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fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
A put option that expires in six months with an exercise price of $65 sells for $2.05. The stock is currently priced at $67, and the risk-free rate is 3.6 percent per year, compounded continuously.
Recalculate the first two problems assuming a dividend yield of 2 percent per year. How does this change your answers? Can you explain why dividends have the effect they do?Data from Problem 1Go to
a. What is a pure financial merger?b. Why might stockholders in a leveraged firm prefer a low NPV project over a higher NPV project?
A put option and a call option with an exercise price of $80 and five months to expiration sell for $2.05 and $4.80, respectively. If the risk free rate is 4.8 percent per year, compounded
A put option and call option with an exercise price of $65 expire in two months and sell for $2.50 and $0.90, respectively. If the stock is currently priced at $63.20, what is the annual continuously
A put option with a maturity of five months sells for $6.33. A call with the same expiration sells for $9.30. If the exercise price is $75 and the stock is currently priced at $77.20, what is the
You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.5 million. Over the past five years, the price of land in the area has increased 12 percent per
A call option with an exercise price of $90 and four months to expiration has a price of $9.02. The stock is currently priced at $94.30, and the risk-free rate is 5 percent per year, compounded
A call option matures in six months. The underlying stock price is $85, and the stock’s return has a standard deviation of 20 percent per year. The risk-free rate is 4 percent per year, compounded
A call option has an exercise price of $75 and matures in six months. The current stock price is $80, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the
A stock is currently priced at $35. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 12 percent per year, compounded continuously, and the standard
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm’s assets is $11,000. The standard deviation of
Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has a NPV of $700, and Project B has an NPV of $1,000. As the result of taking Project A, the
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm’s assets is $20,000. The standard
A company has a single zero coupon bond outstanding which matures in 10 years with a face value of $25 million. The current value of the company’s assets is $22 million, and the standard deviation
Christina Industries has a zero coupon bond issue that matures in two years with a face value of $25,000. The current value of the company’s assets is $12,400, and the standard deviation of the
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 the variables are the same as
Ozzy Corp. has a zero coupon bond that matures in five years with a face value of $50,000. The current value of the company’s assets is $48,000, and the standard deviation of its return on assets
a. What is a merger? How does a merger differ from other acquisition forms?b. What is a takeover?
Pearl Inc. has offered $510 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $380 million as an independent operation. If the merger makes
Consider the following premerger information about Firm X and Firm Y:Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $8 per share. Assuming
a. What factors influence the choice between a taxable and a tax-free acquisition?b. Under current tax law, why are taxable acquisitions less attractive than they once were?
Assume that the following balance sheets are stated at book value. Construct a postmerger balance sheet assuming that Sipowicz purchases Sorenson and the pooling of interests method of accounting is
In the previous problem, suppose the fair market value of Sorenson’s fixed assets is $10,000 versus the $5,000 book value shown. Sipowicz pays $14,000 for Sorenson and raises the needed funds
a. What is the difference between a purchase and a pooling of interests?b. What is “goodwill”?
In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Mining’s
a. What are the relevant incremental cash flows for evaluating a merger candidate?b. What are some different sources of gain from acquisition?
a. Why can a merger create the appearance of earnings growth?b. Why is diversification by itself not a good reason for a merger?
a. Why does the true cost of a stock acquisition depend on the gain from the merger?b. What are some important factors in deciding whether to use stock or cash in an acquisition?
The shareholders of Creed Security Company have voted in favor of a buyout offer from What If Corporation. Information about each firm is given here:Creed’s shareholders will receive one share of
Eastman Corp. is analyzing the possible acquisition of Kodiak Company. Both firms have no debt. Eastman believes the acquisition will increase its total aftertax annual cash flows by $2.6 million
Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding.Firm B has estimated that the value of the
a. What can a firm do to make a takeover less likely?b. What is a share rights plan? Explain how the rights work.
a. What does the evidence say about the benefits of mergers and acquisitions to target-company shareholders?b What does the evidence say about the benefits of mergers and acquisitions to
Consider the following premerger information about Firm A and Firm B:Assume that Firm A acquires Firm B via an exchange of stock at a price of $20 for each share of B’s stock. Both A and B have no
Foxy News, Inc., is considering making an offer to purchase Pulitzer Publications. The vice president of finance has collected the following information:Foxy also knows that securities analysts
Wildcat, Inc., has estimated sales (in millions) for the next four quarters as:Sales for the first quarter of the year after this one are projected at $225 million. Accounts receivable at the
Rework Problem 14 assuming:a. Wildcat maintains a minimum cash balance of $45 million.b. Wildcat maintains a minimum cash balance of $15 million. Based on your answers in (a) and (b), do you think
In exchange for a $750 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.8 percent per quarter on any funds actually borrowed2. Maintain a 5 percent
Stream Bank offers your firm a 7 percent discount interest loan for up to $3 million, and in addition requires you to maintain an 8 percent compensating balance against the amount borrowed. What is
In a typical month, the Bungee Jump Corporation receives 100 checks totaling $90,000. These are delayed six days on average. What is the average daily float?
What are the highest and lowest historical interest rates for commercial paper? Go to www.economagic.com and follow the “Interest Rates” link. Find the highest and lowest interest rates for one-,
Each business day, on average, a company writes checks totaling $30,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from
One provider of float reduction services is ePayment Systems. You can find their web site at www.epaymentsystems.com. Follow the “Services” link and then the “Electronic Check Conversion”
White Whale Corporation has an average daily cash balance of $300. Total cash needed for the year is $30,000. The interest rate is 5 percent, and replenishing the cash costs $6 each time. What are
Purple Feet Wine, Inc., receives an average of $6,000 in checks per day. The delay in clearing is typically five days. The current interest rate is .025 percent per day.a. What is the company’s
Debit and Credit Bookkeepers needs a total of $4,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off $300 in securities and transfers the cash in.
Most often, when news breaks about a firm’s cash position, it’s because the firm is running low, but that wasn’t the case for Ford, Chrysler, and General Motors at the end of 1997. At that
Your neighbor goes to the post office once a month and picks up two checks, one for $20,000 and one for $4,000. The larger check takes four days to clear after it is deposited; the smaller one takes
The Bud Wiser Company is currently holding $600,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by $340,000 per month. How much of the current cash holding
Your firm has an average receipt size of $60. A bank has approached you concerning a lockbox service that will decrease your total collection time by three days. You typically receive 12,000 checks
Econoline Crush, Inc., uses a Miller-Orr cash management approach with a lower limit of $30,000, an upper limit of $125,000, and a target balance of $45,000. Explain what each of these points
A mail-order firm processes 5,000 checks per month. Of these, 60 percent are for $50 and 40 percent are for $70. The $50 checks are delayed two days on average; the $70 checks are delayed three days
The company with the common equity accounts shown here has declared an 8 percent stock dividend at a time when the market value of its stock is $20 per share. What effects on the equity accounts will
In the previous problem, suppose the company instead decides on a four-for-one stock split. The firm’s 60-cent per share cash dividend on the new (post-split) shares represents an increase of 10
For initial public offerings of common stock, 2000 was a very big year, with over $80.6 billion raised by the process. Relatively few of the 452 firms involved paid cash dividends. Why do you think
Soprano, Inc., a litter recycling company, uses a residual dividend policy. A debt-equity ratio of .80 is considered optimal. Earnings for the period just ended were $900, and a dividend of $420 was
Joe C Corporation has declared an annual dividend of $0.50 per share. For the year just ended, earnings were $8 per share.a. What is Joe C’s payout ratio?b. Suppose Joe C has seven million shares
Red Zeppelin Corporation follows a strict residual dividend policy. Its debt-equity ratio is 3.a. If earnings for the year are $140,000, what is the maximum amount of capital spending possible with
Pamela Rock (PR), Inc., predicts that earnings in the coming year will be $45 million. There are 12 million shares, and PR maintains a debt-equity ratio of 2.a. Calculate the maximum investment funds
You own 1,000 shares of stock in Kiessling Corporation. You will receive a 60-cent per share dividend in one year. In two years, Kiessling will pay a liquidating dividend of $30 per share. The
McNair Corporation is evaluating an extra dividend versus a share repurchase. In either case, $4,000 would be spent. Current earnings are $.90 per share, and the stock currently sells for $35 per
Go to www.marketguide.com. You will need to find the most recent annual income statement and two most recent balance sheets for American Home Products (AHP) and Homestake Mining (HM). Both companies
Find the most recent financial statements for Dell Computer (DELL) and Boeing (BA). Calculate the cash and operating cycle for each company for the most recent year. Are the numbers similar for these
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield
Kaleb’s Korndog Corp. has a book net worth of $8,500. Longterm debt is $1,800. Net working capital, other than cash, is $2,250. Fixed assets are $2,200. How much cash does the company have? If
Download the most recent quarterly financial statements for Kmart (KM). Calculate the operating and cash cycle for Kmart over each of the last four quarters. Comment on any changes in the operating
The Thunder Dan Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecasted sales. The payables period is 60 days. Wages, taxes, and other
The Kahauloa Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $200. Kahauloa has a 45-day collection
Here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2002:The company predicts that 5 percent of its credit sales will never be collected, 35 percent
The following is the sales budget for Duck-n- Run, Inc., for the first quarter of 2002:Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the
What impact did the announcement have on Ameritech’s suppliers?
What impact did this change in payables policy have on Ameritech’s operating cycle? Its cash cycle?
Ameritech lengthened its payables period to “control costs and optimize cash flow.” Exactly what is the cash benefit to Ameritech from this change?
Your firm has an average collection period of 42 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing in this case? Assume
You’ve worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is 0.52 percent per month. In addition, 4 percent of the amount that you
A bank offers your firm a revolving credit arrangement for up to $60 million at an interest rate of 1.90 percent per quarter. The bank also requires you to maintain a compensating balance of 6
J Lo Corp. uses no debt. The weighted average cost of capital is 14 percent. If the current market value of the equity is $40 million and there are no taxes, what is EBIT?
Nopay Industries has a debt-equity ratio of 2. Its WACC is 11 percent, and its cost of debt is 11 percent. The corporate tax rate is 35 percent.a. What is Nopay’s cost of equity capital?b. What is
Molly Corp. has no debt but can borrow at 9 percent. The firm’s WACC is currently 15 percent, and the tax rate is 35 percent.a. What is Molly’s cost of equity?b. If the firm converts to 25
Maria & Co. expects its EBIT to be $80,000 every year forever. The firm can borrow at 14 percent. Maria currently has no debt, and its cost of equity is 25 percent. If the tax rate is 35 percent,
Bruin Manufacturing has an expected EBIT of $26,000 in perpetuity, a tax rate of 35 percent, and a debt-equity ratio of .60. The firm has $60,000 in outstanding debt at an interest rate of 8 percent,
Bellevue Corporation expects an EBIT of $6,000 every year forever. Bellevue currently has no debt, and its cost of equity is 16 percent. The firm can borrow at 10 percent. If the corporate tax rate
The owners’ equity accounts for Octagon International are shown here:a. If Octagon stock currently sells for $20 per share and a 10 percent stock dividend is declared, how many new shares will be
Caputo, Inc., has declared a $5.00 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 34 percent. New IRS regulations require that taxes be withheld at the time the
Use the annual financial statements for General Mills (GIS), Boston Beer (SAM), and US Steel (X) to find the dividend payout ratio for each company for the last three years. Why would these companies
The balance sheet for Apple Pie Corp. is shown here in market value terms. There are 4,000 shares of stock outstanding.The company has declared a dividend of $1.25 per share. The stock goes ex
Rooster Rocks Corporation (RRC) currently has 100,000 shares of stock outstanding that sell for $70 per share. Assuming no market imperfections or tax effects exist, what will the share price be
In the previous problem, suppose Apple Pie has announced it is going to repurchase $3,000 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be
The market value balance sheet for Inbox Manufacturing is shown here. Inbox has declared a 20 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is
Find the annual balance sheets for Pfizer (PFE), Ford (F), and McDonald’s (MCD). For each company, calculate the long-term debt-to-equity ratio for the two most recent years. Why would these three
Go to yahoo.marketguide.com and enter the ticker symbol AMGM for Amgen, a biotechnology company. Follow the “Ratio Comparison” link and find long-term debt-to-equity and total debt-to-equity
Control, Inc., has no debt outstanding and a total market value of $100,000. Earnings before interest and taxes, EBIT, are projected to be $6,000 if economic conditions are normal. If there is strong
Go to www.amex.com and follow the “Screening” link. Using the debt-to-equity screener, how many companies have debt-to-equity ratios greater than 2? Greater than 5? Greater than 10? What company
Repeat parts (a) and (b) in Problem 1 assuming Control has a tax rate of 35 percent.Data from Problem 1Control, Inc., has no debt outstanding and a total market value of $100,000. Earnings before
Go to www.amex.com and follow the “Screening” link. Using the total assets-to-equity ratio, how many companies have a total asset-to equity ratio greater than 5? Greater than 10? Greater than 20?
Linkin Park Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Linkin Park would have 100,000 shares of stock
Taylor Corp. is comparing two different capital structures. Plan I would result in 800 shares of stock and $9,000 in debt. Plan II would result in 700 shares of stock and $13,500 in debt. The
Zombie, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 40 percent debt. Currently, there are 1,000 shares outstanding
What is the most recent IPO? Go to www.bloomberg.com and follow the “IPO Center” link. What is the company? What exchange trades the stock? What was the IPO price? What is the current price?
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