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fundamentals corporate finance

Questions and Answers of Fundamentals Corporate Finance

Stock repurchases: Briefly discuss the methods available for a firm to repurchase its shares, and explain why you might expect the stock price reaction to the announcement of each of these methods to
Dividends and firm value: You read that a number of public companies have been financing their dividend payments in recent years entirely through equity issues. A colleague of yours argues that this
Dividends and firm value: Consider a firm that repurchases shares from its stockholders in the open market, and explain why this action might be detrimental to the stockholders from whom the firm
Dividends and firm value: Stock repurchases, once announced, do not actually have to occur in total or in part. From a signaling perspective, why would a special dividend be better than a stock
Dividends and firm value: You own shares in a firm that has extra cash on hand to distribute to stockholders. You do not want the cash. What course of action would you prefer the firm take?
Dividends and firm value: A commentator on a financial talk show on TV says that “On average, firms pay out too little to stockholders. This is why stock prices go up with dividend increases and
Dividends and firm value: A firm can deliver a negative signal to stockholders by increasing the level of dividends or by reducing the level of dividends. Explain why this is true.
Dividends: Undecided Corp. has excess cash on hand right now, although management is not sure about the level of cash flows going forward. If management would like to put cash in
Dividends and firm value: In 2013, the maximum tax rate on dividends increased from 15 percent to 23.8 percent. How would you expect this increase to affect the prices of dividend-paying stocks
Dividends and firm value: CashCo increased its cash dividend each quarter for the past eight quarters. While this may signal that the firm is financially very healthy, what else could we conclude
Dividends and firm value: Explain what the introduction of transaction costs does to the Modigliani and Miller assumption that dividends are irrelevant. Start with a firm that pays dividends to
Dividends and firm value: You have just encountered two identical firms with identical investment opportunities, as well as the ability to fund these opportunities. One of the firms has just
Dividends and firm value: Explain how a stock repurchase is different from a dividend payment.
Dividends: A company’s management announces a $1 per share dividend payment. Assuming all investors are subject to a 15 percent tax rate on dividends, how much should the company’s share price
Dividends: Scintilla, Inc., stock is trading for $10.00 per share on the day before the ex-dividend date. If the dividend is $0.25 and there are no taxes, what should the price of the shares be on
Stock splits and stock dividends: Explain why managers of firms might prefer that their firms’ shares trade in a moderate per-share price range rather than in a high per-share price range.How do
Dividends: Explain why holders of a firm’s debt should insist on a covenant that restricts the amount of cash dividends the firm pays.
Dividends and firm value: Explain how the issuance of new securities by a firm can produce useful information about the issuing firm. How can this information make the shares of the firm more
Dividends: Place the following in the proper chronological order, and describe the purpose of each: ex-dividend date, record date, payment date, and declaration date.
Dividends: Marx Political Consultants management has decided to discontinue all of the firm’s business operations. The firm has total debt of $7 million, and the liquidation value of its assets is
Dividends: The Poseidon Shipping Company has paid a $0.25 dividend per quarter for the past three years. Poseidon just lowered its declared dividend to $0.20 for the next dividend payment. Discuss
M&M Proposition 2 with taxes: You own all of the equity in a debt-free app development business that generates cash flows of $400,000 each year in perpetuity. The cost of assets, kAssets, is 10
M&M Proposition 2 with taxes: Forwards Resources Company is currently an all-equity firm with a WACC of 14 percent and a 40 percent marginal tax rate. Forwards wants to move to a capital structure
PolyAna Corporation has such high cash flows that the company’s managers take Fridays off for a weekly luncheon in Cancun using the corporate jet. Describe how altering the capital structure of the
The costs of debt: Discuss how the legal costs of financial distress may increase with the probability that a firm will formally declare bankruptcy, even if the firm has not reached that point yet.
Two theories of capital structure: The pecking order theory suggests that managers prefer to first use internally generated equity to finance new projects. Does this preference mean that these funds
Two theories of capital structure: Describe how managers who subscribe to the pecking order theory of financing would rank the alternative sources of financing. Evaluate that ranking in terms of the
Two theories of capital structure: Problem 16.22 introduces taxes and information and transaction costs to the simplified Modigliani and Miller model. If the marginal tax rate for the firm were to
Stockholder–manager agency costs: Deficit Corp. management has determined that the firm will be $50 million short of being able to pay its debt obligations at the end of this year. Management has
The costs of debt: Santa’s Shoes is a retailer that has just begun having financial difficulty. Santa’s suppliers are aware of the increased possibility of bankruptcy. What might Santa’s
The costs of debt: Briefly discuss costs of financial distress to a firm that may arise when employees believe it is highly likely that the firm will declare bankruptcy.
M&M Proposition 2: Backwards Resources Company has a WACC of 12.6 percent, and it is subject to a 40 percent marginal tax rate. Backwards has $250 million of debt outstanding at an interest rate of 9
M&M Proposition 2: Mikos Processed Foods is currently valued at $500 million. Mikos will repurchase $100 million of its equity by issuing perpetual debt at an annual interest rate of 10 percent.Mikos
M&M Proposition 1: The weighted average cost of capital for a firm (assuming all three Modigliani and Miller Proposition 1 assumptions apply) is 15 percent. What is the current cost of equity capital
M&M Proposition 1: What is the effect on Modigliani and Miller’s Proposition 1 of relaxing the assumption that there are no information or transaction costs?
M&M Proposition 1: Marx and Spender Corp. currently has a WACC of 21 percent. If the cost of debt capital for the firm is 12 percent and the firm is currently financed with 25 percent debt, then what
M&M Proposition 1: Keyboard Chiropractic Clinic produces$300,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 25 percent. The firm’s management would
Practical considerations in capital structure choice: List and describe three practical considerations that concern managers when they make capital structure decisions.
Interest tax shield benefit: Structural Corp. currently has a cost of equity capital equal to 15 percent. Assume that the Modigliani and Miller Proposition 1 assumptions hold, with the exception of
Interest tax shield benefit: Springer Corp. has $250 million of debt outstanding at an interest rate of 11 percent. What is the present value of the interest tax shield if the debt has no maturity
Interest tax shield benefit: FAJ, Inc., has $500 million of debt outstanding at an interest rate of 9 percent. What is the present value of the tax shield on that debt if it has no maturity and if
Interest tax shield benefit: Legitron Corporation has$350 million of debt outstanding at an interest rate of 9 percent. What is the dollar value of the tax shield on that debt, just for this year, if
M&M Proposition 1: The weighted average cost of capital for a firm, assuming all three Modigliani and Miller assumptions hold, is 10 percent. What is the current cost of equity capital for the firm
M&M Proposition 1: Swan Specialty Cycles is currently financed with 50 percent debt and 50 percent equity. The firm pays$125 each year to its debt investors (at a 10 percent cost of debt), and the
M&M Proposition 1: A firm that is financed completely with equity currently has a cost of capital equal to 15 percent. Assume that the assumptions in Modigliani and Miller’s Proposition 1 hold and
M&M Proposition 1: Cerberus Security Company produces a cash flow of $200 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Cerberus is 20 percent,
M&M Proposition 1: Under Modigliani and Miller’s Proposition 1, when all three of the assumptions remain in effect, explain how the value of the firm changes due to changes in the proportion of
M&M Proposition 1: Describe what exactly is meant when someone is distinguishing between the value of the firm and the value of the equity of the firm.
M&M Proposition 1: The Modigliani and Miller theory suggests that the value of the firm’s assets is equal to the value of the claims on those assets and is not dependent on how the asset claims are
Long-term corporate debt: The 20-year Treasury rate is 4.67 percent, and a firm’s credit rating is BB. Suppose management of the firm decides to raise $20 million by selling 20-year bonds.
IPO underpricing: Suppose that a biotech firm in Pittsburgh raised $120 million in an IPO. The firm received $23 per share, and the stock sold to the public for $25 per share. The firm’s legal
IPO: Bellex Technologies agreed to complete its IPO on a best-effort basis. The company’s investment bank demanded a spread of 17 percent of the offer price, which was set at $30 per share. Three
IPO: When Global Partners went public in September 2016, the offer price was $22.00 per share and the closing price at the end of the first day was $23.90. The firm issued 4.9 million shares. What
IPO: Deere and Bros. is a broker that brings new issues of small firms to the public market. Its most recent deal for Dextra, Inc., had the following characteristics:Number of shares: 1,000,000 Price
IPO: On December 9, 2020, DoorDash completed its IPO of 33 million shares to the initial investors at $102.00 per share. The closing price of the stock that same day was $189.51 What was the dollar
Venture capital: You work for a venture capital firm and are approached to finance a new high-tech start-up. While you believe in the business idea, you also believe it is very risky. What strategies
Prime-rate lending: Cartco needs to borrow $5 million for an upgrade to its headquarters and manufacturing facility. Management has decided to borrow using a five-year term loan from its existing
decides to get a term loan for 10 years. How does this affect the company’s borrowing cost?
Prime-rate lending: Now suppose that Firm B from Problem
Prime-rate lending: Suppose two firms want to borrow money from a bank for a period of one year. Firm A has excellent credit, whereas Firm B’s credit standing is such that it would pay prime + 2
Private placement versus public debt offering: Nalco Holding is an international company that operates in 130 countries, has a market capitalization (market value of equity) of $2.3 billion, and
Bank term lending: Explain how term to maturity affects the price of a bank loan.
Issuing securities: Explain what is meant by economies of scale in issuing securities.
General cash offer: Explain the difference between a competitive and negotiated cash sale. Which method of sale is likely to yield the lower funding cost for firms selling plain vanilla bonds in
General cash offer: What are the steps in a general cash offering?Explain each of them.
Shelf registration: Are the following statements true or false?a. Shelf registration allows firms to register an inventory of securities for an unlimited time.b. The securities can be taken off the
IPO pricing: Myriad Biotech management plans a $114 million IPO in which the offering price to the public will be $51 per share.The company will receive $47.50 per share. The firm’s legal fees, SEC
IPO pricing: Trajax, Inc., a high-technology firm in Portland, raised a total of $90 million in an IPO. The company received $27 of the $30 per share offering price. The firm’s legal fees, SEC
Competitive versus negotiated sale: Why might a negotiated sale be the lowest-cost means of issuing a complex debt security?
IPO: A majority of firms choose a firm-commitment underwriting arrangement rather than a best-effort arrangement for their IPO.Explain why.
IPO: Based on your knowledge from this and previous chapters, what are some methods an investment banker uses to determine an IPO price? What factors will play a significant role in the calculation?
IPO: Briefly describe the IPO process.
Venture capital: What are some viable exit strategies for investors in a start-up company?
Venture capital: You finally decide to act on your brilliant idea and start an online textbook rental company. You develop a detailed business plan and calculate that you will need about $350,000 of
Venture capital: What items in a business plan does a venture capitalist look for in deciding whether to provide initial financing?
Which of the companies reduced the average time it took to collect on accounts receivable from 2019 to 2020?a. Company A.b. Company B.c. Company C.d. Company D.
The industry average receivables collection period:a. Increased from 2019 to 2020.b. Decreased from 2019 to 2020.c. Did not change from 2019 to 2020.d. Increased along with the increase in the
Which of the companies has the lowest accounts receivable turnover in 2020?a. Company A.b. Company B.c. Company C.d. Company D.
Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on Day 10 is closest toa.
What impact would the following actions have on the operating and cash conversion cycles? Would the cycles increase, decrease, or remain unchanged?a. More raw material than usual is purchased.b. The
Factoring: A firm sells $100,000 of its accounts receivable to factors at a 2 percent discount. The firm’s average collection period is one month. What is the dollar cost of the factoring service?
Factoring: Zenex, Inc., sells $250,000 of its accounts receivable to factors at a 3 percent discount. The firm’s average collection period is 90 days. What is the dollar cost of the factoring
Aging schedule: Keswick Fencing Company collects 45 percent of its receivables in 10 days or fewer, 34 percent in 10 to 30 days, 12 percent in 31 to 45 days, 5 percent in 46 to 60 days, and 4 percent
Aging schedule: Ginseng Company collects 50 percent of its receivables in 10 days or fewer, 31 percent in 11 to 30 days, 7 percent in 31 to 45 days, 7 percent in 46 to 60 days, and 5 percent in more
Lockbox: Hazel Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.1 days.Hazel Corp.’s remittances average $37,000 a day, and the average check is
Formal line of credit: Lansdowne Electronics has a formal line of credit of $1 million for up to three years with HND Bank. The interest rate on the loan is 5.3 percent, and under the agreement,
Formal line of credit: Gruppa, Inc., has just set up a formal line of credit of $10 million with First Community Commercial Bank.The line of credit is good for up to five years. The bank will charge
Effective interest rate: The Colonial Window Treatments Company is borrowing $1.5 million. The loan requires a 10 percent compensating balance, and the effective interest rate on the loan is 9.75
Effective interest rate: The Clarkson Designer Company management wants to borrow $750,000. The bank will provide the loan at an APR of 6.875. Since the loan calls for a compensating balance, the
Economic order quantity: Longhorn Traders is one of the largest RV dealers in Austin, Texas, and sells about 2,800 recreational vehicles a year. The cost of placing an order with Longhorn’s
Operating cycle: Given the data for Telecraft Enterprises in Problem 14.22, re-estimate the firm’s operating cycle if days’ sales outstanding decreased to 75 days. For the same level of net
Operating cycle: Telecraft Enterprises carries 45 days of inventory in its stores. Last year Telecraft reported net sales of $1,400,000, and the company had receivables of $325,000 at the end of the
Operating cycle: Premier Corp. has net sales of $812,344, and cost of goods sold equal to 70 percent of net sales. If the firm’s accounts receivable total $113,902 and its operating cycle is 81.6
Operating cycle: Aviva Technology’s operating cycle is 81 days. Its inventory was $134,000 at the end of last year, and the company had cost of goods sold of $1.1 million. How long does it take
Cash conversion cycle: Joanna Handicrafts, Inc., has net sales of $4.23 million with 50 percent being credit sales. Its cost of goods sold is $2.54 million. The firm’s cash conversion cycle is 47.9
Cash conversion cycle: Elsee, Inc., has net sales of $13 million, and 75 percent of these are credit sales. Its cost of goods sold is 65 percent of annual net sales. The firm’s cash conversion
Cash conversion cycle: Your boss asks you to compute your company’s cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $26,300, accounts
Formal line of credit: Winegartner Cosmetics management is setting up a line of credit at the company’s bank for $5 million for up to two years. The interest rate is 5.875 percent, and the loan
Factoring: Maltz Landscaping has an average collection period of 38 days for its accounts receivable. Currently, Maltz factors all of its receivables at a 2 percent discount. What is the effective
Effective interest rate: Morgan Contractors borrowed $1.75 million at an APR of 10.2 percent. The loan called for a compensating balance of 12 percent. What is the effective interest rate on the loan?

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