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fundamentals of corporate finance 11th

Questions and Answers of Fundamentals Of Corporate Finance 11th

7. Pelamed Pharmaceuticals had EBIT of $325 million in 2013. In addition, Pelamed had interest expenses of $125 million and a corporate tax rate of 40%.a. What was Pelamed’s 2013 net income?b. What
6. Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would be its cost of equity if it took on the average amount of debt for its
5. Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.a.
*4. Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows
3. Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The
2. You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To
1. Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required for the project is $100,000, and the
10. How can leverage alter the incentives of managers?
9. Which of the following industries have low optimal debt levels according to the tradeoff theory? Which have high optimal levels of debt?a. Tobacco firmsb. Accounting firmsc. Established restaurant
8. For each pair below, which type of asset is more likely to be liquidated for close to its full market value in the event of financial distress:a. An office building or a brand name?b. Product
7. According to the tradeoff theory, how is capital structure determined?
6. Which type of firm is more likely to experience a loss of customers in the event of financial distress:a. Campbell Soup Company or Intuit, Inc. (a maker of accounting software)?b. Allstate
5. What is meant by “indirect costs of financial distress”?
4. How do taxes affect the choice of debt versus equity?
3. What are the channels through which financing choices can affect firm value?
2. Explain what is wrong with the following argument: “If a firm issues debt that is risk-free because there is no possibility of default, the risk of the firm’s equity does not change.
1. Absent tax effects, why can’t we change the cost of capital of the firm by using more debt financing and less equity financing?
7. Do not change the firm’s capital structure unless it departs significantly from the optimal level. Actively changing a firm’s capital structure (for example, by selling or repurchasing shares
6. Rely first on retained earnings, then debt, and finally equity. This pecking order of financing alternatives will be most important when managers are likely to have a great deal of private
5. Be mindful that investors are aware that you have an incentive to issue securities that you know are overpriced. Thus, when an issue is announced, investors will lower their valuation of that
4. Increase leverage to signal managers’ confidence in the firm’s ability to meet its debt obligations. Investors understand that bankruptcy is costly for managers.
3. Consider short-term debt for external financing when agency costs are significant. Too much debt can motivate managers and equity holders to take excessive risks or under-invest in a firm. When
2. Balance the tax benefits of debt against the costs of financial distress when determining how much of the firm ’s income to shield from taxes with leverage. Whereas the risk of default is not
1. Make use of the interest tax shield if your firm has consistent taxable income. The interest tax shield allows firms to repay investors and avoid the corporate tax.
12. What is the “pecking order” hypothesis?
11. How can too much debt lead to excessive risk-taking?
10. Why would managers In one Industry choose different capital structures from those in another industry?
9. According to the tradeoff theory, how should a financial manager determine the right capital structure for a firm?
8. Why are the indirect costs of financial distress likely to be more important than the direct costs of bankruptcy?
7. What are the direct costs of bankruptcy?
6. How does the firm’s WACC change with leverage?
5. How does the interest tax deduction affect firm value?
4. In a perfect capital market, can you alter the firm's value or WACC by relying more on debt capital?
3. How does leverage affect the risk and cost of equity for the firm?
2. What are some factors a manager must consider when making a financing decision?
1. What constitutes a firm’s capital structure?
• Weigh the many costs and benefits to debt that a manager must balance when deciding how to finance the firm’s investments
• Analyze how debt can alter the incentives of managers to choose different projects and can be used as a signal to investors
• Show how the optimal mix of debt and equity trades off the costs (including financial distress costs) and benefits (including the tax advantage) of debt
• Demonstrate how debt can affect a firm's value through taxes and bankruptcy costs
• Describe how leverage increases the risk of a firm’s equity
• Understand why investment decisions, rather than financing decisions, fundamentally determine the value and cost of capital of a firm
• Examine how capital structures vary across industries and companies
9. Assume that in the five years following the LBO Hannah was able to turn the company around. Over the course of this period, all the bank debt was repaid and the company went public again. The
8. A year after the LBO, just after the second payment was made, the convertible debt traded for a price of $950.a. What was its yield to maturity?b. What was the yield to call?
7. Assume the LBO was successful.a. How much bank debt was required?b. What was the debt-equity ratio immediately following the LBO?
6. Immediately following the SEO, the stock price remained at $20 per share.a. Once the term loan was repaid, what was the value of the whole company?b. What fraction of the equity did Hannah own?
5. Address the following questions related to the SEO:a. What fraction of the SEO was a primary offering and what fraction was a secondary offering?b. Assuming that the underwriters charged a 5% fee,
4. Immediately following the IPO the shares traded at $14.50.a. At this price, what was the value of the whole company? Expressed in percent, by how much was the deal underpriced?b. In dollars, how
3. What fraction of the IPO was a primary offering and what fraction was a secondary offering?
2. At each funding stage prior to the IPO (i.e., 1985, 2000, 2003, and 2006), calculate the pre-money and post-money valuation of the equity of the company.
1. Natasha is an example of what kind of an investor?
11. You are the CFO of RealNetworks on July 1,2008. The company’s stock price is $6.74 and its convertible debt (as shown in Table 15.7) is now callable.a. What is the value of the shares the
10. You are thinking about buying Dovia Co.’s convertible bonds. You plan to convert to equity at the end of the year and you think that Dovia’s common equity will be priced at $35 per share at
9. A $1000 face value bond has a conversion ratio of 40. You estimate the transaction costs of conversion to be 3% of the face value of the bond. What price must the stock reach in order for you to
8. You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?
7. Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon
6. General Electric has just issued a callable (at par) 10-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date.
5. Your firm has tangible assets of $100 million. You are planning to acquire a firm that is half your firm’s size. You have bonds with a merger & acquisition covenant that requires the combined
4. Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can only pay dividends out of earnings made after the debt issue and you must maintain a minimum
3. Your firm is issuing $100 million in straight bonds at par with a coupon rate of 6% and paying total fees of 3%. What is the net amount of funds that the debt issue will provide for your firm?
2. Your firm is considering two one-year loan options for a $500,000 loan. The first carries fees of 2% of the loan amount and charges interest of 4% of the loan amount. The other carries fees of 1%
1. You are finalizing a bank loan for $200,000 for your small business and the closing fees payable to the bank are 2% of the loan. After paying the fees, what will be the net amount of funds from
11. Why is the yield on a convertible bond lower than the yield on an otherwise identical bond without a conversion feature?
10. How does a sinking fund provision affect the cash flows associated with a bond issue from the company's perspective? From a single bondholder's perspective?
9. When will the yield to maturity be higher than the yield to call for a callable bond?
8. What is the effect of including a call feature on the price a company can receive for its bonds?
7. Why would a call feature be valuable to a company issuing bonds?
6. Why would companies voluntarily choose to put restrictive covenants into a new bond issue?
5. What is the difference between a foreign bond and a Eurobond?
4. Why do bonds with lower seniority have higher yields than equivalent bonds with higher seniority?
3. Explain the difference between a secured corporate bond and an unsecured corporate bond.
2. Explain some of the differences between a public debt offering and a private debt offering.
1. What are the different types of corporate debt and how do they differ?
6 What is a sinking fund?
5, Do callable bonds have a higher or lower yield than otherwise identical bonds without a call feature? Why?
4. Why can bond covenants reduce a firm’s borrowing costs?
3. What happens if an issuer fails to live up to a bond covenant?
2. What are the four categories of international bonds?
1. List the four types of corporate public debt that are typically issued.
5. Facebook had only one angel investor, Peter Thiel (the founder of PayPal). Mr. Thiel invested more than once in Facebook, both as an angel and, in later rounds, on behalf of investors in his
4. Prior to the public offering, Facebook was able to raise capital from all the sources mentioned in the chapter. Let’s concentrate on one particular source, Microsoft Corporation.a. Microsoft
3. Using the data provided by Google Finance, calculate the performance of Facebook in the three-month post-IPO period. That is, calculate the annualized return an investor would have received if he
2. Next, navigate to Google Finance and search for “Facebook.” Determine the closing price of the stock on the day of the IPO (use the “Historical prices” link). What was the first day
1. Begin by navigating to the SEC EDGAR Web site, which provides access to company filings: http://www.sec.gov/edgar.shtml. Choose “Search for Company Filings” and pick search by company name.
20. MacKenzie Corporation currently has 10 million shares of stock outstanding at a price of $40 per share. The company would like to raise money and has announced a rights issue. Every existing
*19. Foster Enterprises’ stock is trading for $50 per share and there are currently 10 million shares outstanding. It would like to raise $100 million. If its underwriter charges 5% of gross
18. On January 20, Metropolitan, Inc., sold 8 million shares of stock in an SEO. The market price of Metropolitan at the time was $42.50 per share. Of the 8 million shares sold, 5 million shares were
17. 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?
16. 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?
14. Your firm is selling 3 million shares in an IPO. You are targeting an offer price of $17.25 per share. Your underwriters have proposed a spread of 7%, but you would like to lower it to 5%.
13. Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of
12. If Margóles Publishing from Problem 11 paid an underwriting spread of 7% for its IPO and sold 10 million shares, what was the total cost (exclusive of underpricing) to it of going public?
11. Margóles Publishing recently completed its IPO. The stock was offered at $14 per share. On the first day of trading, the stock closed at $19 per share.a. What was the initial return on
10. Your investment bankers price your IPO at $15 per share for 10 million shares. If the price at the end of the first day of trading is $17 per share,a. What was the percentage underpricing?b. How
9. Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your
8. If Roundtree from Problem 7 decides to issue an extra 500,000 shares (for a total of 2.3 million shares), how much total money will it raise?
7. Roundtree Software is going public using an auction IPO. The firm has received the following bids:Price ($)Number of Shares 14.00 100,000 13.80 200,000 13.60 500,000 13.40 1,000,000 13.20
6. Assuming that you own only the Series A preferred stock in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the
5. Based on the information in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what fractions of the firm do the Series B, C, and D

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