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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

26. Your cousin is currently 12 years old. She will be going to college in 6 years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the
25. Your bank pays 2.5% interest per year. You put $1000 in the bank today and $500 more in the bank in one year. How much will you have in the bank in 2 years?
24. Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?
23. What is the present value of $10,000 receiveda. 12 years from today when the interest rate is 4% per year?b. 20 years from today when the interest rate is 8% per year?c. 6 years from today when
22. Calculate the future value of $2000 ina. 5 years at an interest rate of 5% per year.b. 10 years at an interest rate of 5% per year.c. 5 years at an interest rate of 10% per year.*d. Why is the
*21. Suppose you invest $1000 in an account paying 8% interest per year.a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”?b. What
20. Consider the following alternatives:i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 yearsa. Rank the alternatives from most valuable to least valuable if the
19. If your bank pays you 1.5% interest and you deposit $500 today, what will your balance be in 5 years?
18. You are considering a savings bond that will pay $100 in 10 years. If the interest rate is 2%, what should you pay today for the bond?
17. Suppose the interest rate is 4%.a. Having $200 today is equivalent to having what amount in one year?b. Having $200 in one year is equivalent to having what amount today?c. Which would you
16. The local electronics store is offering a promotion “1-year: same as cash,” meaning that you can buy a TV now, and wait a year to pay (with no interest). So, if you take home a $1000 TV
15. You plan to borrow $1000 from a bank. In exchange for $1000 today, you promise to pay $1080 in one year. What does the cash flow timeline look like from your perspective?What does it look like
14. If your discount factor is 0.9009, what is your discount rate?
13. What is the discount factor that is equivalent to a 6% discount rate?
12. A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans:a. How much would you have in one year if you
11. Due to your good credit, your bank reduces the interest rate on your $12,000 loan from 9% to 7.5% per year. Thanks to the change, how much will you save in interest this year?
10. You expect to have $1000 in one year. A bank is offering loans at 6% interest per year.How much can you borrow today?
9. You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
8. Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him. Assume he
7. Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,000 per
6. Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, Restaurant Brands International (QSR), the parent company of Burger King and
5. If the cost of buying a CD and ripping the tracks to your iPod (including your time)is $25, what is the most Apple could charge on iTunes for a whole 15-track CD?
4. Suppose Big Bank offers an interest rate of 5.5% on both savings and loans, and Bank Enn offers an interest rate of 6% on both savings and loans.a. What profit opportunity is available?b. Which
3. Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company’s stock. Whichever one you choose will be awarded today. The stock is currently trading at $63 per
2. You are an international shrimp trader. A food producer in the Czech Republic offers to pay you 2 million Czech koruna today in exchange for a year’s supply of frozen shrimp. Your Thai supplier
1. Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase
10. What is the intuition behind the geometric growth in interest?
9. What is compound interest?
8. What is a discount rate?
7. Why is a cash flow in the future worth less than the same amount today?
6. Can we directly compare dollar amounts received at different points in time?
5. How does the Valuation Principle help a financial manager make decisions?
4. Why is arbitrage important to competitive market prices?
3. Why are market prices useful to a financial manager?
2. How important are our personal preferences in valuing an investment decision?
1. What makes an investment decision a good one?
• Calculate the value of distant cash flows in the present and of current cash flows in the future
• Assess the effect of interest rates on today’s value of future cash flows
• Understand the Valuation Principle, and how it can be used to identify decisions that increase the value of the firm
• Identify the roles of financial managers and competitive markets in decision making
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.
38. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015).a. Which auditing firm certified the financial statements?b. Which officers
36. Repeat the analysis from parts a and b in Problem 35 using Walmart Stores (WMT)instead. Specifically, use Walmart’s 2015 fiscal data, filed in October 2015. Based on the DuPont Identity, what
*35. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015).a. Compute Costco’s net profit margin, total asset turnover, and equity
34. Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million.a. What is the firm’s current
33. In January 2016, United Airlines (UAL) had a market capitalization of $20.6 billion, debt of $11.9 billion, and cash of $5.2 billion. United Airlines had revenues of $37.9 billion. Southwest
*30. Suppose that in 2016, 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,
29. If JPJ Corp (the company in Problem 28) is able to increase sales by 10% but keep its total and fixed asset growth to only 5%, what will its new asset turnover ratios be?
28. JPJ Corp has sales of $1 million, accounts receivable of $50,000, total assets of $5 million(of which $3 million are fixed assets), inventory of $150,000, and cost of goods sold of $600,000. What
27. Ladders, Inc. has a net profit margin of 5% on sales of $50 million. It has book value of equity of $40 million and total liabilities with a book value of $30 million. What is Ladders’ ROE? ROA?
26. Chutes & Co. has interest expense of $1 million and an operating margin of 10% on total sales of $30 million. What is Chutes’ interest coverage ratio?
25. If Local Co., the company in Problem 23, had interest expense of $800,000, how would that affect each of its margins?
24. If Local Co., the company in Problem 23, had an increase in selling expenses of$300,000, how would that affect each of its margins?
23. Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general, and administrative expenses are $500,000 and its research and development is $1 million. It has annual
22. In fiscal year 2015, Walmart Stores. (WMT) had revenue of $485.65 billion, gross profit of $120.57 billion, and net income of $16.36 billion. Costco Wholesale Corporation(COST) had revenue of
20. In December 2015, Apple had cash of $38.07 billion, current assets of $76.22 billion, and current liabilities of $76.09 billion. It also had inventories of $2.45 billion.a. What was Apple’s
19. In December 2015, General Electric (GE) had a book value of equity of $98 billion, 9.4 billion shares outstanding, and a market price of $31 per share. GE also had cash of $102 billion, and total
18. Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is
17. Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1
15. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from its cash flow statement:a. How much
*14. Quisco Systems has 6.5 billion shares outstanding and a share price of $18. Quisco is considering developing a new networking product in house at a cost of $500 million.Alternatively, Quisco can
13. Suppose a firm’s tax rate is 35%.a. What effect would a $10 million operating expense have on this year’s earnings?What effect would it have on next year’s earnings?b. What effect would a
12. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydeco’s costs and expenses had been the same fraction of revenues in 2013–2016 as they were in
11. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydeco had purchased additional equipment for $12 million at the end of 2013, and this equipment was
10. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.Suppose Mydeco repurchases 2 million shares each year from 2013–2016. What would its earnings per share be in
9. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. By what percentage did Mydeco’s revenues grow each year from 2013–2016?b. By what percentage did net
7. Find the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from its balance sheet:a. How much cash did Costco
6. Use EDGAR (www.sec.gov) to find Qualcomm’s 10K filing for 2014. From the balance sheet, answer the following questions:a. How much did Qualcomm have in cash and short-term investments?b. What
5. What was the change in Global’s book value of equity from 2015 to 2016 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2016?Explain.
4. Consider the following potential events that might have occurred to Global on December 30, 2016. For each one, indicate which line items in Global’s balance sheet would be affected and by how
3. Confirm that you can find the most recent financial statements for Starbucks Corporation(SBUX) using the following sources:a. From the company’s Web page.b. From the SEC Web site
2. What is GAAP and who oversees it?
1. What four financial statements can be found in a firm’s 10-K filing? What checks are there on the accuracy of these statements?
11. How did accounting fraud contribute to the collapse of Enron?
10. What can you learn from the management’s discussion in the financial statements or the notes to the financial statements?
9. What is the DuPont Identity and how can a financial manager use it?
8. How are the balance sheet and the income statement related?
7. How can you use the balance sheet to assess the health of a firm?
6. Can a firm with positive net income run out of cash? Explain.
5. How does the statement of cash flows differ from the income statement?
4. What is the purpose of the income statement?
3. What is the purpose of the balance sheet?
2. Who reads financial statements? List at least three different categories of people. For each category, provide an example of the type of information they might be interested in and discuss why?
1. Why do firms disclose financial information?
• Understand the main purpose and aspects of the Sarbanes-Oxley reforms following Enron and other financial scandals
• Analyze a firm through its financial statements, including using the DuPont Identity
• Understand the management’s discussion and analysis and the statement of stockholders’ equity
• Understand how the income statement is used
• Understand the function of the balance sheet
• Know why the disclosure of financial information through financial statements is critical to investors
25. What are some of the similarities and differences among mutual funds, pension funds, and hedge funds?
24. What role do investment banks play in the economy?
23. How do financial institutions help with risk-bearing?
22. What is the financial cycle?
20. What are the tradeoffs in using a dark pool?
19. Explain why the bid-ask spread is a transaction cost.
18. How are limit orders and market orders different?
17. What is the difference between a primary and a secondary market?
16. What is the difference between a public and a private corporation?
15. You sit on the board of a public corporation. Your CEO has proposed taking steps to offset the carbon impact of your company’s manufacturing process. Doing so will add to the company’s

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