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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Why is the coupon rate a bad estimate of a firm’s cost of debt?
How can the cost of debt be calculated?
How can the cost of preference shares be calculated?
How is the WACC calculated?
Why do we multiply the cost of debt by (1 − TC) when we compute the WACC?
Under what conditions is it correct to use the WACC to determine NPV?
What are the likely consequences if a firm uses its WACC to evaluate all proposed investments?
What is the pure play approach to determining the appropriate discount rate? When might it be used?
How are flotation costs included in an NPV analysis?
Calculating the Cost of Equity Suppose equity in Watta plc has a beta of 0.80. The market risk premium is 6 per cent, and the risk-free rate is 6 per cent.Watta’s last dividend was £1.20 per
Calculating the WACC In addition to the information given in the previous problem, suppose Watta has a target debt–equity ratio of 50 per cent.Its cost of debt is 9 per cent before taxes. If the
Flotation Costs Suppose in the previous problem Watta is seeking £30 million for a new project. The necessary funds will have to be raised externally.Watta’s flotation costs for selling debt and
Calculating Cost of Equity Down and Out NV has just issued a dividend of €2.40 per share on its equity. The company is expected to maintain a constant 5.5 per cent growth rate in its dividends
Calculating Cost of Equity Dybvig plc’s equity has a beta of 1.3. If the risk-free rate is 4.5 per cent and the expected return on the market is 12 per cent, what is Dybvig’s cost of equity
Cost of Capital As financial manager of Cosco Pacific Limited, you have been tasked with determining your firms cost of equity capital. The shares currently sell for HK$10.40, and the dividend per
Calculating Cost of Equity Equity in Landsväg AG has a beta of 0.85. The market risk premium is 8 per cent, and T-bills are currently yielding 5 per cent. The company’s most recent dividend was
Cost of Capital Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall firm WACC were used as the hurdle
Estimating the DCF Growth Rate Suppose Found Ltd issued a dividend of £1.43 per share on its equity. The company paid dividends of £1.05, £1.12, £1.19 and £1.30 per share in the last 4 years. If
Calculating Cost of Preference Shares Holdup Bank has an issue of preference shares with a €6 stated dividend that just sold for €96 per share. What is the bank’s cost of preference shares?
Calculating Cost of Debt Advance plc is trying to determine its cost of debt. The firm has a debt issue outstanding with 7 years to maturity that is quoted at 92 per cent of face value. The issue
Calculating Cost of Debt Shanken NV issued a 30-year, 10 per cent semi-annual bond 7 years ago. The bond currently sells for 108 per cent of its face value. The company’s tax rate is 35 per cent.
Calculating Cost of Debt For the firm in Problem 13.9, suppose the book value of the debt issue is €20 million. In addition, the company has a second debt issue on the market, a zero-coupon bond
Calculating WACC Mullineaux has a target capital structure of 55 per cent equity and 45 per cent debt. Its cost of equity is 16 per cent and the cost of debt is 9 per cent. The relevant tax rate is
Taxes and WACC Miller Manufacturing has a target debt–equity ratio of 0.60. Its cost of equity is 18 per cent, and its cost of debt is 10 per cent. If the tax rate is 35 per cent, what is
Beta The returns of Siracha plc have a standard deviation of 40 per cent per annum and have a correlation with the FTSE 100 of 0.65. The standard deviation of the FTSE 100 is 20 per cent. What is
Book Value versus Market Value Filer Manufacturing has 9.5 million shares of equity outstanding. The current share price is £53, and the book value per share is £5.Filer Manufacturing also has two
Calculating the WACC In Problem 13.14, suppose the company’s equity has a beta of 1.2. The risk-free rate is 5.2 per cent, and the market premium is 9 per cent.Assume that the overall cost of debt
Finding the WACC Bottled Water is a listed European company which has a corporate finance structure as shown below. What is the company’s WACC?Debt: 50,000 bonds with a quoted price of 119.80,
Finding the WACC Titan Mining Corporation has 9 million shares of equity outstanding and 1,200,000 8.5 per cent semi-annual bonds outstanding, par value £100 each.The equity currently sells for £34
SML and WACC An all-equity firm is considering the following projects:Project Beta Expected return (%)W 0.80 6 X 0.70 5 Y 1.15 9 Z 1.70 13 The T-bill rate is 3 per cent, and the expected return on
Calculating Flotation Costs Suppose your company needs £20 million to build a new assembly line. Your target debt–equity ratio is 0.75. The flotation cost for new equity is 8 per cent, but the
Calculating Flotation Costs Southern Alliance needs to raise €45 million to start a new project, and will raise the money by selling new bonds. The company will generate no internal equity for the
Flotation Costs Purple Haze recently issued new securities to finance a new TV show. The project cost €15 million, and the company paid €850,000 in flotation costs.In addition, the equity issued
Calculating the Cost of Debt Ying Imports has several bond issues outstanding, each making semi-annual interest payments. The bonds are listed in the following table. If the corporate tax rate is 28
Calculating the Cost of Equity Floyd Industries equity has a beta of 1.50. The company has just paid a dividend of £0.80, and dividends are expected to grow at 5 per cent.The expected return of the
Flotation Costs and NPV Photochronograph Creative(PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of 0.70. It is considering building a new £45
Flotation Costs Trower has a debt–equity ratio of 1.20.The company is considering a new plant that will cost€145 million to build. When the company issues new equity, it incurs a flotation cost
Project Evaluation This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial
All publicly traded UK corporations are required to submit financial reports to Companies House detailing their financial operations over the previous 6 months or year, respectively. These corporate
To estimate the cost of equity for Spirent Communications, go to www.reuters.com and enter the ticker symbol ‘SPT.L’. Follow the various links to find answers to the following questions. What is
We now need to estimate the historical market risk premium. Go to Yahoo! Finance, and download the monthly historical prices for the FTSE 100 index for the last five years. Calculate the monthly
Go to www.reuters.com and find the list of competitors in the industry. Find the beta for each of these competitors, and then calculate the industry average beta. Using the industry average beta,
You now need to calculate Spirent’s cost of debt. There are several ways to do this, all of which are broad approximations. One approach is to use the information on Spirent’s bonds to find the
You now have all the necessary information to calculate the weighted average cost of capital for Spirent Communications.Calculate WACC using book value weights and market value weights, assuming
You used Spirent Communications as a representative company to estimate the cost of capital for GTT. What are some of the potential problems with this approach? What improvements might you suggest?
What is a call option? A put option?
If you thought that an equity was going to drop sharply in value, how might you use equity options to profit from the decline?
What is a protective put strategy?
What strategy exactly duplicates a protective put?
What is the value of a call option at expiration?
What are the upper and lower bounds on the value of a call option any time before expiration?
Assuming that the share price is certain to be greater than the exercise price on a call option, what is the value of the call? Why?
What are the five factors that determine an option’s value?
Which is worth more, an American-style put or a Europeanstyle put? Why?
What are the key differences between a traded share option and an ESO?
What are the benefits of ESOs? Why are ESOs controversial?
Why is the value of an ESO to the holder less than its market value?
Why do we say that the equity in a leveraged firm is effectively a call option on the firm’s assets?
All other things being the same, would the shareholders of a firm prefer to increase or decrease the volatility of the firm’s return on assets? Why? What about the bondholders? Give an intuitive
Why do we say that almost every capital budgeting proposal involves mutually exclusive alternatives?
What are the options to expand, abandon and suspend operations?
What are strategic options?
Value of a Call Option Equity in REM plc is currently selling for £25 per share. In one year the price will be either £20 or £30. T-bills with one year to maturity are paying 10 per cent. What is
Black—Scholes An equity sells for €40 per share.The continuously compounded risk-free rate is 4 per cent. The standard deviation of the return on the equity is 80 per cent. What is the value of a
Calculating Option Values T-bills currently yield 2.1 per cent and the Man Group plc share price is £0.97.There is no possibility that the equity will be worth less than £0.50 per share in one
Understanding Option Quotes Use the option quote information from Euronext Liffe shown here for Xstrata plc to answer the questions that follow. The equity is currently selling for £11.025.(a) Are
Calculating Pay–offs Use the option quote information on Ageas from Euronext Liffe shown here to answer the questions that follow. Assume lot size per contract is 100 shares.(a) Suppose you buy 10
Calculating Option Values The price of ABC plc will be either £2 or £1.50 at the end of the year. Call options are available with one year to expiration. UK government bond yields are currently at
Equity as an Option Rackin Pinion NV’s assets are currently worth €1,050. In one year they will be worth either €1,000 or €1,270. The risk-free interest rate is 7 per cent. Suppose Rackin
Put–Call Parity An Alcatel-Lucent put option and a call option with an exercise price of €1 and three months to expiration sell for €0.28 and €0.11, respectively. If the risk-free rate is 2.5
Put–Call Parity Arcellormittal call and put options with an exercise price of €17 expire in four months and sell for€2.07 and €2.03, respectively. If the equity is currently priced at
Black—Scholes The spot price of XYZ plc is 394.5p, with a standard deviation of 20 per cent. A call option on the stock expires in 219 days, and it has a strike price of 400p, with a quoted price
Black—Scholes and Asset Value Coal mining is becoming more popular because of the demand for energy in Asia. Assume that you have the rights to a coal mine and the most recent valuation of the mine
Abandonment Value We are examining a new project.We expect to sell 7,500 units per year at £68 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected
Abandonment and Expansion In the previous problem, suppose the scale of the project can be doubled in one year, in the sense that twice as many units can be produced and sold. Naturally, expansion
Abandonment Decisions Top Products is considering a new product launch for its products. The firm expects to have annual operating cash flow of €18 million for the next eight years. Top Products
Black—Scholes A call option matures in 6 months. The underlying share price is £85, and the share’s return has a standard deviation of 20 per cent per year. The risk-free rate is 4 per cent per
Black—Scholes Xstrata plc is currently priced at £10.52.A call option with an expiration of 6 months has an exercise price of £9.00. The risk-free rate is 3 per cent per year, compounded
Abandonment Decisions Consider the following project of Hand Clapper SA. The company is considering a fouryear project to manufacture clap-command garage door openers. This project requires an
Black—Scholes and Dividends In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black–Scholes option pricing model with dividends is:All of
Put—Call Parity and Dividends The put–call parity condition is altered when dividends are paid. The dividend adjusted put–call parity formula is where d is again the continuously compounded
Black—Scholes An equity is currently priced at £50. The share will never pay a dividend. The risk-free rate is 12 per cent per year, compounded continuously, and the standard deviation of the
You’re trying to value your options. What minimum value would you assign? What is the maximum value you would assign?
Suppose that in three years the company’s equity is trading at £60.At that time, should you keep the options or exercise them immediately? What are some of the important determinants in making
Your options, like most employee share options, are not transferable or tradable. Does this have a significant effect on the value of the options? Why?
Why do you suppose employee share options usually have a vesting provision? Why must they be exercised shortly after you depart the company even after they vest?
As we have seen, much of the volatility in a company’s share price is due to systematic or market-wide risks. Such risks are beyond the control of a company and its employees. What are the
What are the differences between a Eurobond and a foreign bond?
What is triangle arbitrage?
What do we mean by the 90-day forward exchange rate?
If we say that the exchange rate is €1.1/£, what do we mean?
What does absolute PPP say? Why might it not hold for many types of goods?
According to relative PPP, what determines the change in exchange rates?
What financial complications arise in international capital budgeting? Describe two procedures for estimating NPV in the case of an international project.
What are blocked funds?
What are the different types of exchange rate risk?
How can a firm hedge short-run exchange rate risk? Longrun exchange rate risk?
What are some ways of hedging political risk?
Relative Purchasing Power Parity The inflation rate in the United Kingdom is projected at 3 per cent per year for the next several years. The Swiss inflation rate is projected to be 5 per cent during
Covered Interest Arbitrage The spot and 360-day forward rates on the Turkish lira to the euro are L2.1/€ and L1.9/€, respectively. Assume that the risk-free interest rate in Europe is 6 per cent,

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