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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

Nicholas Health Systems recently reported an EBITDA of $25.0 million and net income of $15.8 million. It had $2.0 million of interest expense, and its federal tax rate was 21% (ignore any possible
Holly’s Art Galleries recently reported $7.9 million of net income. Its EBIT was $13 million, and its federal tax rate was 21% (ignore any possible state corporate taxes). What was its interest
Corporate bonds issued by Johnson Corporation currently yield 8.0%. Municipal bonds of equal risk currently yield 5.5%. At what personal tax rate would an investor be indifferent between these two
An investor recently purchased a corporate bond that yields 7.68%. The investor is in the 25% federal-plus-state tax bracket. What is the bond’s after-tax yield to the investor?
The following information is available from Bromfield Co.’s accounting records for the year ended December 31, 2019 (amounts in millions):Cash dividends declared and paid . . . . . . . . . . . . .
One of the more famous examples of a violation of absolute purchasing power parity is the Big Mac index calculated by The Economist. This index calculates the dollar price of a McDonald’s Big Mac
Go to the Financial Times site at www.ft.com, and find the current exchange rate between the U.S. dollar and the euro. Next, find the U.S. dollar LIBOR and the Euro LIBOR interest rates. What must
Go to reuters.com and enter the ticker symbol AMGN for Amgen, a biotechnology company. Find the long-term debt-to-equity and total debt-to-equity ratios. How does Amgen compare to the industry,
You have decided to invest in an equally weighted portfolio consisting of American Express, Procter & Gamble, Home Depot, and Du Pont and need to find the beta of your portfolio. Go to
You want to find the expected return for Honeywell using the CAPM. First, you need the market risk premium. Use the average large-company stock return in Table 10.3 to estimate the market risk
You have a project that has an initial cash outflow of −$20,000 and cash inflows of $6,000, $5,000, $4,000, and $3,000, respectively, for the next four years. Go to www.datadynamica.com and follow
How does a stock trade take place? Go to www.nyse.com to find out. Describe the process of a trade on the NYSE.
You are interested in buying stock in Coca-Cola (KO). You believe that the dividends will grow at 15 percent for the next four years and level off at 6 percent thereafter. Using the most recent
What is the most expensive publicly traded stock in the United States? Go to finance.yahoo.com and enter BRKA (for Berkshire Hathaway Class A). What is the current price per share? What is the
According to the June 2009 Value Line Investment Survey, the dividend growth rate for ExxonMobil (XOM) is 7 percent. Find the current stock price quote and dividend information at finance.yahoo.com.
You can find information regarding the most current bond yields at money.cnn.com. Go there and graph the yield curve for U.S. Treasury bonds. What is the general shape of the yield curve? What does
Bankrate.com, located at www.bankrate.com, has a financial calculator that will prepare an amortization table based on your inputs. First, find the APR quoted on the Web site for a 30-year fixed rate
Find the retirement calculator at www.moneychimp.com to answer the following question: Suppose you have $1,500,000 when you retire and want to withdraw an equal amount each year for the next 30
The St. Louis Federal Reserve Board has files listing historical interest rates on their Web site www.stlouisfed.org. Find the link for “FRED®” (Federal Reserve Economic Data). You will find
Why is underpricing not a great concern with bond offerings?Use the following information to answer the next three questions. Eyetech Pharmaceuticals, Inc., a company that develops treatments for eye
The Verbatim Co. has just gone public. Under a firm commitment agreement, Verbatim received $20.15 for each of the 6.5 million shares sold. The initial offering price was $22 per share, and the stock
The Hootenanny Corporation needs to raise $51 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If
The Bostitch Co. has just gone public. Under a firm commitment agreement, Bostitch received $32 for each of the 4.1 million shares sold. The initial offering price was $34.40 per share, and the stock
The IBBS Co. needs to raise $65 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price
The Sun Co. and the Moon Co. have both announced IPOs at $40 per share. One of these is undervalued by $9, and the other is overvalued by $4.25, but you have no way of knowing which is which. You
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .6. It’s considering building a new $65 million manufacturing
Laverne Industries stock has a beta of 1.25. The company just paid a dividend of $0.75, and the dividends are expected to grow at 5 percent. The expected return of the market is 11.5 percent, and
Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the table below. If the corporate tax rate is 34 percent, what is the aftertax cost
Gnomes R Us is considering a new project. The company has a debt-equity ratio of .80. The company’s cost of equity is 14.5 percent, and the aftertax cost of debt is 7.8 percent. The firm feels
DeVille Industrial Machines issued 135,000 zero coupon bonds four years ago. The bonds originally had 30 years to maturity with a 6.5 percent yield to maturity. Interest rates have recently
An all-equity firm is considering the following projects:The T-bill rate is 5 percent, and the expected return on the market is 12 percent.a. Which projects have a higher expected return than the
Organic Produce Corporation has 7.5 million shares of common stock outstanding, 500,000 shares of 7 percent preferred stock outstanding, and 175,000 of 8.2 percent semiannual bonds outstanding, par
Blue Bull, Inc., has a target debt-equity ratio of .70. Its WACC is 8.4 percent, and the tax rate is 35 percent.a. If the company’s cost of equity is 11 percent, what is its pretax cost of
Regions, Inc., has 6 million shares of common stock outstanding. The current share price is $61, and the book value per share is $4. Regions also has two bond issues outstanding. The first bond
Fama’s Llamas has a WACC of 11.20 percent. The company’s cost of equity is 15 percent, and its cost of debt is 8 percent. The tax rate is 35 percent. What is Fama’s target debt-equity ratio?
Rainbow in the Dark Manufacturing has a target debt-equity ratio of .65. Its cost of equity is 13 percent, and its cost of debt is 8 percent. If the tax rate is 35 percent, what is the
Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12.5 percent, the cost of preferred stock is
For the firm in Problem 7, suppose the book value of the debt issue is $90 million. In addition, the company has a second debt issue, a zero coupon bond with 10 years left to maturity; the book value
Peyton’s Colt Farm issued a 30-year, 7 percent semiannual bond 7 years ago. The bond currently sells for 94 percent of its face value. The company’s tax rate is 35 percent.a. What is the pretax
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with seven years to maturity that is quoted at 108 percent of face value. The issue makes semiannual
Sixth Fourth Bank has an issue of preferred stock with a $5.50 stated dividend that just sold for $97 per share. What is the bank’s cost of preferred stock?
Suppose Matta Ltd. just issued a dividend of $2.46 per share on its common stock. The company paid dividends of $1.96, $2.03, $2.20, and $2.30 per share in the last four years. If the stock currently
Stock in CDB Industries has a beta of 0.90. The market risk premium is 7 percent, and T-bills are currently yielding 4 percent. CDB’s most recent dividend was $1.90 per share, and dividends are
Bohannon Corporation’s common stock has a beta of 1.10. If the risk-free rate is 4.5 percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital?
Betancourt International has operations in Arrakis. The balance sheet for this division in Arrakeen Solaris shows assets of 20,000 solaris, debt in the amount of 6,000 solaris, and equity of 14,000
According to purchasing power parity, if a Big Mac sells for $3.29 in the United States and kronur 127.49 in Iceland, what is the kronur/$ exchange rate?
The £ trades at $1.4934 in London and $ 1.4872 in New York. How much profit could you earn on each trade with $10,000?
Suppose the spot exchange rate for the Hungarian forint is HUF 221. Interest rates in the United States are 3.2 percent per year. They are 5.1 percent in Hungary, (a) What do you predict the
Suppose the spot and three-month forward rates for the yen are ¥102.16 and ¥101.23, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference
Suppose the spot and six-month forward rates on the South Korean won are SKW 1,304.81 and SKW 1,315.16, respectively. The annual risk-free rate in the United States is 5 percent, and the annual
Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 18.1. You have just placed an order for 30,000 motherboards at a cost to you of 230.75
The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .47 percent per month. The interest rate in Great Britain is .51 percent per
Suppose the Japanese yen exchange rate is ¥106 = $1, and the British pound exchange rate is £1 = $1.51.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥165 =
The Trektronics store begins each month with 950 phasers in stock. This stock is depleted each month and reordered. If the carrying cost per phaser is $32 per year and the fixed order cost is $540,
Vang, Inc., has an average collection period of 28 days. Its average daily investment in receivables is $87,000. What are annual credit sales? What is the receivables turnover?
A firm offers terms of 2/15, net 40. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to
Two Doors Down, Inc., has weekly credit sales of $38,600, and the average collection period is 34 days. What is TDD’s average accounts receivable figure?
Miyagi Data, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 1/10, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average
The Johnson Corporation has annual credit sales of $31 million. The average collection period is 33 days. What is the average investment in accounts receivable as shown on the balance sheet?
Essence of Skunk Fragrances, Ltd., sells 5,000 units of its perfume collection each year at a price per unit of $380. All sales are on credit with terms of 1/10, net 30. The discount is taken by 35
Each business day, on average, a company writes checks totaling $32,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
In a typical month, the Tanner Corporation receives 100 checks totaling $78,000. These are delayed three days on average. What is the average daily float? Assume 30 days in a month.
You place an order for 900 units of Good X at a unit price of $46. The supplier offers terms of 1/20, net 35.a. How long do you have to pay before the account is overdue? If you take the full period,
Kings of Leon, Inc., has a book value of equity of $62,000. Longterm debt is $55,000. Net working capital, other than cash, is $21,800. Fixed assets are $91,600. How much cash does the company have?
We are evaluating a project that costs $1,350,000, 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 projected
Automatic Transmissions, Inc., has the following estimates for its new gear assembly project: price = $1,070 per unit; variable cost = $290 per unit; fixed costs = $4.8 million; quantity = 70,000
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $190,000 per year. Will you accept the project? What if the pretax cost savings are
A major college textbook publisher has an existing finance textbook. The publisher is debating whether or not to produce an “essentialized” version, meaning a shorter (and lower-priced) book.
For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?Previous problemThe next dividend payment by Mosby, Inc., will be $2.45 per share. The
In 2007, baseball player Alex Rodriguez signed a contract reported to be worth $275 million. The contract called for $2 million immediately and $27 million in 2008. The remaining $246 million was to
You want to borrow $58,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,200, but no more. Assuming monthly compounding, what is the highest rate you can
You’re prepared to make monthly payments of $175, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 10-year annuity of $15,000 per year at the current interest rate of 10 percent per
You’re trying to choose between two different investments, both of which have up-front costs of $85,000. Investment G returns $150,000 in six years. Investment H returns $270,000 in 13 years. Which
Peter Lynchpin wants to sell you an investment contract that pays equal $12,000 amounts at the end of each of the next 20 years. If you require an effective annual return of 9 percent on this
You have an investment that will pay you 1.27 percent per month. How much will you have per dollar invested in one year? In two years?
You are saving to buy a $175,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 6 percent. How long will it take your initial $92,000 investment to
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.1 percent per year, compounded monthly for the first six months, increasing thereafter to 17
You want to buy a new sports car from Muscle Motors for $43,000. The contract is in the form of a 60-month annuity due at a 6.25 percent APR. What will your monthly payment be?
If the appropriate discount rate for the following cash flows is 9.29 percent per year, what is the present value of the cash flows? Cash Flow Year $1,900 2,300 4,500 5,100 3
If you put up $25,000 today in exchange for a 7.9 percent, 12-year annuity, what will the annual cash flow be?
You have $35,400 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $4,700 and then deposit a check for $6,300. What are your disbursement, collection, and net
You have $13,200 on deposit with no outstanding checks or uncleared deposits. If you deposit a check for $4,800, does this create a disbursement float or a collection float? What is your available
You have $145,000 on deposit with no outstanding checks or uncleared deposits. One day you write a check for $39,000. Does this create a disbursement float or a collection float? What is your
In the chapter opening, we discussed the cash positions of several companies. Automobile manufacturers also have enormous cash reserves. At the beginning of 2009, Ford Motor Co. had $28.2 billion in
Come and Go Bank offers your firm an 8 percent discount interest loan for up to $20 million, and in addition requires you to maintain a 3 percent compensating balance against the face amount
In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.8 percent per quarter on any funds actually borrowed.2. Maintain a 4 percent
Piano Man, Inc., has a 40-day average collection period and wants to maintain a minimum cash balance of $25 million, which is what the company currently has on hand. The company currently has a
A bank offers your firm a revolving credit arrangement for up to $75 million at an interest rate of 1.34 percent per quarter. The bank also requires you to maintain a compensating balance of 4
You’ve worked out a line of credit arrangement that allows you to borrow up to $60 million at any time. The interest rate is .573 percent per month.In addition, 4 percent of the amount that you
The Coba Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $3,700. The company has a 45-day collection period.
Here are some important figures from the budget of Red Barchetta, Inc., for the second quarter of 2010:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of
The Bruin 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 are 30
Confusion Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers
Your firm has an average collection period of 47 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume
Consider the following financial statement information for the Keenan Corporation:Assume all sales are on credit. Calculate the operating and cash cycles. How do you interpret your answer? Ending
The Maynard Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $240. Maynard has a 45-day collection period.
Kane Manufacturing, Inc., has recently installed a justin- time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating
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
Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $16,320 would be spent. Current earnings are $3.10 per share, and the stock currently sells for $85

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