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principles corporate finance

Questions and Answers of Principles Corporate Finance

27.4 Following are the 20X2 balance sheet and income statement for the S/B Corporation. Use them to construct a sources-and-uses-of-cash statement. Assets Cash..... Accounts receivable Inventories.
A.4 Assume the following spot rates:What are the forward rates over each of the three years? Maturity Spot Rates (%) 1 23 5 7 10
5.15 Use the following stock quoteThe expected growth rate in Citigroup’s dividends is 7% a year. Suppose you use the discounted dividend model to price Citigroup’s shares. The constant growth
5.14 Use the following February 12, 1998, WSJ quotation for Merck & Co. to answer the next questionWhich of the following statements is false?a. The dividend yield was about 1.6%.b. The 52
5.12 Following are selected quotations for New York Exchange Bonds from the Wall Street Journal. Which of the following statements about Wilson’s bond is false?a. The bond maturing in year 2000 has
5.11 Use the following February 11, 2000, WSJ quotation for AT&T Corp. Which of the following statements is false?a. The closing price of the bond with the shortest time to maturity was $1,000.b.
• What is the annual dividend of General Motors? TABLE 5.3 Stock Market Reporting of NYSE-Listed Securities 52 Weeks Hi Lo Yld Stock Sym Vol Div 5375 19% % PE 100s Hi Net 2225 Gap Inc Lo 956 GPS
• What is the PE of Gateways? TABLE 5.3 Stock Market Reporting of NYSE-Listed Securities 52 Weeks Hi Lo Yld Stock Sym Vol Div 5375 19% % PE 100s Hi Net 2225 Gap Inc Lo 956 GPS Close .09 .5 Chg 84
• What is the closing price of Gateways? TABLE 5.3 Stock Market Reporting of NYSE-Listed Securities 52 Weeks Hi Lo Yld Stock Sym Vol Div 5375 19% % PE 100s Hi Net 2225 Gap Inc Lo 956 GPS Close .09
1. Suppose it is November 2000 and we are considering a government bond. We see in The Wall Street Journal some 13s of November 2004. This is jargon that means the annual coupon rate is 13 percent.1
4.43 You must decide whether or not to purchase new capital equipment. The cost of the machine is$5,000. It will produce the following cash flows. The appropriate discount rate is 10 percent.Should
4. Danielle Caravello will receive a four-year annuity of $500 per year, beginning at date 6. If the interest rate is 10 percent, what is the present value of her annuity?This situation can be
2. If the stated annual rate of interest, 8 percent, is compounded quarterly, what is the effective annual rate of interest? m m -1
1. Jay Ritter invested $1,000 in the stock of the SDH Company. The company pays a current dividend of $2, which is expected to grow by 20 percent per year for the next two years. What will the
1. Suh-Pyng Ku has put $500 in a savings account at the First National Bank of Kent.The account earns 7 percent, compounded annually. How much will Ms. Ku have at the end of three years?Figure 4.5
3.9 To answer this question, refer to the following figure.The Badvest Corporation is an all-equity firm with BD in cash on hand. It has an investment opportunity at point C, and it plans to invest
3.5 Harry Hernandez has $60,000 this year. He faces the investment opportunities represented by point B in the following figure. He wants to consume $20,000 this year and $67,500 next year. This
3.4 The following figure depicts the financial situation of Ms. J. Fawn. In period 0 her labor income and current consumption is $40; later, in period 1, her labor income and consumption will be $22.
Assume that ¥1 = $0.0077 in New York, $1 = SKr2.00 in London, and SKr1 = ¥65 in Tokyo.(a) If you have ¥10,000 on hand, how could you use a triangle arbitrage to earn a profit?(b) If you ignore
Assume that: (1) a country has a current-account surplus of $10,000; (2) its financial account has a deficit of $15,000; and (3) its other two accounts – the capital account and net errors and
A country has a merchandise trade surplus of $5,000, an income balance of zero, a current transfer surplus of $3,000, and a current-account deficit of $4,000. What is the service trade balance?
Assume that a country has a current-account deficit of $10,000 and a financial-account surplus of $12,000. Assume that the capital account and net errors and omissions are negligible.(a) Does the
27.16 List several short-term external financing options.
27.15 What are the most important considerations in deciding the most appropriate amount of short-term borrowing?
27.13 The sales budget for your company in the coming year is based on a 20-percent quarterly growth rate with the first quarter projection at $100 million. In addition to this basic trend, the
27.11 In an ideal economy, net working capital is always zero. Why might net working capital be greater than zero in the real world?
27.9 What are the costs of shortages? Describe them.
27.8a. Define flexible short-term financing.b. Define restrictive short-term financing.c. When is flexible short-term financing optimal?d. When is restrictive short-term financing optimal?
27.7 Indicate whether the following company actions increase, decrease, or cause no change to the cash cycle and the operating cycle.a. The use of discounts offered by suppliers is decreased.b. More
27.6 Define:a. Operating cycleb. Cash cyclec. Accounts payable period
27.2 Indicate whether the following corporate actions increase, decrease, or cause no change to cash.a. Cash is paid for raw materials purchased for inventory.b. A dividend is paid.c. Merchandise is
27.1 Derive the cash equation from the basic balance sheet equation: assets liabilities equity.
• Describe two types of secured loans.
• What are the two basic forms of short-term financing?
• What could you learn from such an analysis?
• How would you conduct a sensitivity analysis for Fun Toys’ net cash balance?
• What considerations determine the optimal compromise between flexible and restrictive net working capital policies?
• What keeps the real world from being an ideal one where net working capital could always be zero?
• Describe the operating cycle and the cash cycle. What are the differences between them?
• What does it mean to say that a firm has an inventory-turnover ratio of four?
• List the potential sources of cash.
• List the potential uses of cash.
• Will net working capital always increase when cash increases?
• What is the difference between net working capital and cash?
6.1 Fuji Software, Inc., has the following projectsa. Suppose Fuji’s cutoff payback period is two years. Which of these two projects should be chosen?b. Suppose Fuji uses the NPV rule to rank these
6.3 The annual, end-of-year, book-investment accounts for the machine whose purchase your firm is considering are shown below.If your firm purchases this machine, you can expect it to generate, on
6.6 Compute the internal rate of return on projects with the following cash flows. Cash Flows ($) Year Project A Project B 0 -3,000 -6,000 12 2,500 5,000 1,000 2,000
6.7 CPC, Inc., has a project with the following cash flows.a. Compute the internal rate of return on the project.b. Suppose the appropriate discount rate is 8 percent. Should the project be adopted
6.8 Compute the internal rate of return for the cash flows of the following two projects. Cash Flows ($) Time A B 0 -2,000 -1,500 123 2,000 500 8,000 1,000 -8,000 1,500
6.9 Suppose you are offered $5,000 today and obligated to make scheduled payments as follows:a. What is the IRRs of this offer?b. If the appropriate discount rate is 10 percent, should you accept
6.10 As the Chief Financial Officer of the Orient Express, you are offered the following two mutually exclusive projects.a. What are the IRRs of these two projects?b. If you are told only the IRRs of
6.13 Suppose the following two mutually exclusive investment opportunities are available to the DeAngelo Firm. The appropriate discount rate is 10 percent.a. What is the NPV of project alpha and
6.14 The firm for which you work must choose between the following two mutually exclusive projects. The appropriate discount rate for the projects is 10 percent.The firm chose to undertake A. At a
6.15 The treasurer of Davids, Inc., has projected the cash flows of projects A, B, and C as follows. Suppose the relevant discount rate is 12 percent a year.a. Compute the profitability indices for
6.18 Consider the following cash flows of two mutually exclusive projects for Chinese Daily News.a. Based on the payback period rule, which project should be chosen?b. Suppose there is no corporate
6.19 Consider the following cash flows on two mutually exclusive projects that require an annual return of 15 percent. Working in the financial planning department for the Bahamas Recreation Corp.,
1. Stanley Jaffe and Sherry Lansing have just purchased the rights to Corporate Finance:The Motion Picture. They will produce this major motion picture on either a small budget or a big budget. The
26.4 The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future. Its financial statements for the current year are presented below.The current financial policy
2.Shields Electric forecasts the following nominal cash flows on a particular project:The nominal interest rate is 14 percent, and the inflation rate is forecast to be 5 percent.What is the value of
26.7 Your firm recently hired a new MBA. She insists that your firm is incorrectly computing its sustainable growth rate. Your firm computes the sustainable growth rate using the following formula:P
7.3 The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. (Cash flows are in $ thousands and the corporate tax rate is 34
7.5 Benson Enterprises, Inc., is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $225,000. The company could continue to rent the
7.13 Consider the following cash flows on two mutually exclusive projects.Cash flows of project A are expressed in real terms while those of project B are expressed in nominal terms. The appropriate
7.16 Harry Gultekin, a small restaurant owner/manager, is contemplating the purchase of a larger restaurant from its owner who is retiring. Gultekin would finance the purchase by selling his existing
7.17 The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of their proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable
7.18 Sony International has an investment opportunity to produce a new stereo color TV. The required investment on January 1 of this year is $32 million. The firm will depreciate the investment to
7.23 A machine that lasts four years has the following net cash outflows. $12,000 is the cost of purchasing the machine, and $6,000 is the annual year-end operating cost. At the end of four years,
7.27 Office Automation, Inc., is obliged to choose between two copiers, XX40 or RH45. XX40 costs less than RH45, but its economic life is shorter. The costs and maintenance expenses of these two
7.29 Pilot Plus Pens is considering when to replace its old machine. The replacement costs $3 million now and requires maintenance costs of $500,000 at the end of each year during the economic life
7.34 Philben Pharmaceutics must decide when to replace its autoclave. Philben’s current autoclave will require increasing amounts of maintenance each year. The resale value of the equipment falls
26.1 After examining patterns from recent years, management found the following regressionestimated relationships between some company balance sheets and income statement accounts and sales CA = 0.5
1. You own a 5% bond maturing in two years and priced at 87%. Suppose that there is a 10% chance that at maturity the bond will default and you will receive only 40% of the promised payment. What is
3. The difference between the value of a government bond and a simple corporate bond is equal to the value of an option. What is this option and what is its exercise price?
4. The following table shows some financial data for two companies:A B Total assets $1,552.1 $1,565.7 EBITDA 60 70 Net income interest 80 24 Total liabilities 814.0 1,537.1 Use the formula shown in
7. You have an A-rated bond. Is a rise in rating more likely than a fall? Would your answer be the same if the bond were B-rated?
8. Why is it more difficult to estimate the value at risk for a portfolio of loans rather than for a single loan?INTERMEDIATE
10. Company X has borrowed $150 maturing this year and $50 maturing in 10 years. Company Y has borrowed $200 maturing in five years. In both cases asset value is $140. Sketch a scenario in which X
13. How much would it cost you to insure the bonds of Backwoods Chemical against default?(See Section 23-1 .)
14. Look back to the first Backwoods Chemical example at the start of Section 23-1 . Suppose that the firm’s book balance sheet is:Backwoods Chemical Company (Book Values)Net working capital $ 400
15. Use the Black–Scholes model and redraw Figures 23.5 and 23.6 assuming that the standard deviation of the return on the firm’s assets is 40% a year. Do the calculations for 60%leverage only. (
1. Select three industrial companies that have been experiencing difficult times.a. For each of them draw a figure similar to Figure 23.8 . Are the companies’ troubles reflected in their financial
2. Log in to the Moody’s KMV Web site at www.moodyskmv.com . This site contains a number of case studies showing how the probability of default (termed the expected default frequency or EDF )
9. True or false?a. Convertible bonds are usually senior claims on the firm.b. The higher the conversion ratio, the more valuable the convertible.c. The higher the conversion price, the more valuable
11. Find the terms and conditions of a recent bond issue and compare them with those of the J.C. Penney issue.
19. A puttable bond is a bond that may be repaid before maturity at the investor’s option.Sketch a diagram similar to Figure 24.2 showing the relationship between the value of a straight bond and
20. Alpha Corp. is prohibited from issuing more senior debt unless net tangible assets exceed 200% of senior debt. Currently the company has outstanding $100 million of senior debt and has net
21. Explain carefully why bond indentures may place limitations on the following actions:a. Sale of the company’s assets.b. Payment of dividends to shareholders.c. Issue of additional senior debt.
22. Explain when it makes sense to use project finance rather than a direct debt issue by the parent company.
24. Piglet Pies has issued a zero-coupon 10-year bond that can be converted into 10 Piglet shares. Comparable straight bonds are yielding 8%. Piglet stock is priced at $50 a share.a. Suppose that you
25. Iota Microsystems’ 10% convertible is about to mature. The conversion ratio is 27.a. What is the conversion price?b. The stock price is $47. What is the conversion value?c. Should you convert?
26. In 1996 Marriott International made an issue of unusual bonds called Liquid Yield Option Notes, or LYONS. The bond matures in 2011, has a zero coupon, and was issued at $532.15. It could be
27. Dorlcote Milling has outstanding a $1 million 3% mortgage bond maturing in 10 years.The coupon on any new debt issued by the company is 10%. The finance director, Mr. Tulliver, cannot decide
29. This question illustrates that when there is scope for the firm to vary its risk, lenders may be more prepared to lend if they are offered a piece of the action through the issue of a convertible
7. Lenders to leveraged leases hold nonrecourse debt. What does “nonrecourse” mean? What are the benefits and costs of nonrecourse debt to the equity investors in the lease?INTERMEDIATE
8. Acme has branched out to rentals of office furniture to start-up companies. Consider a$3,000 desk. Desks last for six years and can be depreciated on a five-year MACRS schedule(see Table 6.4).
10. In Problem 8 we assumed identical lease rates for old and new desks.a. How does the initial break-even lease rate change if the expected inflation rate is 5% per year? Assume that the real cost
11. Look at Table 25.1 . How would the initial break-even operating lease rate change if rapid technological change in limo manufacturing reduces the costs of new limos by 5% per year? ( Hint: We
12. Suppose that National Waferonics has before it a proposal for a four-year financial lease.The firm constructs a table like Table 25.2 . The bottom line of its table shows the lease cash
13. Look again at the bus lease described in Table 25.2 .a. What is the value of the lease if Greymare’s marginal tax rate is T c ⫽ .20?b. What would the lease value be if Greymare had to use
14. In Section 25-4 we showed that the lease offered to Greymare Bus Lines had a positive NPV of $820 if Greymare paid no tax and a ⫹ $700 NPV to a lessor paying 35% tax. What is the minimum lease

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