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business
fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

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?
Lizard King, Inc., is proposing a rights offering. Presently there are 240,000 shares outstanding at $80 each. There will be 60,000 new shares offered at $60 each.a. What is the new market value of
You want to find the option prices for ConAgra Foods (CAG). Go to finance.yahoo.com, get a stock quote, and follow the “Options” link. What is the option premium and strike price for the highest
T-bills currently yield 6 percent. Stock in Christina Manufacturing is currently selling for $50 per share. There is no possibility that the stock will be worth less than $45 per share in one year.a.
a. What is the value of a call option at expiration?b. What are the upper and lower bounds on the value of a call option anytime before expiration?c. Assuming that the stock price is certain to be
What is the option symbol for a call option on Cisco Systems (CSCO) with a strike price of $25 that expires in July. Go to www.cboe.com, follow the “Trading Tools” link, then the “Symbol
Use the option quote information shown here to answer the questions that follow.a. Suppose you buy 10 contracts of the February 120 call option. How much will you pay, ignoring commissions?b. In part
a. What are the five factors that determine an option’s value?b What is the effect of an increase in each of the five factors on the value of a call option? Give an intuitive explanation for your
Go to www.cboe.com, highlight the “Trading Tools” tab, then follow the “Expiration Calendar” link. On what day do equity options expire in the current month? On what day do they expire next
a. What are the key differences between a traded stock option and an ESO?b. What is ESO repricing? Why is it controversial?
Go to www.cboe.com, highlight the “Products” tab, then follow the “LEAPS®” link. What are LEAPS? What are the two types of LEAPS? What are the benefits of equity LEAPS? What are the benefits
The price of Paula Corp. stock will be either $70 or $90 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent.a. Suppose the current price
a. Why do we say that the equity in a leveraged firm is effectively a call option on the firm’s assets?b. All other things being the same, would the stockholders of a firm prefer to increase or
Go to www.cboe.com, highlight the “Institutional” tab, then follow the “FLEX Options” link. What is a FLEX option? When do FLEX options expire? What is the minimum size of a FLEX option?
The price of Tara, Inc., stock will be either $80 or $100 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent.a. Suppose the current
a. Why do we say that almost every capital budgeting proposal involves mutually exclusive alternatives?b. What are the options to expand, abandon, and suspend operations?c. What are strategic options?
A one-year call option contract on Cheesy Poofs Co. stock sells for $1,400. In one year, the stock will be worth $40 or $60 per share. The exercise price on the call option is $55. What is the
a. How are warrants and call options different?b. What is the minimum value of a convertible bond?c. Explain how car insurance acts like a put option.d. Explain why U.S. government loan guarantees
Rackin Pinion Corporation’s assets are currently worth $1,100. In one year, they will be worth either $1,000 or $1,300. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an
Volunteer Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Volunteer’s assets is currently $1,200. Phil Fulmer, the CEO, believes that the assets
A $1,000 par convertible debenture has a conversion price for common stock of $125 per share. With the common stock selling at $90, what is the conversion value of the bond?
You have been hired to value a new 30- year callable, convertible bond. The bond has an 8 percent coupon, payable annually, and its face value is $1,000. The conversion price is $70 and the stock
A bond with 30 detachable warrants has just been offered for sale at $1,000. The bond matures in 15 years and has an annual coupon of $110. Each warrant gives the owner the right to purchase two
Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $180,000 per year. You believe the technology used in the machine has a 10-year life, in other
We are examining a new project. We expect to sell 6,000 units per year at $65 net cash flow apiece for the next 10 years. In other words, the annual operating cash flow is projected to be $65 ×
In the previous problem, suppose you think it is likely that expected sales will be revised upwards to 8,000 units if the first year is a success and revised downwards to 4,000 units if the first
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 would only be desirable if
Suppose a share of stock sells for $60. The risk-free rate is 5 percent, and the stock price in one year will be either $70 or $80.a. What is the value of a call option with a $70 exercise price?b.
Alicia, Inc., has a $1,000 face value convertible bond issue that is currently selling in the market for $950. Each bond is exchangeable at any time for 25 shares of the company’s stock. The
You have been hired to value a new 25-year callable, convertible bond. The bond has a 6.20 percent coupon, payable annually. The conversion price is $140, and the stock currently sells for $41.12.
For some projects, it may be advantageous to terminate the project early. For example, if a project is losing money, you might be able to reduce your losses by scrapping out the assets and
Suppose we are thinking about replacing an old computer with a new one. The old one cost us $300,000; the new one will cost $600,000. The new machine will be depreciated straight-line to zero over
The Wind Rider Co. just issued a dividend of $2.10 per share on its common stock. The company is expected to maintain a constant 7 percent growth rate in its dividends indefinitely. If the stock
The Tubby Ball Corporation’s common stock has a beta of 1.15. If the risk-free rate is 5 percent and the expected return on the market is 12 percent, what is Tubby Ball’s cost of equity capital?
Stock in Parrothead Industries has a beta of 1.10. The market risk premium is 8 percent, and T-bills are currently yielding 5.5 percent. Parrothead’s most recent dividend was $2.20 per share, and
Suppose Massey Ltd. just issued a dividend of $.68 per share on its common stock. The company paid dividends of $.40, $.45, $.52, and $.60 per share in the last four years. If the stock currently
Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank’s cost of preferred stock?
Legend, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 12 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments
Jiminy’s Cricket Farm issued a 30-year, 9 percent semiannual bond 8 years ago. The bond currently sells for 105 percent of its face value. The company’s tax rate is 35 percent.a. What is the
For the firm in Problem 7, 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 with seven years left to
Mullineaux Corporation has a target capital structure of 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 18 percent, the cost of preferred stock is 6.5
Modigliani Manufacturing has a target debt-equity ratio of .75. Its cost of equity is 18 percent and its cost of debt is 10 percent. If the tax rate is 35 percent, what is Modigliani’s WACC?
Fama’s Llamas has a weighted average cost of capital of 12.5 percent. The company’s cost of equity is 15 percent and its cost of debt is 8 percent. The tax rate is 35 percent. What is Fama’s
Given the following information for Dunhill Power Co., find the WACC. Assume the company’s tax rate is 35 percent. Debt: Common stock: Preferred stock: Market: 3,000 8 percent coupon bonds
Filer Manufacturing has 8.2 million shares of common stock outstanding. The current share price is $52, and the book value per share is $5. Filer Manufacturing also has two bond issues outstanding.
Sniffles, Inc., has a target debt-equity ratio of .90. Its WACC is 13 percent, and the tax rate is 35 percent.a. If Sniffles’ cost of equity is 18 percent, what is its pretax cost of debt?b. If
Titan Mining Corporation has 8 million shares of common stock outstanding, .5 million shares of 6 percent preferred stock outstanding, and 100,000 9 percent semiannual bonds outstanding, par value
Suppose your company needs $6 million to build a new assembly line. Your target debt-equity ratio is 1.0. The flotation cost for new equity is 15 percent, but the flotation cost for debt is only 4
Western Alliance Company needs to raise $12 million to start a new project and will raise the money by selling new bonds. The company has a target capital structure of 60 percent common stock, 10
Sallinger, Inc., is considering a project that will result in initial aftertax cash savings of $4 million at the end of the first year, and these savings will grow at a rate of 5 percent per year
Salsman, Inc., recently issued new securities to finance a new TV show. The project cost $1.4 million and the company paid $105,000 in flotation costs. In addition, the equity issued had a flotation
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of 1.2. It’s considering building a new $40 million manufacturing
The Clifford Corporation has announced a rights offer to raise $60 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a
What were the 10 largest IPOs in U.S. markets? Go to www.hoovers.com, follow the “IPO Central” link, then the “IPO Statistics” link.

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