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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

For the company in Problem 4, show how the equity accounts will change if:a. The company declares a two-for-one stock split. How many shares are outstanding now? What is the new par value per
The owners’ equity accounts for Masterson International are shown here:Common stock ($1 par value) .......$ 45,000Capital surplus ..................................157,000Retained earnings
During 2017, 108 companies went public with common stock offerings, raising a combined total of $24.5 billion. Relatively few of these 108 companies involved paid cash dividends. Why do you think
On Friday, December 8, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3. When
Estes Park, Inc., has declared a dividend of $8.40 per share. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the
Your portfolio is 200 shares of Callahan, Inc. The stock currently sells for $93 per share. The company has announced a dividend of $1.43 per share with an ex-dividend date of April 19. Assuming no
Tatum can borrow at 6.7 percent. The company currently has no debt, and the cost of equity is 12.9 percent. The current value of the firm is $595,000. What will the value be if the company borrows
Bird Enterprises has no debt. Its current total value is $47 million. Ignoring taxes, what will the company’s value be if it sells $18.4 million in debt? Suppose now that the company’s tax rate
You have found the following historical information for the Daniela Company: Earnings are expected to grow at 7 percent for the next year. Using the company?s historical average PE as a benchmark,
Berta, Inc., currently has an EPS of $3.85 and an earnings growth rate of 7 percent. If the benchmark PE ratio is 21, what is the target share price five years from now?
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark
Consider four different stocks, all of which have a required return of 19 percent and a most recent dividend of $2.40 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
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 the current
What is the payback period for the following set of cash flows?Year .....................Cash Flow0 ..............................−$7,8001 ..................................3,1002
An investment project provides cash inflows of $865 per year for eight years. What is the project payback period if the initial cost is $3,100? What if the initial cost is $4,300? What if it is
Stenson, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Cash Flow
You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $10.8 million, which will be depreciated straight-line
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .62. The company’s cost of equity is 11.8 percent, and the aftertax cost of debt is 4.9 percent. The firm feels
A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project?Year ............Cash Flow0
For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21
A project that provides annual cash flows of $2,620 for eight years costs $9,430 today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount rate
What is the IRR of the following set of cash flows?Year .......Cash Flow0 .............−$19,4001 .................10,4002 ...................9,3203 ...................6,900
In June 2017, automobile manufacturer BMW announced plans to invest $600 million to expand production at its South Carolina plant. BMW apparently felt that it would better be able to compete and
For the cash flows in the previous problem, what is the NPV at a discount rate of 0 percent? What if the discount rate is 10 percent? If it is 20 percent? If it is 30 percent?Previous problemWhat
Piercy, LLC, has identified the following two mutually exclusive projects: a. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept?
Consider the following two mutually exclusive projects: Sketch the NPV profiles for X and Y over a range of discount rates from 0 to 25 percent. What is the crossover rate for these two projects?
Howell Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year .............Cash Flow0 ............−$38,000,0001 ................56,000,0002
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?Year
The Whenworth Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 11 percent and the company applies the profitability index
Consider the following two mutually exclusive projects: Whichever project you choose, if any, you require a return of 13 percent on your investment. a. If you apply the payback criterion, which
Bausch Company is presented with the following two mutually exclusive projects. The required return for both projects is 15 percent. a. What is the IRR for each project?b. What is the NPV for each
Coore Manufacturing has the following two possible projects. The required return is 12 percent. a. What is the profitability index for each project?b. What is the NPV for each project?c. Which, if
Ace Industrial Machines issued 195,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a yield to maturity of 5.2 percent. Interest rates have recently decreased,
Crenshaw Enterprises has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required
An investment has an installed cost of $787,350. The cash flows over the four-year life of the investment are projected to be $312,615, $304,172, $245,367, and $229,431. If the discount rate is
Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 10 percent. a. Calculate
Doak Corp. is evaluating a project with the following cash flows:Year ................Cash Flow0 .......................−$32,6001 ...........................11,5202
Hanse, Inc., has the following two mutually exclusive projects available. What is the crossover rate for these two projects? What is the NPV of each project at the crossover rate? Year Project R
A project has the following cash flows:Year ..........Cash Flow0 ................$112,0001 .................− 67,0002 .................− 57,000What is the IRR for this project? If the required
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 net cash
Koepka Corp. has a project with the following cash flows:Year ...............Cash Flow0 .......................$35,0001 ......................− 27,0002 .........................29,000What is the
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year ...................Cash Flow0 ........................−$875,0001
Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $5.3 million in anticipation of using it as a warehouse and distribution
Winnebagel Corp. currently sells 28,000 motor homes per year at $84,000 each and 7,000 luxury motor coaches per year at $135,000 each. The company wants to introduce a new portable camper to fill out
A proposed new investment has projected sales of $635,000. Variable costs are 40 percent of sales, and fixed costs are $168,000; depreciation is $83,000. Prepare a pro forma income statement assuming
Consider the following income statement:Sales ........................$537,200Costs .........................346,800Depreciation ..............94,500EBIT...................................?Taxes
A piece of newly purchased industrial equipment costs $745,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
Consider an asset that costs $635,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6.8 million and will be sold for $1.46 million at the end of the
Cusic Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,400, and the company expects to sell 1,500 per year. The company currently
H. Cochran, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.15 million. The fixed asset will be depreciated straight-line to zero over
In the previous problem, suppose the project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $185,000 at the end of the project.
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2?
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. This cost will be depreciated straightline to zero over the project’s five-year life, at the end of which
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Previous problemKolby’s Korndogs is
Your firm is contemplating the purchase of a new $395,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $135,000 per year. Will you accept the project? What if the pretax cost savings are
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $940 per unit; variable cost = $340 per unit; fixed costs = $3.4 million; quantity = 53,000
We are evaluating a project that costs $1.68 million, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are
In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent. Calculate the best-case and worst-case NPV
In the previous problem, suppose the fixed asset actually falls into the three-year MACRS class. All the other facts are the same. What is the project’s Year 1 net cash flow now? Year 2? Year 3?
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $120,000 for a marketing survey to determine the viability of the product. It is
CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $395,000 is estimated to result in $144,000 in annual pretax cost savings. The
In the previous problem, suppose the required return on the project is 14 percent. What is the project’s NPV?Previous problemH. Cochran, Inc., is considering a new three-year expansion project that
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV?Previous problemCSM Machine Shop is
Consider a three-year project with the following information: initial fixed asset investment = $665,000; straight-line depreciation to zero over the five-year life; zero salvage value; price =
You are considering a new product launch. The project will cost $780,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 170 units per
McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $925 per set and have a variable cost of $480 per set. The company has spent $150,000 for a marketing study that
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year......................Unit Sales1 ................................71,5002
A proposed cost-saving device has an installed cost of $565,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Given that Madrigal Pharmaceuticals was up by 516 percent for 2017, why didn’t all investors hold Madrigal?
Suppose a stock had an initial price of $87 per share, paid a dividend of $2.15 per share during the year, and had an ending share price of $98. Compute the percentage total return. What was the
Given that Sears Holdings was down by 61 percent for 2017, why did some investors hold the stock? Why didn’t they sell out before the price declined so sharply?
Rework Problem 1 assuming the ending share price is $78.Problem 1Suppose a stock had an initial price of $87 per share, paid a dividend of $2.15 per share during the year, and had an ending share
You purchased 250 shares of a particular stock at the beginning of the year at a price of $104.32. The stock paid a dividend of $2.34 per share, and the stock price at the end of the year was
Asset W has an expected return of 11.6 percent and a beta of 1.23. If the risk-free rate is 3.15 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the
Suppose you bought a bond with an annual coupon rate of 5.5 percent one year ago for $1,017. The bond sells for $1,041 today.a. Assuming a $1,000 face value, what was your total dollar return on this
What was the arithmetic average annual return on large-company stocks from 1926 through 2017:a. In nominal terms?b. In real terms?
Using the following returns, calculate the arithmetic average returns, the variances, and the standard deviations for X and Y. Returns Year 14% 41% -13 2 3 23 11 18 -13 4 42 5
You’ve observed the following returns on Yamauchi Corporation’s stock over the past five years: -10 percent, 24 percent, 21 percent, 11 percent, and 8 percent.a. What was the arithmetic average
For Problem 9, suppose the average inflation rate over this period was 3.1 percent and the average T-bill rate over the period was 4.1 percent.a. What was the average real return on the stock?b. What
You purchased a zero-coupon bond one year ago for $267.35. The market interest rate is now 5.3 percent. If the bond had 25 years to maturity when you originally purchased it, what was your total
You bought a share of 4.5 percent preferred stock for $105.35 last year. The market price for your stock is now $103.18. What is your total return for last year?
You bought a stock three months ago for $51.27 per share. The stock paid no dividends. The current share price is $55.36. What is the APR of your investment? The EAR?
You find a certain stock that had returns of 15 percent, −17 percent, 23 percent, and 11 percent for four of the last five years. If the average return of the stock over this period was 10 percent,
A stock has had returns of −26 percent, 12 percent, 34 percent, −8 percent, 27 percent, and 23 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? Price Year Dividend $64.10 $1.10 74.05 2 1.25 67.61 4 76.25 1.45
You bought one of Rocky Mountain Manufacturing Co.’s 5.7 percent coupon bonds one year ago for $1,032.15. These bonds make annual payments and mature nine years from now. Suppose you decide to sell
Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than -3.9
What are the portfolio weights for a portfolio that has 185 shares of Stock A that sell for $64 per share and 115 shares of Stock B that sell for $49 per share?
You own a portfolio that has $3,140 invested in Stock A and $4,300 invested in Stock B. If the expected returns on these stocks are 9 percent and 14 percent, respectively, what is the expected return
You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.5 percent and Stock Y with an expected return of 9.5 percent. If your goal is to create a
Based on the following information, calculate the expected return. Rate of Return if Probability of State of State of Economy Economy State Occurs Recession .30 -13 .21 Boom .70
Based on the following information, calculate the expected return. Probability of State of Economy Rate of Return if State of Economy State Occurs Recession .15 -.12 Normal .60 .10 .25 .27 Boom
Based on the following information, calculate the expected returns and standard deviations for the two stocks. Rate of Return if State Occurs Probability of State of State of Economy Economy Stock A
You want to create a portfolio equally as risky as the market, and you have $500,000 to invest. Given this information, fill in the rest of the following table: Asset Investment Beta $85,000 Stock A
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .35. It’s considering building a new $37 million manufacturing
A portfolio is invested 20 percent in Stock G, 35 percent in Stock J, and 45 percent in Stock K. The expected returns on these stocks are 9.6 percent, 10.9 percent, and 14.3 percent, respectively.
Consider the following information: a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B
You own a stock portfolio invested 15 percent in Stock Q, 25 percent in Stock R, 40 percent in Stock S, and 20 percent in Stock T. The betas for these four stocks are .78, .87, 1.13, and 1.45,

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