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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Forward rate: The three-month forward rate on the Swiss Francs is $1.13310/SF and the spot rate $1.12630/SF. The three-month forward rate on the Japanese yen is $0.008754/¥ and the spot rate
Forward rate: Triumph Autos has contracted with an Indian software firm for design software. The payment of 22,779,750 rupees(Rs) is due in 30 days. What is the cost in dollars if the 30-day forward
Forward rate: Brilliant Equipment purchased machinery from a Japanese firm and must make a payment of ¥313.25 million in 45 days. The bank quotes a forward rate of ¥103.01/$ to buy the required
Forward rate: Crane, Inc., sold equipment to an Irish firm and will receive €1,319,405 in 30 days. If the company entered a forward contract to sell at the 30-day forward rate of $1.2183/€, what
Forward rate: If the spot rate was $0.7885/C$ and the 90-day forward rate was $0.8003/C$, how much more (in U.S. dollars) would you receive by selling C$1,000,000 at the forward rate than at the spot
Forward rate: Explain the relation between each pair of currencies.Spot Rate Forward Ratea. $1.3455/£ $1.2801/£b. ¥104.45/$ ¥102.33/$c. C$1.1940/$ C$1.2121/$
Spot rate: Suppose a BMW 528i is priced at $68,750 in New York and €50,267 in Berlin. In which city is the car more expensive if the spot rate is $1.2150/€?
Spot rate: Convert the following indirect quotes to the appropriate American quotes.a. £0.6917/$b. ¥104.28/$c. SF 1.0769/$
Spot rate: Given the following direct quotes, calculate the equivalent indirect quotes.a. $0.0507/Mexican pesob. £0.8513/€c. Indian rupee Rs54.64/C$
Spot rate: Crescent Corporation’s recent sale to a firm in Mexico produced revenues of 19,500,000 Mexican pesos. If the firm sold the pesos to its bank and was credited with $1,077,873.60, what was
Spot rate: Ryan wants to buy a pair of leather shoes at Harrods in London that costs £113.60. If the exchange rate is $1.3686/£, what is Ryan’s cost in U.S. dollars?
The price of a stock that does not pay dividends is currently $35, and the risk-free rate is 4 percent. A European call option on the stock, that has a strike price of $35 and that expires in six
One way to extend the binomial pricing model is by including multiple time periods. Suppose Splittime, Inc., is currently trading for $100 per share. In one month, the price will either increase by
Other options: A golden parachute is a part of a manager’s compensation package that makes a large lump-sum payment in the event that the manager is fired or loses his or her job in a merger.
Option valuation: You hold a European put option on Tubes, Inc., stock, with a strike price of $100. Things haven’t been going too well for Tubes. The current stock price is $2, and you think that
Option valuation: You are considering buying a three-month put option on Wing and a Prayer Construction stock. The company’s stock currently trades for $10 per share, and its price will either rise
Option valuation: Assume that the stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month. The risk-free rate for one month is 1.5 percent. What
Option valuation: Assume that the price of Socrates Motors stock will either rise to $50 or fall to $35 in one month and that the risk-free rate for one month is 1.5 percent. How much is an option
Option valuation: The stock of Socrates Motors is currently trading for $40 and will either rise to $50 or fall to $35 in one month.The risk-free rate for one month is 1.5 percent. What is the value
Option valuation: The seller of an option can never make any money from a change in the value of the underlying asset; he or she can only hope that the option will not be exercised and that and he or
Other options: A convertible bond is a bond that can be exchanged for stock at the discretion of the bondholder. How would you go about finding the value of such a bond? Would the bond be worth more
Other options: A callable bond is a bond that can be bought back by the bond issuer before maturity for some prespecified price (normally a small amount above face value) at the discretion of the
Option valuation: Suppose that you own a call option and a put option on the same stock and that these options have the same exercise price. Explain how the relative values of these two options will
Agency costs: How are options related to the agency costs of debt and equity?
Real options: List and describe four different types of real options that are associated with investment projects.
Real options: What is the difference between a financial option and a real option?
Option valuation: You hold an American option to sell one share of Zyther Co. stock. The option expires tomorrow. The strike price of the option is $50, and the current stock price is $49.What is the
Option valuation: Suppose you have an option to buy a share of ABC Corp. stock for $100. The option expires tomorrow, and the current price of ABC Corp. is $95. How much is your option worth?
Option valuation: What is the value at expiration of a call option with a strike price of $65 if the stock price is $1? $50? $65?$100? $1,000?
Option valuation: Like owners of stock, owners of options can lose no more than the amount they invested. They are far more likely to lose that full amount, but they cannot lose more. Do sellers of
Option valuation: What is the value of a call option or a put option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?
Option valuation: What does the seller of a put option hope will happen?
Option valuation: Assuming nothing else changes, what happens to the value of an option as time passes and the expiration date gets closer?
Option valuation: What are the five variables that affect the value of an option, and how do changes in each of these variables affect the value of a call option?
Option payoffs: What is the payoff for a put option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?
Option payoffs: What is the payoff for a call option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?
Option characteristics: Explain how the payoff functions differ for the owner (buyer) and the seller of a call option and of a put option.
Option characteristics: What is an option?
Munson Communications Company management has just reported earnings for the year ended June 30, 2021. Following are the firm’s income statement and balance sheet. The company has had a 55 percent
and 19.36. Assume that equity accounts do not vary directly with sales, but change when retained earnings change or new equity is issued. The company’s long-term debt-to-equity ratio is
Use the information for Morgan Construction Company from Problems
The financial statements for the year ended June 30, 2021, are given below for Morgan Construction Company. The firm’s sales are projected to grow at a rate of 25 percent next year, and all
Maximum sales growth: Rockville Consulting Group expects to add $271,898 to retained earnings this year. The company has total assets of $3,425,693 and wishes to add no new external funds for the
Maximum sales growth: Given the data for Capstone Marketing Group in Problem 19.32, what would Capstone’s payout ratio have to be for the firm’s EFN to be zero?
percent, a total equity/total assets ratio of 65 percent, and a dividend payout ratio of 75 percent. What is the company’s internal growth rate?
Internal growth rate: Fantasy Travel Company has a return on equity of
Internal growth rate: Given the information in Problem 19.26, what is the internal growth rate of Ellicott Textile Mills?
Sustainable growth rate: Ellicott Textile Mills management has reported the following financial information for the year ended September 30, 2021. The company generated a net income of $915,366 on a
Sustainable growth rate: Rocky Sales, Inc., has current sales of $1,215,326 and net income of $211,253. It also has a debt ratio of 25 percent and a dividend payout ratio of 75 percent. The
Sustainable growth rate: Refer to the information for Rowan Company in Problem 19.23. The firm’s management desires a sustainable growth rate of 10 percent but does not wish to change the
Sustainable growth rate: Rowan Company has a net profit margin of 8.3 percent, debt ratio of 45 percent, total assets of $4,157,550, and sales of $6,852,654. If the company has a dividend payout
Sustainable growth rate: Use the following pro forma information for Tomey Supply Company for next year: net income =$563,012; addition to retained earnings = $377,218; common equity =$884,845; net
Internal growth rate: Using the pro forma financial statements for Tomey Supply Company developed in Problem 19.20, find the internal growth rate for Tomey.
Percent of sales: Tomey Supply Company’s financial statements for the most recent fiscal year are shown here. Management projects that sales will increase by 20 percent next year. Assume that all
Capital intensity: Identify two industries (other than airlines)that are capital intensive. Using online or other data sources, compute the capital intensity ratio for the largest firm in each of the
Retention ratio: Refer to Problem 19.7. Northwood expects to increase its sales by 15 percent next year. All costs vary directly with sales. If Northwood wants to retain $65,000 of earnings next
EFN and growth: Refer to Exhibits 19.10 and 19.11 in the text. The EFNs for several growth rates for Empire Enterprises are as follows:Growth Rate (%) EFN ($ millions)0% −$4.8 5 −2.3 9.6 0.0 10
Sustainable growth rate: If Newell Corp. has a ROE of 13.7 percent and a dividend payout ratio of 32 percent, what is its sustainable growth rate?
Internal growth rate: Swan Supply Company has net income of $1,212,335 and assets of $12,522,788, and it retains 70 percent of its income every year. What is the company’s internal growth rate?
Capital intensity ratio: For McDonald Metal Works in Problem 19.13, how much must net sales grow if the capital intensity ratio has to drop to 60 percent? State your answer as both a percent of sales
Capital intensity ratio: McDonald Metal Works has been able to generate net sales of $13,445,196 on assets of $9,145,633. What is the firm’s capital intensity ratio?
Capital intensity ratio: Tantrix Confectioners has total assets of $3,257,845 and net sales of $5,123,951. What is the firm’s capital intensity ratio?
Capital intensity ratio: Define capital intensity ratio, and explain its significance.
Percent of sales: Given the data for Cattail Corporation in Problem 19.9, and assuming that all balance sheet items also vary with the change in sales, develop a pro forma balance sheet for Cattail
Percent of sales: Cattail Corporation’s financial statements for the fiscal year just ended are shown below:Cattail Corporation Financial Statements for Fiscal Year Just Ended($ thousands)Income
Payout and retention ratio: Goodwin Corp. has revenues of$12,112,659, costs of $9,080,545, interest payments of $412,375, and a tax rate of 27 percent. It paid dividends of $1,025,000 to its
Addition to retained earnings: Northwood, Inc., has revenue of $455,316, costs of $316,487, and a tax rate of 31 percent. If the firm pays out 45 percent of its earnings as dividends every year, how
Payout ratio: Define the retention (plowback) ratio and the dividend payout ratio.
Financial modeling: List the various elements of financial modeling.
Financial planning: Identify the steps in the financial planning process.
Financing plan: What are the elements of a financing plan?
Capital budget: What are the various steps in preparing a capital budget?
Strategic plan: Explain the importance of the strategic plan.
and the concepts covered in this book, do you think that these commentators are right or wrong? Explain your answer?
The S&P 500 P/E multiple of 36.80 at the end of 2020 was higher than its historical average of approximately 16. Some financial commentators argued that this meant that the firms in the S&P 500 were,
At the end of 2020, the value of the S&P 500 Index divided by the estimated 2020 earnings for S&P 500 firms (the S&P 500 P/E multiple)was 36.80. Assume that the long-term Treasury bond yield was 1.88
Mad Rock Inc. is a company that sells music online. It is expected to generate earnings of $1 per share this year after its Web site is upgraded and online marketing is stepped up. The stock price of
For the previous question, assume that you do not have sufficient savings to cover the entire amount required to start your sunblock business. You are going to have to get external financing. A local
Valuing a private business: A few years ago, a friend of yours started a small business that develops gaming software. The company is doing well and is valued at $1.5 million based on multiples for
Valuing a private business: You want to estimate the value of a privately owned restaurant that is financed entirely with equity. Its most recent income statement is as follows:Revenue $ 3,000,000
Income approaches: You are using the FCFF approach to value a business. You have estimated that the FCFF for next year will be $123.65 million and that it will increase at a rate of 8 percent for
Multiples analysis: Which of the above multiples analyses do you believe is more accurate for valuing the firm and its stock?
Multiples analysis: Using the Enterprise value/EBITDA multiple, what is the total value of Johnson Machine Tool Company? What is the per share value of Johnson’s stock?
Break-even point: You have started a business that sells a home gardening system that allows people to grow vegetables on their kitchen countertop. You are considering two options for marketing your
Organizational form: Discuss the pros and cons of an S-corporation compared with a C-corporation.
Organizational form: Compare the characteristics of an LLC with those of a partnership and a C-corporation.
Control: Does the expected rate of return that is calculated using CAPM, with a beta estimated from stock returns in the public market, reflect a minority or a controlling ownership position?How is
Public versus private company valuation: You are considering investing in a private company that is owned by a friend of yours. You have read through the company’s financial statements and believe
Dividend discount approach: You want to estimate the total intrinsic value of a large gas and electric utility company. This company has publicly traded stock and has been paying a regular dividend
Nonoperating assets: Why is excess cash a nonoperating asset(NOA)? Why does it make sense to add the value of excess cash to the value of the discounted cash flows when we use the WACC (FCFF) or FCFE
Multiples analysis: It is April 7, 2021, and your company is considering the possibility of purchasing the Chrysler automobile manufacturing business. Managers of Fiat Chrysler Automobiles N.V., the
Replacement cost: What is the replacement cost of a business?
Raising capital: Why is it especially difficult for an entrepreneur with a new business to raise capital? What tool can help him or her to raise external capital?
Cash requirements: You believe you have a great business idea and want to start your own company. However, you do not have enough savings to finance it. Where can you get the additional funds you
Cash requirements: List two useful tools to help an entrepreneur to understand the cash requirements of a business and to estimate the financing needs of that business.
Organizational form: Explain how financial liabilities differ among different forms of business organization.
Starting a business: What are some of the things that the founder of a company must do to launch a new business?
Organizational form: List some common forms of business organization, and discuss how access to capital differs across these forms of organization.
You purchased 1,000 shares of Zebulon Copper Co. five years ago for $50 per share. Today Zebulon management is trying to decide whether to repurchase shares for $70 per share through a fixed-price
Stock repurchases: What is an advantage of a Dutch auction over a fixed-price tender offer?

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