In the previous problem, suppose the company’s stock has a beta of 1.10. The risk-free rate is 2.9 percent and the market risk premium is 7 percent. Assume that the overall cost of debt is the
Hero Manufacturing has 7.6 million shares of common stock outstanding. The current share price is $67 and the book value per share is $4. The company also has two bond issues outstanding, both with
Fama’s Llamas has a weighted average cost of capital of 9.1 percent. The company’s cost of equity is 11 percent and its cost of debt is 6.4 percent. The tax rate is 21 percent. What is the
Miller Manufacturing has a target debt-equity ratio of .40. Its cost of equity is 11.8 percent and its cost of debt is 6.5 percent. If the tax rate is 21 percent, what is the company’s WACC?
Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 10.9 percent and the cost of debt is 5.7 percent. The relevant tax
For the firm in the previous problem, suppose the book value of the debt issue is $25 million. In addition, the company has a second debt issue on the market, a zero coupon bond with nine years left
Shanken Corp. issued a 30-year, 5.9 percent semiannual bond three years ago. The bond currently sells for 106 percent of its face value. The company’s tax rate is 22 percent. a. What is the
One Step, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 17 years to maturity that is quoted at 95 percent of face value. The issue makes semiannual
What is wrong with measuring the performance of a U.S. growth stock manager against a benchmark composed of British stocks?
How can the return on a portfolio be expressed in terms of a factor model?
What is the relationship between the one factor model and the CAPM?
The Nixon Corporation’s common stock has a beta of .95. If the risk-free rate is 2.7 percent and the expected return on the market is 10 percent, what is the company’s cost of equity capital?
Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented in the following
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
Assume Stocks A and B have the following characteristics: The covariance between the returns on the two stocks is .001. a. Suppose an investor holds a portfolio consisting of only Stock A
Suppose you observe the following situation: a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than Stock
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? Expected
Consider the following information about Stocks I and II:? The market risk premium is 7.5 percent and the risk-free rate is 4 percent. Which stock has more systematic risk? Which one has more
Suppose the risk-free rate is 4.4 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0391. Portfolio Z has a correlation coefficient
A portfolio that combines the risk-free asset and the market portfolio has an expected return of 9 percent and a standard deviation of 16 percent. The risk-free rate is 4.1 percent and the expected
The market portfolio has an expected return of 11.5 percent and a standard deviation of 19 percent. The risk-free rate is 4.1 percent.a. What is the expected return on a well-diversified portfolio
You have been provided the following data about the securities of three firms, the market portfolio, and the riskfree asset: a. Fill in the missing values in the table. b. Is the stock of
Suppose the expected returns and standard deviations of Stocks A and B are E(RA) = .11, E(RB) = .13, σA = .47, and σB = .81. a. Calculate the expected return and standard deviation of a
Security F has an expected return of 10 percent and a standard deviation of 53 percent per year. Security G has an expected return of 13 percent and a standard deviation of 79 percent per
Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two
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
You want to create a portfolio equally as risky as the market and you have $1,000,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta Stock A
Consider the following information about three stocks: a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The
Stock Y has a beta of 1.15 and an expected return of 11.8 percent. Stock Z has a beta of .85 and an expected return of 10.7 percent. If the risk-free rate is 4.5 percent and the market risk premium
Asset W has an expected return of 12.3 percent and a beta of 1.2. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
A stock has a beta of 1.08 and an expected return of 11.6 percent. A risk-free asset currently earns 3.6 percent. a. What is the expected return on a portfolio that is equally invested in the
A stock has an expected return of 10.9 percent, its beta is .9, and the expected return on the market is 11.8 percent. What must the risk-free rate be?
A stock has an expected return of 12.7 percent, its beta is 1.20, and the risk-free rate is 4.2 percent. What must the expected return on the market be?
A stock has an expected return of 10.4 percent, the risk-free rate is 3.8 percent, and the market risk premium is 7 percent. What must the beta of this stock be?
A stock has a beta of 1.15, the expected return on the market is 11.1 percent, and the risk-free rate is 3.8 percent. What must the expected return on this stock be?
You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.61 and the total portfolio is equally as risky as the market, what must the beta be for
You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R, 15 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .75, 1.90, 1.38, and 1.16,
Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz and the acquisition would allow Schultz to better control its material supply. The
Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the company’s financial performance. Dan graduated from college
You’ve observed the following returns on SkyNet Data Corporation’s stock over the past five years: 19 percent, 24 percent, 11 percent, −9 percent, and 13 percent. a. What was the
A portfolio is invested 15 percent in Stock G, 60 percent in Stock J, and 25 percent in Stock K. The expected returns on these stocks are 9 percent, 11 percent, and 14 percent, respectively. What is
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.7 percent and Stock Y with an expected return of 9.1 percent. If your goal is to create a
In Problem 9, suppose the average inflation rate over this period was 3.6 percent and the average T-bill rate over the period was 4.1 percent. a. What was the average real return on the
A stock has had returns of 12.79, 9.21, 14.68, 21.83, and −10.34 per-cent over the past 5 years, respectively. What was the holding period return for the stock?
You own a portfolio that is 20 percent invested in Stock X, 45 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 10.5 percent, 16.1 percent, and 12.4
You purchased a zero coupon bond 1 year ago for $273.82. The market interest rate is now 6.4 percent. If the bond had 21 years to maturity when you originally purchased it, what was your total return
You bought a share of 3.1 percent preferred stock for $94.82 last year. The market price for your stock is now $97.18. What was your total return for last year?
You bought a stock three months ago for $82.18 per share. The stock paid no dividends. The current share price is $91.45. What is the APR of your investment? The EAR?
You find a certain stock that had returns of 17, −19, 9, and 34 percent for four of the last five years. If the average return of the stock over this period was 10.1 percent, what was the stock’s
You own a portfolio that has $3,100 invested in Stock A and $4,600 invested in Stock B. If the expected returns on these stocks are 9.8 percent and 12.7 percent, respectively, what is the expected
A stock has had returns of 23, 11, 37, −3, 22, and −17 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
A stock has had the following year-end prices and dividends:? What are the arithmetic and geometric average returns for the stock? Year Price Dividend $64.12 68.13 2 1.15 61.23 1.25 1.36 4 74.27
What are the portfolio weights for a portfolio that has 145 shares of Stock A that sell for $47 per share and 130 shares of Stock B that sell for $86 per share?
You bought one of Colton Manufacturing Co.’s 5.8 percent coupon bonds one year ago for $1,027.50. These bonds make annual payments and mature six years from now. Suppose you decide to sell your
Suppose you bought a bond with a 4.9 percent coupon rate one year ago for $1,010. The bond sells for $1,052 today. a. Assuming a $1,000 face value, what was your total dollar return on this
You found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?
Suppose a stock had an initial price of $76 per share, paid a dividend of $1.95 per share during the year, and had an ending share price of $84. Compute the percentage total return.
The Nearside Co. just paid a dividend of $2.07 per share on its stock. The dividends are expected to grow at a constant rate of 4.3 percent per year, indefinitely. If investors require a return of 11
The next dividend payment by Skippy, Inc., will be $2.95 per share. The dividends are anticipated to maintain a growth rate of 4.8 percent, forever. If the stock currently sells for $53.10 per share,
Saine Corporation will pay a $3.25 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 10.5 percent on your
Change, Inc., is expected to maintain a constant 4.9 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.2 percent, what is the required return on the
Suppose you know that a company’s stock currently sells for $74 per share and the required return on the stock is 9.9 percent. You also know that the total return on the stock is evenly divided
Gruber Corp. pays a constant $8.50 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required return on this
Meteora, Inc., has an issue of preferred stock outstanding that pays a $3.75 dividend every year, in perpetuity. If this issue currently sells for $81 per share, what is the required return?
The newspaper reported last week that Bennington Enterprises earned $17.5 million this year. The report also stated that the firm’s return on equity is 13 percent. The firm retains 80 percent of
The Rose Co. has earnings of $3.41 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
Bretton, Inc., just paid a dividend of $3.15 on its stock. The growth rate in dividends is expected to be a constant 4 percent per year, indefinitely. Investors require a 15 percent return on the
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next 9 years because the firm needs to plow back its earnings to fuel growth. The company will
Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of $15 per share and has announced that it will increase the dividend by $3 per share for each of the next five

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