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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

Calvini Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly
You want to look at the most recent initial public offering filing with the SEC. Go to www.hoovers.com, follow the “IPO Central” link, and follow the link for the most recent SEC filing. What is
Why is underpricing not a great concern with bond offerings?Use the following information in answering the next three questions: Netscape Communications, maker of Internet and World Wide Web
The Netscape IPO was severely underpriced. This occurred even though the offering price of $28 had already been doubled from a planned $14 just weeks earlier. Should Netscape be upset with Morgan
The Mudd Stereo Corporation needs to raise $20 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If
In the previous question, would it affect your thinking to know that, at the time of the IPO, Netscape was only 16 months old, had only $16.6 million in revenues for the first half of the year, had
In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $250,000, how many shares need to be sold now?Data from Previous ProblemThe Mudd Stereo
In the previous two questions, would it affect your thinking to know that, of 38 million shares total in Netscape, only 5 million were actually offered to the public? The remaining 33 million were
The Attar Co. has just gone public. Under a firm commitment agreement, Attar received $18 for each of the 2 million shares sold. The initial offering price was $19 per share, and the stock rose to
Raggio, Inc., has 100,000 shares of stock outstanding. Each share is worth $80, so the company’s market value of equity is $8,000,000. Suppose the firm issues 20,000 new shares at the following
Tom and Jerry, Inc., wishes to expand its facilities. The company currently has 10 million shares outstanding and no debt. The stock sells for $20 per share, but the book value per share is $40. Net
In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $96 per share (assume the PE ratio still remains constant)? What is the NPV of
Gates Window Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $45. The current price is $48 per share, and there are four million shares outstanding.
Boan Corp. wants to raise $3.29 million via a rights offering. The company currently has 420,000 shares of common stock outstanding that sell for $30 per share. Its underwriter has set a subscription
Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $35. At the close of
Consider the following abbreviated financial statements for Parrothead Enterprises:a. What is owners’ equity for 2001 and 2002?b. What is the change in net working capital for 2002?c. In 2002,
On the Market Insight Home Page, follow the “Industry” link at the top of the page. You will be on the industry page. You can use the drop down menu to select different industries. Answer the
Haselden Fried Chicken Company has a debt-equity ratio of 1.10. Return on assets is 8.4 percent, and total equity is $440,000. What is the equity multiplier? Return on equity? Net income?
Look up the financial statements for Emerson Electric (EMR) and Wal-Mart (WMT). For each company, calculate the internal growth rate and sustainable growth rate over the past two years. Are the
The most recent financial statements for Tool Co. are shown here:Assets and costs are proportional to sales. Tool Co. maintains a constant 30 percent dividend payout ratio and a constant debt-equity
The most recent financial statements for Moose Tours, Inc., follow. Sales for 2003 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout
In the previous problem, suppose the firm was operating at only 80 percent capacity in 2002. What is EFN now?Data from Problem 23The most recent financial statements for Moose Tours, Inc., follow.
In Problem 23, suppose the firm wishes to keep its debt equity ratio constant. What is EFN now?Data from Problem 23The most recent financial statements for Moose Tours, Inc., follow. Sales for 2003
Redo Problem 23 using sales growth rates of 25 and 30 percent in addition to 20 percent. Illustrate graphically the relationship between EFN and the growth rate, and use this graph to determine the
Lander’s Recording, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .40. Profit margin is 4.5 percent, and the ratio of total assets to sales is constant at
First Tappan Bank pays 5 percent simple interest on its savings account balances, whereas First Mullineaux Bank pays 5 percent interest compounded annually. If you made a $5,000 deposit in each bank,
Find the monthly adjusted prices for Tyco International LTD (TYC). If the stock appreciates 11 percent per year, what stock price do you expect to see in five years? In 10 years? Ignore dividends
Find the monthly adjusted prices for Redhook Ale Brewery Inc. (HOOK). What is the average annual return over the past four years?
Find the monthly adjusted stock prices for Nucor Corp. (NUE). You find an analyst who projects the stock price will increase 12 percent per year for the foreseeable future. Based on the most recent
Cigna has a financial calculator available at www.cigna.com. To get to the calculator, follow the “Calculator & Tools” link, then the “Present/Future Value Calculator” link. You want to buy a
Use the Cigna financial calculator to solve the following problem. You still want to buy the Lamborghini VTTT, but you have $50,000 to deposit and want to buy the car in 15 years. What interest rate
Assume the total cost of a college education will be $200,000 when your child enters college in 18 years. You presently have $27,000 to invest. What annual rate of interest must you earn on your
Why would GMAC be willing to accept such a small amount today ($500) in exchange for a promise to repay 20 times that amount ($10,000) in the future?
At 6 percent interest, how long does it take to double your money? To quadruple it?
GMAC has the right to buy back the securities anytime it wishes by paying $10,000 (this is a term of this particular deal). What impact does this feature have on the desirability of this security as
You are offered an investment that requires you to put up $12,000 today in exchange for $40,000 15 years from now. What is the annual rate of return on this investment?
Would you be willing to pay $500 today in exchange for $10,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?
You’re trying to save to buy a new $120,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 5.5 percent annual interest on its accounts. How long will it be before
Suppose that when GMAC offered the security for $500, the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price? Why?
Imprudential, Inc., has an unfunded pension liability of $650 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back
The GMAC security is actively bought and sold on the New York Stock Exchange. If you looked in The Wall Street Journal today, do you think the price would exceed the $500 original price? Why? If you
You have just received notification that you have won the $1 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you’re around to
Your coin collection contains fifty 1952 silver dollars. If your parents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2067,
In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2001, the winner’s check was $900,000. What was the percentage increase in the winner’s check over
In 2001, a mechanized toy robot from the television series Lost in Space sold for $750. This represented a 13.86 percent annual return. For this to be true, what must the robot have sold for new in
Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 1995, Christie’s auctioned the William de Kooning painting Untitled. The highest bid
Referring to the GMAC security we discussed at the very beginning of the chapter:a. Based upon the $500 price, what rate was GMAC paying to borrow money?b. Suppose that, on December 1, 2002, this
Suppose you are still committed to owning a $120,000 Ferrari (see Question 9). If you believe your mutual fund can achieve an 11 percent annual rate of return and you want to buy the car in 10 years
Mercer Shaved Ice Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value
You have just made your first $2,000 contribution to your individual retirement account. Assuming you earn a 9 percent rate of return and make no additional contributions, what will your account be
You are scheduled to receive $30,000 in two years. When you receive it, you will invest it for six more years at 5.5 percent per year. How much will you have in eight years?
Rasputin, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future value
You expect to receive $10,000 at graduation in two years. You plan on investing it at 12 percent until you have $120,000. How long will you wait from now?
Investment X offers to pay you $3,000 per year for eight years, whereas Investment Y offers to pay you $5,000 per year for four years. Which of these cash flow streams has the higher present value if
An investment offers $4,100 per year for 15 years, with the first payment occurring one year from now. If the required return is 10 percent, what is the value of the investment? What would the value
If you put up $20,000 today in exchange for a 8.25 percent, 12-year annuity, what will the annual cash flow be?
Your company will generate $75,000 in annual revenue each year for the next eight years from a new information database. The computer system needed to set up the database costs $380,000. If you can
If you deposit $1,500 at the end of each of the next 20 years into an account paying 9.5 percent interest, how much money will you have in the account in 20 years? How much will you have if you make
You want to have $50,000 in your savings account five years from now, and you’re prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.2 percent
Biktimirov Bank offers you a $35,000, seven-year term loan at 10 percent annual interest. What will your annual loan payment be?
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $5,000 per year forever. If the required return on this investment is 9 percent, how much
In the previous problem, suppose the Perpetual Life Insurance Co. told you the policy costs $58,000. At what interest rate would this be a fair deal?Data from problem 10The Perpetual Life Insurance
First National Bank charges 9.1 percent compounded monthly on its business loans. First United Bank charges 9.2 percent compounded semiannually. As a potential borrower, which bank would you go to
Cannone Credit Corp. wants to earn an effective annual return on its consumer loans of 14 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by
What is the future value of $600 in 20 years assuming an interest rate of 11 percent compounded semiannually?
Corn Credit Bank is offering 6.3 percent compounded daily on its savings accounts. If you deposit $5,000 today, how much will you have in the account in 5 years? In 10 years? In 20 years?
An investment will pay you $19,000 in six years. If the appropriate discount rate is 12 percent compounded daily, what is the present value?
Big Al’s Pawn Shop charges an interest rate of 25 percent per month on loans to its customers. Like all lenders, Big Al must report an APR to consumers. What rate should the shop report? What is
You want to buy a new sports coupe for $48,250, and the finance office at the dealership has quoted you a 9.8 percent APR loan for 60 months to buy the car. What will your monthly payments be? What
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $400 per month. You will charge 1.5 percent per month interest on the overdue
Maybepay Life Insurance Co. is selling a perpetuity contract that pays $1,050 monthly. The contract currently sells for $75,000. What is the monthly return on this investment vehicle? What is the
You are to make monthly deposits of $100 into a retirement account that pays 11 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your
If the appropriate discount rate for the following cash flows is 14 percent compounded quarterly, what is the present value of the cash flows? Year 1234 Cash Flow $ 800 700 0 1,200
In the previous problem, suppose you make $1,200 annual deposits into the same retirement account. How large will your account balance be in 20 years?Data from problem 24You are to make monthly
Beginning three months from now, you want to be able to withdraw $1,000 each quarter from your bank account to cover college expenses over the next four years. If the account pays 0.75 percent
If the appropriate discount rate for the following cash flows is 11.5 percent per year, what is the present value of the cash flows? Year 1234 Cash Flow $1,500 0 7,200 900
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.90 percent per year, compounded monthly for the first six months, increasing thereafter to
You are saving to buy a $150,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 5 percent. How long will it take your initial $95,000 investment to
You have an investment that will pay you 1.72 percent per month. How much will you have per dollar invested in one year? In two years?
You have $1,100 today. You need $2,000. If you earn 1 percent per month, how many months will you wait?
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $75,000 per year for the next two years, or you can
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $1,200,000 purchase price. The monthly payment on this loan will
Consider a firm with a contract to sell an asset for $95,000 three years from now. The asset costs $57,000 to produce today. Given a relevant discount rate on this asset of 14 percent per year, will
You’ve just won the U.S. Lottery. Lottery officials offer you the choice of two alternative payouts: either $2 million today, or $4 million 10 years from now. Which payout will you choose if the
Congratulations! You’ve just won the $15 million first prize in the Subscriptions R Us Sweepstakes. Unfortunately, the sweepstakes will actually give you the $15 million in $375,000 annual
What is the present value of $1,000 per year, at a discount rate of 12 percent, if the first payment is received 8 years from now and the last payment is received 20 years from now?
A 10-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 15 percent compounded monthly for the first four years, and 12 percent compounded
You have your choice of two investment accounts. Investment A is a 10-year annuity that features end-of-month $1,000 payments and has an interest rate of 11.5 percent compounded monthly. Investment B
Given an interest rate of 6.5 percent per year, what is the value at date t = 7 of a perpetual stream of $500 payments that begin at date t = 13?
If today is Year 0, what is the future value of the following cash flows five years from now? What is the future value 10 years from now? Assume a discount rate of 9 percent per year. Year 235 Cash
A local finance company quotes a 13 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $2,600. Because you must repay a total of $22,600 in one
A 5-year annuity of ten $8,000 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 14 percent compounded monthly, what is the
As discussed in the text, an ordinary annuity assumes equal payments at the end of each period over the life of the annuity. An annuity due is the same thing except the payments occur at the
You want to buy a new sports car from Muscle Motors for $48,000. The contract is in the form of a 48-month annuity due at a 9.25 percent APR. What will your monthly payment be?
Prepare an amortization schedule for a five-year loan of $20,000. The interest rate is 12 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
Rework Problem 58 assuming that the loan agreement calls for a principal reduction of $4,000 every year instead of equal annual payments.Data from Problem 58Prepare an amortization schedule for a
You are considering a one-year loan of $13,000. The interest rate is quoted on a discount basis (see the previous problem) as 16 percent. What is the effective annual rate?Data from Problem 60This
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 11
You are looking at a one-year loan of $10,000. The interest rate is quoted as 12 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes
The interest rate on a one-year loan is quoted as 14 percent plus two points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?Data from problem 62You are

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