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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.9%. The firm faces a tax rate of 35% on all income, no matter where it is earned. Managers in the firm need to know its yen
Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in the euro area. You are in Manzetti’s corporate finance department and are responsible for deciding
How do GILTI and FDII reduce the incentive for U.S. firms to shift overseas the profits due to intangible assets used to produce foreign goods?
Assume that in the original Ityesi example in Table 31.1, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping the cost of sales,
What is the highest possible value for the delta of a call option? What is the lowest possible value? (Hint : See Figure 21.1.)
Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the 800 January 2014 call option.
Return to Example 20.11 (on page 786), in which Google was contemplating issuing zerocoupon debt due in 16 months with a face value of $163.5 billion, and using the proceeds to pay a special
Consider the United Studios example in Section 22.2. Suppose United has the rights to produce the first film, but has not yet purchased the sequel rights.a. How much are the sequel rights worth to
Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 9-year life of the fund, 2.5% of this committed capital will be used to pay GSB’s management
Three years ago, you founded your own company. You invested $120,000 of your money and received 6 million shares of Series A preferred stock. Since then, your company has been through three
Beru.com recently raised $4.6 million with a pre-money value of $9.5 million. They are seeking to raise another $6.4 million. What is the largest fraction of the firm they can offer and avoid a down
BitBox has raised $11 million in a Series A round with $41 million post-money value and a 1.5x liquidation preference, and $23 million in a Series B round with a $74 million post-money value and a 3x
Roundtree Software is going public using an auction IPO. The firm has received the following bids:Price ($) Number of Shares 14.40 120,000 14.20 200,000 14.00 540,000 13.80 1,200,000 13.60 1,200,000
Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your
Chen Brothers, Inc., sold 2 million shares in its IPO, at a price of $19 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of this
Few IPOs have garnered as much attention as social media giant Facebook’s public offering on May 18, 2012. It was the biggest IPO in Internet history, easily topping Google’s initial public
Suppose on January 15, 2018, the U.S. Treasury issued a five-year inflation-indexed note with a coupon of 4%. On the date of issue, the consumer price index (CPI) was 232.By January 15, 2023, the CPI
On January 15, 2020, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 6%. On the date of issue, the CPI was 403.By January 15, 2030, the CPI had decreased to 297.What
ABC Electric has just issued a callable 10-year, 7% coupon bond with annual coupon payments.The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of
Bancroft Corporation has just issued a callable (at par) three-year, 4% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon
Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature.
You own a bond with a face value of $10,000 and a conversion ratio of 363.What is the conversion price?
You are employed at Telekom Malaysia, a Malaysian telecommunications company. The company plans to increase leverage to the Board of Directors. The idea of changing Telekom Malaysia’s capital
Which type of firm is more likely to experience a loss of customers in the event of financial distress:a. Campbell Soup Company or Intuit, Inc. (a maker of accounting software)?b. Allstate
Facebook, Inc. has no debt. As Problem 21 in Chapter 15 makes clear, by issuing debt Facebook can generate a very large tax shield potentially worth nearly $2 billion. Given Facebook’s success, one
Your firm is considering issuing one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt:Debt
Sarvon Systems has a debt-equity ratio of 1.2, an equity beta of 2.0, and a debt beta of 0.30. It currently is evaluating the following projects, none of which would change the firm’s
Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below.
Petron Corporation’s management team is meeting to decide on a new corporate strategy. There are four options, each with a different probability of success and total firm value in the event of
Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):EBIT $1000 Interest expense 0 Income before tax 1000 Taxes -350 Net income $650 Approximately $200,000
Ralston Enterprises has assets that will have a market value in one year as follows:Probability 1% 6% 24% 38% 24% 6% 1%Value (in $ million) 70 80 90 100 110 120 130 That is, there is a 1% chance the
Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 200 million shares outstanding. The correct price for these shares is
Now suppose Natsam Corporation has $275 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $19 per share. The board decided to do the share
Suppose B&E Press paid dividends at the end of each year according to the schedule below. It also reduced its share count by repurchasing 5.2 million shares at the end of each year at the ex-dividend
Using Table 17.2, for each of the following years, state whether dividends were tax disadvantaged or not for individual investors with a one-year investment horizon:a. 1985b. 1989c. 1995d. 1999e.
Redo Problem 22, but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes.
Use the data in Table 15.3 to calculate the tax disadvantage of retained cash in the following:a. 1998b. 1976
Explain under which conditions an increase in the dividend payment can be interpreted as a signal of the following:a. Good newsb. Bad news
Berkshire Hathaway’s A shares are trading at $70,000. What split ratio would it need to bring its stock price down to $40?
Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share.a. If Host issued a 20% stock dividend, what will its new share price be?b. If Host does a 3:2 stock split, what will
After the market close on May 11, 2001, Adaptec, Inc., distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received 0.1646 share of Roxio
In 2018, Mastercard Incorporated had a market capitalization of $200 billion, debt of$6.5 billion, cash of $8.2 billion, and EBIT of over $7 billion. If Mastercard were to increase its debt by $1
Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1%
Consider Alcatel-Lucent’s project in Problem 6.a. What is the free cash flow to equity for this project?b. What is its NPV computed using the FTE method? How does it compare with the NPV based on
Amarindo, Inc. (AMR), is a newly public firm with 9.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be$14.97 million,
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. For each year into the indefinite future, Remex’s free cash flow is expected to equal $25 million.Remex
You are on your way to an important budget meeting. In the elevator, you review the project valuation analysis you had your summer associate prepare for one of the projects to be discussed:0 1 2 3 4
Your firm is considering building a $593 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $136 million per year for the next 10 years. The plant will be
DFS Corporation is currently an all-equity firm, with assets with a market value of $100 million and 4 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share
Consider Avco’s RFX project from Section 18.3. Suppose that Avco is receiving government loan guarantees that allow it to borrow at the 6% rate. Without these guarantees, Avco would pay 6.5% on its
Propel Corporation plans to make a $50 million investment, initially funded completely with debt. The free cash flows of the investment and Propel’s incremental debt from the project follow:Year 0
Hyundai Motor Company is expanding the production of their gas-electric hybrid drive systems and plans to shift production in Thailand. To enable the expansion, they are contemplating investing $1.7
Under the assumption that Ideko’s market share will increase by 0.5% per year (and the investment and financing will be adjusted as described in Problem 3), you project the following
Below is an option quote on IBM from the CBOE Web site showing options expiring in November and December 2018.a. Which option contract had the most trades on that day?b. Which option contract is
Consider the November 2018 IBM call and put options in Problem 3.Ignoring any interest you might earn over the remaining few days’ life of the options:a. Compute the break-even IBM stock price for
You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short
You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against this possibility?
It is November 9, 2018, and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in terms
Consider the IBM call and put options in Problem 3.IBM paid a dividend on November 8th, 2018, and was not scheduled to pay another dividend until February 2019. Ignoring the negligible interest you
In mid-July 2018, European-style options on the S&P 100 index (OEX) expiring in December 2019 were priced as follows:Dec 2019 OEX Index Options Strike Price Call Price Put Price 840 87.58 860 76.39
Consider the data for IBM options in Problem 3.Suppose a new American-style put option on IBM is issued with a strike price of $130 and an expiration date of December 1st.a. What is the maximum
Use the option data from July 13, 2009, in the following table to determine the rate Google would have paid if it had issued $128 billion in zero-coupon debt due in January 2011. Suppose Google
You own 10,000 shares of Rio Tinto stock. You are concerned about the short-term outlook for Rio Tinto’s stock due to an impending “major announcement.” This announcement has received much
You work in the corporate finance division of Singapore Airlines Limited and your boss has asked you to review the firm’s capital structure. Specifically, your boss is considering changing the
Pelamed Pharmaceuticals has EBIT of $347 million in 2018. In addition, Pelamed has interest expenses of $147 million and a corporate tax rate of 30%.a. What is Pelamed’s 2018 net income?b. What is
Suppose the corporate tax rate is 40%. Consider a firm that earns $2500 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year,
Rumolt Motors has 68 million shares outstanding with a price of $28 per share. In addition, Rumolt has issued bonds with a total current market value of $2149 million. Suppose Rumolt’s equity cost
Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 25%, and it pays 7% interest on its debt. The interest tax shield from its debt lowers Summit’s WACC by what
NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%.Suppose NatNah decides to increase its leverage and maintain a market debt-to-value ratio of 0.5. Suppose
Acme Storage has a market capitalization of $140 million and debt outstanding of $94 million.Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.8%
PMF, Inc., is equally likely to have EBIT this coming year of $7 million, $16 million, or $25 million. Its corporate tax rate is 38%, and investors pay a 25% tax rate on income from equity and a 45%
Your boss was impressed with your presentation regarding the irrelevance of capital structure from Chapter 14 but, as expected, has realized that market imperfections like taxes must be accounted
Aluminum maker Alcoa has a beta of about 1.73, whereas Hormel Foods has a beta of 1.68.If the expected excess return of the marker portfolio is 3%, which of these firms has a higher equity cost of
Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. What does the market portfolio consist of (what are the portfolio weights)?Stock
Suppose Best Buy stock is trading for $24 per share for a total market cap of $9 billion, and Walt Disney has 2.43 billion shares outstanding. If you hold the market portfolio, and as part of it hold
You need to estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:Year Risk-free Return Market Return XYZ Return 2017 4% 7% 8%2018 1% -43%
Go to Chapter Resources on MyLab Finance and use the data in the spreadsheet provided to estimate the beta of Nike (NKE) and HP (HPQ) stock based on their monthly returns from 2011–2017. (Hint :
Using the same data as in Problem 11, estimate the 95% confidence interval for the alpha and beta of Nike and HP stock using Excel’s regression tool (from the data analysis menu) or the linest( )
In mid-2017, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.36%.a. What is the highest expected return these bonds could have?b. At the time, similar maturity
In mid-2012, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6% and
IDX Tech is looking to expand its investment in advanced security systems. The project will be financed with equity. You are trying to assess the value of the investment, and must estimate its cost
In mid-2015, Cisco Systems had a market capitalization of $123 billion. It had A-rated debt of$21 billion as well as cash and short-term investments of $62 billion, and its estimated equity beta at
Consider the following airline industry data from mid-2009:Company Name Market Capitalization($mm)Total Enterprise Value ($mm) Equity Beta Debt Ratings Delta Air Lines (DAL) 4,938.5 17,026.5 2.04 BB
Your company operates a steel plant. On average, revenues from the plant are $50 million per year. All of the plants costs are variable costs and are consistently 70% of revenues, including energy
You would like to estimate the weighted average cost of capital for a new airline business.Based on its industry asset beta, you have already estimated an unlevered cost of capital for the firm of
You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team
In the earlier data case for this chapter, you relied on the beta estimate for Walt Disney provided by Yahoo! Finance. You decide to dig deeper and estimate Disney’s equity beta on your own.1. Get
Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 2%. New news arrives that does not change any of
You know that there are informed traders in the stock market, but you are uninformed. Describe an investment strategy that guarantees you will not lose money to the informed traders and explain why
Consider the price paths of the following two stocks over six time periods:1 2 3 4 5 6 Stock 1 8 10 12 10 11 14 Stock 2 15 11 8 16 15 18 Neither stock pays dividends. Assume you are an investor with
Suppose that all investors have the disposition effect. A new stock has just been issued at a price of $70, so all investors in this stock purchased the stock today. A year from now the stock will be
Assume the economy consisted of three types of people. 45% are fad followers, 48% are passive investors (they have read this book and so hold the market portfolio), and 7% are informed traders. The
Each of the six firms in the table below is expected to pay the listed dividend payment every year in perpetuity.Firm Dividend ($ million) Cost of Capital (%/Year)S1 10.2 7.8 S2 10.2 11.1 S3 10.2
Consider the following stocks, all of which will pay a liquidating dividend in a year and nothing in the interim:Market Capitalization($ million)Expected Liquidating Dividend ($ million) Beta Stock A
Explain why an employee who cares only about expected return and volatility will likely underweight the amount of money he invests in his own company’s stock relative to an investor who does not
Consider a project with free cash flows in one year of $141,494 or $182,105, with each outcome being equally likely. The initial investment required for the project is $100,368, and the project’s
Wolfrum Technology (WT) has no debt. Its assets will be worth $476 million in one year if the economy is strong, but only $262 million in one year if the economy is weak. Both events are equally
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of
Schwartz Industry is an industrial company with 89.9 million shares outstanding and a market capitalization (equity value) of $4.24 billion. It has $1.75 billion of debt outstanding. Management have
Suppose PayPal (PYPL) has no debt and an equity cost of capital of 9.2%. The average debt-tovalue ratio for the credit services industry is 15%. What would its cost of equity be if it took on the

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