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fundamentals of corporate finance 11th

Questions and Answers of Fundamentals Of Corporate Finance 11th

AMS Company has unexpectedly generated a one-time extra \($5\) million in cash-flow this year. After announcing the extra cash flow, AMS stock price was \($55\) per share(it has 1 million shares
In your role as a consultant at a wealth management firm, you have been assigned a very powerful client who holds 1 million shares of Cisco Systems, Inc., purchased on January 4, 2007. In researching
Recall Barston Mining from Example 17.2. Suppose Barston must pay corporate taxes at a 25% rate on the interest it will earn from the one-year Treasury bill paying 2% interest. Would pension fund
Maria Suarez returned to her office after spending the afternoon meeting with her firm’s investment bankers. Suarez was CFO of Midco Industries, a mid-sized manufacturing firm, and she was taking a
How does long-term financial planning support the goal of the financial manager?
On January 15, 2015, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 0.25%.On the date of issue, the consumer price index (CPI) was 236.854. On January 15, 2022, the CPI
On May 8, 1984, Hannah Motsi graduated from Louisiana State University. She set to work opening a coffee shop in Baton Rouge called HannaH and found a perfect location in a new development. Using a
How does the firm’s WACC (with taxes) change with leverage?
Assume that Microsoft has no debt, a total market value of $2 trillion, and a marginal tax rate of 21%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13%
Empire Industries forecasts net income this coming year as shown below (in thousands of dollars):Approximately $200,000 of Empire’s earnings will be needed to make new, positive-NPV investments.
You work in Walt Disney Company’s corporate finance and treasury department and have been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team
By using the yield to maturity on AT&T’s debt, we found that its pretax cost of debt is 3.65%. If AT&T’s tax rate is 25%, what is its effective cost of debt?
Assume the following information about Johnson & Johnson (ticker: JNJ). JNJ’s equity beta is 0.60. The yield on 10-year treasuries is 3%, and you estimate the market risk premium to be 6%.
Suppose Starbucks is considering introducing a new low-calorie blended coffee drink called FrapZero. The firm believes that the drink’s flavor and appeal to calorie-conscious drinkers will make it
You are working for Microsoft evaluating the possibility of selling energy drinks. Microsoft’s WACC is 8.1%. Energy drinks would be a new line of business for Microsoft, however, so the systematic
You are analyzing AT&T’s potential acquisition of Netflix. AT&T plans to offer \($150\) billion as the purchase price for Netflix, and it will need to issue additional debt and equity to finance
You and your best friend started a company 4 years ago. You each contributed $25,000 and each received 500,000 Series A preferred shares in the company. Since then, you have had the following funding
If all of the shares sold are primary shares, how much will the firm raise? What will be your percentage ownership of the firm after the IPO?
If all of the shares sold are from your holdings, how much will the firm raise? What will be your percentage ownership of the firm after the IPO?
What is the maximum number of secondary shares you could sell and still retain more than 50% ownership of the firm? How much would the firm raise in that case?
Consider the same setting as problem 20, but suppose instead 80% of the shareholders redeem their shares, and no warrants are exercised.a. What is the amount of cash per share contributed by the SPAC
Insight Partners created a SPAC with units priced at \($10\) share. Each unit consists of 1 share of common stock plus a 3/10ths of a warrant with a strike price of \($11.50\).Insight issued 10
In Lucid’s case, the terms of the warrants allowed Lucid to redeem them at a share price of \($20.75\) shortly after the deal closed. They chose to honor these warrants on a “cashless basis” by
In the Lucid / CCIV case, suppose that after the deal was announced, negative information were to come out about Lucid’s future prospects. As a result, the PIPE investors renegotiate their terms to
What is an asset-backed security?
What is the distinguishing feature of how municipal bonds are taxed?
Suppose Avis Budget Group stock has a beta of 2.55, whereas Costco stock has a beta of 0.69. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, what is the
Suppose Intel stock has a beta of 0.95, whereas Boeing stock has a beta of 2.2. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM,a.
Using the data from Table 12.3, what is the volatility (standard deviation) of a portfolio with equal amounts invested in Microsoft and Hewlett-Packard stock? What is the standard deviation of a
Suppose the stock of Bankruptcy Auction Services Inc. (BAS) has a negative beta of −0.30. Will its expected return be more or less than the risk-free rate, according to the CAPM? Why?
You are currently considering making an investment in the fast food industry. You determine the project has the same level of non-diversifiable risk as investing in McDonald’s stock. You use data
What is an efficient market?
River Enterprises has \($500\) million in debt and 20 million shares of equity outstanding.Its excess cash reserves are \($15\) million. They are expected to generate \($200\) million in free cash
Consider the valuation of Nike given in Example 10.1.Example 10.1.Recall our example of Nike, Inc., from Chapter 7. Nike had sales of \($36.397\) billion in 2018. Suppose you expected its sales to
You are evaluating the stock price of Kroger, a grocery store chain. It has forward earnings per share of \($3.\) You notice that its competitor Target has a P/E ratio of 13.What is a good estimate
You notice that Coca-Cola has a stock price of \($62.90\) and EPS of \($2.37.\) Its competitor PepsiCo has EPS of \($7.30.\) But Jones Soda, a small batch craft soda producer, has a P/E ratio of 35.
Suppose that in July 2022, Nike had EPS of \($3.75\) and a book value of equity of \($9.72\) per share.a. Using the average P/E multiple in Table 10.1, estimate Nike’s share price.b. What range of
Suppose that in July 2022, Nike had EBITDA of \($6,675\) million, excess cash of \($12,997 million,\) \($12,627\) million of debt, and 1573.8 million shares outstanding.a. Using the average
As a new junior analyst for a large brokerage firm, you are excited to demonstrate the skills you learned in college and prove that you are worth your attractive salary. Your first assignment is to
Why do we use the WACC in the discounted free cash flow model?
Nike had sales of \($36.397\) billion in 2018. Suppose you expected its sales to grow at a rate of 10% in 2023, but then slow by 1% per year to the long-run growth rate that is characteristic of the
In Example 10.1, Nike’s EBIT was assumed to be 16% of sales. If Nike can reduce its operating expenses and raise its EBIT to 17% of sales, how would the estimate of the stock’s value change?
Suppose furniture manufacturer Bassett Furniture Industries, Inc., has earnings per share of \($2.00.\) If the average P/E of comparable furniture stocks is 9.5, estimate a value for a share of
Amazon and Macy’s are retailers. At one point in 2022, Amazon had a price of \($108.68\) and forward earnings per share of \($2.26.\) Macy’s had a price of \($18.27\) and forward earnings per
You have just been hired by International Business Machines Corporation (IBM) in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new
You are evaluating a new product. In year 3 of your analysis, you are projecting pro forma sales of \($5\) million and cost of goods sold of \($3\) million. You will be depreciating a \($1\) million
Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first
What are real options?
After graduating, your success in business has put you in a position to purchase a house for \($500,000.\) You plan to put \($100,000\) down and borrow \($400,000.\) You need to decide on a mortgage,
Your firm has a credit rating of AA. You notice that the credit spread for 10-year maturity AA debt is 0.90%.In the bond market, this would be quoted as “90 basis points.” (A basis point is
Colgate-Palmolive Company has just paid an annual dividend of \($1.50.\) Analysts are predicting dividends to grow by \($0.12\) per year over the next five years. After then, Colgate’s earnings are
Maynard Steel plans to pay a dividend of \($3\) this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%.a. Assuming that Maynard’s dividend
What pieces of information are needed to forecast dividends per share?
Consolidated Edison, Inc. (Con Ed) is a regulated utility company that services the New York City area. Suppose Con Ed plans to pay \($3.40\) per share in dividends in the coming year. If its equity
What is the NPV rule?
In March 2019, one-year U.S. government bond rates were about 2.4%, while the inflation rate that year was 1.5%. In March 2021, one-year interest rates were about 0.1%, and the inflation rate that
What is the risk-free interest rate for a five-year maturity?
In December 2021, Kraft Heinz Co. (KHC) had 1.22 billion shares outstanding, a share price of \($35.19,\) a book value of debt of \($21.82\) billion, and cash of \($3.45\) billion. What was Kraft
Suppose Global had an additional \($1\) million depreciation expense in 2022. If Global’s tax rate on pretax income is 26%, what would be the impact of this expense on Global’s earnings? How
What is the intuition behind the geometric growth in interest?
You have $100,000 to donate to your college. You want to endow a perpetual scholarship that makes its first payment in 1 year. If the college’s discount rate is 4%, how large will the annual
Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science.She is currently employed as a Tier 2 field service representative for a telephony corporation located in
This is your second interview with a prestigious brokerage firm for a job as an equity analyst.You survived the morning interviews with the department manager and the vice president of equity.
The following quote on Tesla stock appeared on April 8, 2022, on Yahoo! Finance.If you wanted to buy Tesla, what price would you pay per share? How much would you receive per share if you wanted to
What is dilution?
Compute Global’s accounts payable days, inventory days, and inventory turnover for 2022.
What was the change in Global’s book value of equity from 2021 to 2022 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2022? Explain.TABLE 2.1
Use EDGAR (www.sec.gov) to find Qualcomm’s 10K filing for 2021. From the balance sheet, answer the following questions:a. How much did Qualcomm have in cash, cash and equivalents, and marketable
Find the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021). Answer the following questions from its balance sheet:a. How much cash did Costco
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021). Answer the following questions from the income statement:a. What were Costco
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydeco repurchases 2 million shares each year from 2020–2023. What would its earnings per share be in
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021). Answer the following questions from its cash flow statement:a. How much cash
See the cash flow statement below (all values in thousands of dollars):a. What were the company’s cumulative earnings over these four quarters? What were its cumulative cash flows from operating
In December 2021, General Electric (GE) had a book value of equity of \($40\) billion,1.1 billion shares outstanding, and a market price of \($94.47\) per share. GE also had cash of \($28\) billion,
In December 2021, Apple had cash of \($62.64\) billion, current assets of \($134.84\) billion, and current liabilities of \($125.48\) billion. It also had inventories of \($6.58\) billion.a. What was
In early 2022, the following information was true about Abercrombie and Fitch (ANF)and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars.a. What is
In fiscal year 2021, Walmart Stores. (WMT) had revenue of \($572.8\) billion, gross profit of \($143.8\) billion, and net income of \($13.7\) billion. Costco Wholesale Corporation (COST) had revenue
Suppose that in 2023, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4. 50%. Suppose that they had no other income,
For 2021, Walmart and Target had the following information (all values are in millions of dollars):a. What is each company’s accounts receivable days?b. What is each company’s inventory
In January 2022, United Airlines (UAL) had a market capitalization of \($14.3\) billion, debt of \($39.4\) billion, and cash of \($18.4\) billion. United Airlines had revenues of \($24.6\)
Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2021 (filed in October 2021).a. Compute Costco’s net profit margin, total asset turnover, and equity
Some balance sheet information is shown here (all values in millions of dollars):a. What change in the book value of the company’s equity took place at the end of 2021?b. Is the company’s
What is the goal of the financial manager?
What advantage does a stock market provide to corporate investors? To financial managers?
Explain how the control variate technique is implemented.
Suppose that in September 2013 a company takes a long position in a contract on May 2014 crude oil futures. It closes out its position in March 2014. The futures price (per barrel) is \($88.30\) when
A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline futures price changes. The company will lose $1 million for each 1 cent increase in the
A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest accrues per \($100\) of principal to the bond holder between July 7, 2013, and August 9, 2013? How would your answer
The price of a non-dividend paying stock is \($19\) and the price of a three-month European call option on the stock with a strike price of \($20\) is \($1.\) The risk-free rate is 4% per annum.What
A married couple earned $95,000 in 2021. How much did they pay in taxes?a. What was their marginal tax bracket?b. What was their average tax bracket?
Morningstar provides data on mutual fund performance. Log on to its website. Which category of funds has performed unusually well or badly?
Balance Sheet. Construct a balance sheet for Fincorp for 2021 and 2022. What is shareholders’ equity?The table below contains data on Fincorp Inc. The balance sheet items correspond to values at
Construct an income statement for Fincorp for 2021 and 2022. What were reinvested earnings for 2022?The table below contains data on Fincorp Inc. The balance sheet items correspond to values at
Construct a statement of cash flows for Fincorp for 2022.The table below contains data on Fincorp Inc. The balance sheet items correspond to values at year-end 2021 and 2022, while the income
Your uncle owns 10,000 shares of Walmart stock. He is concerned about the short-term outlook for Walmart’s stock due to an impending “major announcement.” This announcement has received much
What will a short-term financial plan enable a financial manager to do?
What is the difference between pledging accounts receivable to secure a loan and factoring accounts receivable? What types of short-term secured financing can a firm use to cover shortfalls?
What is the purpose of long-term forecasting?
Why is trade credit important?
What are the tradeoffs involved in reducing inventory?

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