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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Compare the performance of West Coast Yachts with that of the industry as a whole. For each ratio, comment on why it might be viewed as positive or negative relative to the industry. Suppose you
Calculate the sustainable growth rate of West Coast Yachts.Calculate external funds needed (EFN), and prepare a pro forma income statement and statement of financial position, assuming growth at
As a practical matter, West Coast Yachts is unlikely to be willing to raise external equity capital, in part because the owners don’t want to dilute their existing ownership and control positions.
Most assets can be increased as a percentage of sales. For instance, cash can be increased by any amount. However, non-current assets often must be increased in specific amounts, because it is
Suppose the following zero-coupon bonds are trading at the prices shown below per $100 face value.Determine the corresponding yield to maturity for each bond. Maturity Price 1 year $96.62 2 years 3
Given the yield curve shown in Figure 6.2, what is the price of a five-year risk-free zero-coupon bond with a face value of $100?
Given the following zero-coupon yields, compare the yield to maturity for a three-year zero-coupon bond, a three-year coupon bond with 4% annual coupons, and a three-year coupon bond with 10% annual
What depreciation deduction would be allowed for HomeNet’s $7.5 million lab equipment using the MACRS method, assuming the lab equipment is designated to have a five-year recovery period? For
Compute the present value of a risk-free five-year annuity of $1000 per year, given the yield curve for November 2008 in Figure 5.3.
Assume that it is May 21, 2019, and the U.S. Treasury has just issued securities with a May 2024 maturity, $1000 par value, and a 2.2% coupon rate with semiannual coupons. Since the original maturity
Consider the five-year, $1000 bond with a 2.2% coupon rate and semiannual coupons described in Example 6.3. If this bond is currently trading for a price of $963.11, what is the bond’s yield to
Consider again the five-year, $1000 bond with a 2.2% coupon rate and semiannual coupons in Example 6.4. Suppose interest rates drop and the bond’s yield to maturity decreases to 2% (expressed as an
Consider three 30-year bonds with annual coupon payments. One bond has a 10% coupon rate, one has a 5% coupon rate, and one has a 3% coupon rate. If the yield to maturity of each bond is 5%, what is
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 5%. For a face value of$100, the bond will initially trade for:If the bond’s yield to maturity remains at 5%, what will
Consider a 10-year coupon bond and a 30-year coupon bond, both with 10% annual coupons. By what percentage will the price of each bond change if its yield to maturity increases from 5% to 6%?
Consider two bonds, each of which pays semiannual coupons and has five years left until maturity. One has a coupon rate of 5% and the other has a coupon rate of 10%, but both currently have a yield
Your firm has a credit rating of AA. You notice that the credit spread for 10-year maturity AA debt is 90 basis points (0.90%). Your firm’s 10-year debt has a coupon rate of 5%. You see that new
Consider a 15-year bond with a face value of $1000 that has a coupon rate of 5.1%, with semiannual payments.a. What is the coupon payment for this bond?b. Draw the cash flows for the bond on timeline.
Your company wants to raise $11 million by issuing 10-year zero-coupon bonds. If the yield to maturity on the bonds will be 7% (annually compounded APR), what total principal amount of bonds must you
The following table summarizes prices of various default-free zero-coupon bonds(expressed as a percentage of face value):a. Compute the yield to maturity for each bond.b. Plot the zero-coupon yield
What is the risk-free interest rate for a five-year maturity?The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years) 1 YTM 5.00% 2 5.50% 3 5.75% 4 5.95% 5 6.05%
In the Global Financial Crisis box in Section 6.2, Bloomberg.com reported that the three-month Treasury bill sold for $100.002556 per $100 face value. What is the yield to maturity of this bond,
The yield to maturity of a $1000 bond with a 6.5% coupon rate, semiannual coupons, and two years to maturity is 8.5% APR, compounded semiannually. What must its price be?
Assume the current Treasury yield curve shows that the spot rates for six months, one year, and 1½ years are 1%, 1.1%, and 1.3%, all quoted as semiannually compounded APRs. What is the price of a
Suppose a 10-year, $1000 bond with an 8.1% coupon rate and semiannual coupons is trading for $1035.61.a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?b. If
Suppose a five-year, $1000 bond with annual coupons has a price of $897.33 and a yield to maturity of 5.7%. What is the bond’s coupon rate?
Assume that the six-month Treasury spot rate is 1.7% APR, and the one-year rate is 2% APR, both compounded semiannually. What is the price of a one-year $1000 par Treasury bond with 2% coupons?
You have purchased a 10% coupon bond for $1030. What will happen to the bond’s price if market interest rates rise?
Suppose a seven-year, $1000 bond with an 10.46% coupon rate and semiannual coupons is trading with a yield to maturity of 8.78%.a. Is this bond currently trading at a discount, at par, or at a
Your company currently has $1000 par, 5.5% coupon bonds with 10 years to maturity and a price of $1080. If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set?
Suppose you purchase a 10-year bond with 11% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 9.94%
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 4%.You hold the bond for five years before selling it.a. If the bond’s yield to maturity is 4% when you sell it, what is
The following table summarizes the yields to maturity on several one-year, zero-coupon securities:a. What is the price (expressed as a percentage of the face value) of a one-year, zerocoupon
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 6.87% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard &
HMK Enterprises would like to raise $12 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 5.1% (annual payments).
A BBB-rated corporate bond has a yield to maturity of 9%. A U.S. Treasury security has a yield to maturity of 7.5%. These yields are quoted as APRs with semiannual compounding. Both bonds pay
You are an intern with Enel Generacion Chile, the largest electric utility company in Chile, in their corporate finance division. The firm is planning to issue $100 million of 7.875%annual coupon
What is the role of a floor broker at the NYSE?
What is the role of a dealer at the Nasdaq?
How does the total payout model address part of the dividend-discount model’s limitations?
How does the growth rate used in the total payout model differ from the growth rate used in the dividenddiscount model?
Suppose you expect Longs Drug Stores to pay an annual dividend of $0.56 per share in the coming year and to trade for $45.50 per share at the end of the year. If investments with equivalent risk to
Consolidated Edison, Inc. (Con Ed) is a regulated utility company that services the New York City area.Suppose Con Ed plans to pay $2.30 per share in dividends in the coming year. If its equity cost
Crane Sporting Goods expects to have earnings per share of $6 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these
Suppose Crane Sporting Goods decides to cut its dividend payout rate to 75% to invest in new stores, as in Example 7.3. But now suppose that the return on these new investments is 8%, rather than
Small Fry, Inc., has just invented a potato chip that looks and tastes like a french fry. Given the phenomenal market response to this product, Small Fry is reinvesting all of its earnings to expand
Titan Industries has 217 million shares outstanding and expects earnings at the end of this year of $860 million. Titan plans to pay out 50% of its earnings in total, paying 30% as a dividend and
If you own 11,000 shares of stock of Nike and it pays a dividend of $0.29 per share, then what is the total dividend you will receive?
Anzio, Inc., has two classes of shares. Class B has five times the voting rights as Class A. If you own 16% of the class A shares and 28% of the Class B shares, what percentage of the total voting
Assume Evco, Inc., has a current stock price of $50.36 and will pay a $2.20 dividend in one year; its equity cost of capital is 12%. What price must you expect Evco stock to sell for immediately
You just purchased a share of SPCC for $103. You expect to receive a dividend of $7 in one year. If you expect the price after the dividend is paid to be $113, what total return will you have earned
Assume Coleco pays an annual dividend of $1.53 and has a share price of $37.03. It announces that its annual dividend will increase to $1.77. If its dividend yield is to stay the same, what should
Anle Corporation has a current stock price of $27 and is expected to pay a dividend of$2 in one year. Its expected stock price right after paying that dividend is $28.a. What is Anle’s equity cost
Achi Corp. has preferred stock with an annual dividend of $3.15. If the required return on Achi’s preferred stock is 7.9%, what is its price? (Hint: For a preferred stock, the dividend growth rate
Ovit, Inc., has preferred stock with a price of $18.14 and a dividend of $1.26 per year.What is its dividend yield?
Suppose Acap Corporation will pay a dividend of $2.85 per share at the end of this year and a dividend of $3.02 per share next year. You expect Acap’s stock price to be $53.74 in two years. Assume
Krell Industries has a share price of $21.16 today. If Krell is expected to pay a dividend of $0.91 this year and its stock price is expected to grow to $23.94 at the end of the year, what is
NoGrowth Corporation currently pays a dividend of $2.36 per quarter, and it will continue to pay this dividend forever. What is the price per share of NoGrowth stock if the firm’s equity cost of
Summit Systems will pay a dividend of $1.45 this year. If you expect Summit’s dividend to grow by 6.8% per year, what is its price per share if the firm’s equity cost of capital is 11.9%?
Dorpac Corporation has a dividend yield of 1.2%. Its equity cost of capital is 7.4%, and its dividends are expected to grow at a constant rate.a. What is the expected growth rate of Dorpac’s
Laurel Enterprises expects earnings next year of $3.84 per share and has a 50% retention rate, which it plans to keep constant. Its equity cost of capital is 9%, which is also its expected return on
DFB, Inc., expects earnings at the end of this year of $4.46 per share, and it plans to pay a $2.74 dividend to shareholders (assume that is one year from now). DFB will retain $1.72 per share of its
Cooperton Mining just announced it will cut its dividend from $3.95 to $2.38 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a
Assume Gillette Corporation will pay an annual dividend of $0.66 one year from now.Analysts expect this dividend to grow at 11.9% per year thereafter until the fifth year.After then, growth will
CX Enterprises has the following expected dividends: $1.08 in one year, $1.18 in two years, and $1.27 in three years. After that, its dividends are expected to grow at 4.1%per year forever (so that
Halliford Corporation expects to have earnings this coming year of $2.77 per share.Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm
Shatin Intl. has 9.8 million shares, an equity cost of capital of 12.7% and is expected to pay a total dividend of $20.7 million each year forever. It announces that it will increase its payout to
Zoom Enterprises expects that one year from now it will pay a total dividend of $4.8 million and repurchase $4.8 million worth of shares. It plans to spend $9.6 million on dividends and repurchases
Tolo Co. plans the following repurchases: $9.9 million in one year, nothing in two years, and $19.1 million in three years. After that, it will stop repurchasing and will issue dividends totaling
AFW Industries has 219 million shares outstanding and expects earnings at the end of this year of $724 million. AFW plans to pay out 65% of its earnings in total, paying 39% as a dividend and using
Suppose Compco Systems pays no dividends but spent $5.09 billion on share repurchases last year. If Compco’s equity cost of capital is 11.4%, and if the amount spent on repurchases is expected to
After saving $1500 by waiting tables, you are about to buy a 50-inch TV. You notice that the store is offering a “one year same as cash” deal. You can take the TV home today and pay nothing until
Assume Fredrick’s requires all projects to have a payback period of two years or less. Would the firm undertake the fertilizer project under this rule?
You own a small piece of commercial land near a university. You are considering what to do with it. You have been approached with an offer to buy it for $220,000. You are also considering three
Solve for the crossover point for Maria from Figure 8.8.Figure 8.8: $12,000 $10,000 $8000 $6000 $4000 $2000 $0 -$2000 -$4000 Delivery Service (10 drones) 12% Cost of Capital Crossover 20% 23.4% IRR
You are about to sign the contract for server A from Table 8.2 when a third vendor approaches you with another option that lasts for four years. The cash flows for server C are given below. Should
Your division at NetIt, a large networking company, has put together a project proposal to develop a new home networking router. The expected NPV of the project is $17.7 million, and the project will
You have an opportunity to invest $105,000 now in return for $80,300 in one year and $29,400 in two years. If your cost of capital is 9.1%, what is the NPV of this investment?
Your storage firm has been offered $98,000 in one year to store some goods for one year. Assume your costs are $95,000, payable immediately, and the cost of capital is 8.7%. Should you take the
You are preparing to produce some goods for sale. You will sell them in one year and you will incur costs of $80,000 immediately. If your cost of capital is 7.2%, what is the minimum dollar amount
You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10.3 million today and $5.3 million in one year. The
You have been offered a unique investment opportunity. If you invest $20,000 today, you will receive $1000 one year from now, $3000 two years from now, and $20,000 ten years from now.a. What is the
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $40,000 at the end of each of the next three years. The opportunity requires an
You are considering opening a new plant. The plant will cost $95.8 million up front and will take one year to build. After that, it is expected to produce profits of $31.5 million at the end of every
FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $197,300 per year. Once in production, the bike is expected to make
OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship will cost$497 million, and will operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $71.1
You are CEO of Rivet Networks, maker of ultra-high performance network cards for gaming computers, and you are considering whether to launch a new product. The product, the Killer X3000, will cost
You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $5000 and will be posted for one year. You expect that it will generate
Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an up-front payment of $52,000. In return, for the next year the firm would have access to eight
Innovation Company is thinking about marketing a new software product. Up-front costs to market and develop the product are $4.92 million. The product is expected to generate profits of $1.08 million
You own a coal mining company and are considering opening a new mine. The mine will cost $118 million to open. If this money is spent immediately, the mine will generate $22 million for the next 10
You have just been offered a contract worth $1.01 million per year for seven years.However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is
You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $290 million.Once this investment is
You are evaluating a project that will cost $475,000, but is expected to produce cash flows of $126,000 per year for 10 years, with the first cash flow in one year. Your cost of capital is 11% and
You are considering making a movie. The movie is expected to cost $8.8 million upfront and take a year to produce. After that, it is expected to make $4.3 million in the year it is released and $2.1
You are trying to decide between two mobile phone carriers. Carrier A requires you to pay $180 for the phone and monthly charges of $64 for 24 months. Carrier B wants you to pay $85 for the phone and
Hassle-Free Web is bidding to provide Web hosting services for Hotel Lisbon. Hotel Lisbon pays its current provider $10,400 per year for hosting its Web page, handling transactions, etc. Hassle-Free
You have to buy a new copier. The cost of the copier is $1950, plus $405 per year in maintenance costs. The copier will last for five years. Alternatively, a local company offers to lease the copier
Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts:a. What are the profitability indices of the projects?b.
Kartman Corporation is evaluating four real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is

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