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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

Suppose that you are currently 28 years old and expect to earn a constant real salary of $70,000 starting next year. You are planning to work for 32 years and then retire. You currently have $0 in
Suppose that you are currently 32 years old and expect to earn a constant real salary of $85,000 starting next year. You are planning to work for 25 years and then retire. You currently have $10,000
At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard deviation of daily returns is 74.73%, the yield on a six-month U.S. Treasury Bill was 0.12%, the
Same as before, except we will use an eight-period model to evaluate it. At the close of trading on October 11, 2013, the stock price of Facebook (FB)was $49.11, the standard deviation of daily
Same as before, except we will use the risk neutral method to evaluate it. At the close of trading on October 11, 2013, the stock price of Facebook (FB)was $49.11, the standard deviation of daily
At the close of trading on October 11, 2013, the stock price of Facebook was $49.11, the standard deviation of daily returns is 74.73%, and the option time to maturity was 0.4472 years. Show what
Same as before, except we will value American options where the underlying stock pays dividends. At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard
Same as before, except we will use a fifty-period model to evaluate it in order to increase accuracy. At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the
Download three months of daily stock price for any stock that has listed options on it. What is the annual standard deviation of your stock based on continuous returns?
Lookup the current stock price of your stock, use the standard deviation of daily returns you computed, lookup the yield on a six-month U.S. Treasury Bill, lookup the exercise price of a call on your
For the same inputs as problem 2, determine the replicating portfolio and the price of the call and put using an eight-period, replicating portfolio model.
For the same inputs as problem 3, determine the price of the call and put using an eight-period, risk neutral model.
For the same inputs as problem 4 determine the price of the call and put using the average of N and N-1 method to evaluate them.
For the same inputs as problem 4, show what happens to the stock price at maturity distribution of the binomial stock price tree as the number of periods increases. Show what happens to the
Use the same inputs as problem 4. Further, forecast the dividends that you stock pays or make an assumption about the dividends that your stock pays.What is the price of an American call and an
For the same inputs as problem 7, determine the price of an American call and an American put using a fifty-period, risk neutral model of American options with discrete dividends?
Extend the Binomial Option Pricing – Full-Scale Estimation model to determine how fast the binomial option price converges to the price in the Black-Scholes Option Pricing – Basics model. Reduce
Extend the Binomial Option Pricing – Full-Scale Estimation model to determine how fast the binomial option price with averaging of adjacent odd and even numbers of periods converges to the price in
The static project value, defined as the net present value of future project cash flows ignoring any real options, is $146 million right now. The standard deviation of static project value is 63.0%,
Same as before, except that the project has the option to expand. The static project value now is $146 million, the standard deviation of static project value is 63.0%, the riskfree rate is 0.00%,
Same as before, except that the project has the option to contract. The static project value now is $146 million, the standard deviation of static project value is 63.0%, the riskfree rate is 0.00%,
Same as before, except that the project has the option to choose among all three alternatives: (1) abandonment, (2) expansion, or (3) contraction.The static project value now is $146 million, the
A project requires two sequential investments, each of which takes time to implement, before the project cash flows are generated. This is a compound option, because it is an option to make the phase
Option to Abandon. The static project value, defined as the net present value of future project cash flows ignoring any real options, is $283 million right now. The standard deviation of static
Option to Expand. The static project value now is $320 million, the standard deviation of static project value is 62.0%, the riskfree rate is 0.00%, the project can be expanded by 50% at any time for
Option to Contract. The static project value now is $479 million, the standard deviation of static project value is 85.0%, the riskfree rate is 0.00%, the project can be contracted by 39% at any time
Option to Choose. The project has the option to choose among three alternatives: (1) abandonment, (2) expansion, or (3) contraction. The static project value now is $318 million, the standard
Compound Option. A project requires two sequential investments, each of which takes time to implement, before the project cash flows are generated.This is a compound option, because it is an option
At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard deviation of daily returns is 74.73%, the yield on a six-month U.S. Treasury Bill was 0.12%, the
Suppose that Facebook paid dividends in tiny amounts on a continuous basis throughout the year at a 1.0% / year rate. What would be the new price of the call and put?
Download three months of daily stock prices for any stock that has listed options on it and compute the standard deviation of daily returns. Lookup the current stock price of your stock, use the
Use the same inputs as problem 1. Forecast the continuous dividend that your stock pays or make an assumption about the continuous dividend that your stock pays. Determine the price of the call and
Perform instant experiments on whether changing various inputs causes an increase or decrease in the Call Price and in the Put Price and by how much.(a.) What happens when the standard deviation is
The Value of the Firm (V) is $340 million, the Face Value of the Debt(B) is $160 million, the time to maturity of the debt (t) is 2.00 years, the riskfree rate ( RF k ) is 5.0%, and the standard
What impact does the firm's risk have upon the firm's Debt and Equity valuation? Specifically, if you increased Firm Asset Standard Deviation, then what would happen to the firm’s Equity Value and
The Value of the Firm (V) is $780 million, the Face Value of the Debt (B) is$410 million, the time to maturity of the debt (t) is 1.37 years, the riskfree rate ( RF k ) is 3.2%, and the standard
Determine what impact an increase in the Firm Asset Standard Deviation has on the firm’s Equity Value and Risky Debt Value.
Task. How to Freeze column titles at the top of the columns and/or freeze row titles on the left side of the rows. This is especially useful for large spreadsheets.
Task. How to Add a spin button to make an input interactive.
Task. How to Add option buttons to allow input choices
Task. How to Add a scroll bar call option to make big or small changes to an input.
Task. How to Install Solver or the Analysis Tool Pak.
Task. How to Create a two-dimensional Scatter Chart.
Task. How to Create a three-dimensional Surface Chart.
A single cash flow of $1,000.00 will be received in 5 periods. For this cash flow, the appropriate discount rate / period is 6.0%. What is the present value of this single cash flow?
A single cash flow of $747.26 is available now (in period 0). For this cash flow, the appropriate discount rate / period is 6.0%. What is the period 5 future value of this single cash flow?
A single cash flow of $1,723.48 will be received in 6 periods. For this cash flow, the appropriate discount rate / period is 6.8%. What is the present value of this single cash flow?
A single cash flow of $1,032.47 is available now (in period 0). For this cash flow, the appropriate discount rate / period is 2.9%. What is the period 5 future value of this single cash flow?
Examine several recent mergers and suggest the principal motives for merging in each case.
In Section 30-5, we described a three-month bill that was issued on an annually compounded yield of 5%. Suppose that one month has passed and the investment still offers the same annually compounded
The websites of the major commodities exchanges provide futures prices. Calculate the annualized net convenience yield for a commodity of your choice. (Note: You may need to use the futures price of
Go to finance.yahoo.com and select three industrial companies that have been experiencing difficult times.a. Are the companies’ troubles reflected in their financial ratios? (You may find it
Look at the stocks listed in Table 7.3. Pick at least three stocks, and find call option prices for each of them on finance.yahoo.com. Now find monthly adjusted prices and calculate the standard
Look at actual trading prices of call options on stocks to check whether they behave as the theory presented in this chapter predicts. For example,a. Follow several options as they approach maturity.
Take another look at the APV calculation for the perpetual crusher project in Section 19-4. This time assume that the corporation investing in the project has hit the 30% constraint on interest
1. Look up Johnson & Johnson on Yahoo! Finance.a. Recalculate book- and market-value balance sheets using the most recent available financial information. Use the same format as for Table 18.4.b.
Select three or four companies from the Yahoo! Finance database. Estimate how much more these companies could borrow before they would exhaust taxable profits.You can download data for the following
The website www.federalreserve.gov/releases/z1/current/default.htm provides data on sources of funds and an aggregate balance sheet for nonfarm nonfinancial corporations. Look at Table F.102 for the
Look at the companies listed in Table 8.2. Calculate monthly rates of return for two successive five-year periods. Calculate betas for each subperiod using the Excel SLOPE function. How stable was
Find a low-risk stock—Walmart or Kellogg would be a good candidate. Use monthly returns for the most recent three years to confirm that the beta is less than 1.0. Now estimate the annual standard
Download to a spreadsheet the last five years of monthly adjusted stock prices for each of the companies in Table 7.5 and for the Standard & Poor’s Composite Index (S&P 500).a. Calculate the
Download to a spreadsheet the last three years of monthly adjusted stock prices for Coca- Cola (KO), Citigroup (C), and Pfizer (PFE).a. Calculate the monthly returns.b. Calculate the monthly standard
Bond transactions are reported on FINRA’s TRACE service, which was the source of the data for Table 3.7. Use the Advanced Search facility in TRACE to find bond prices for Johnson & Johnson (JNJ),
You have just turned 22 years old, received your bachelor’s degree, and accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as follows:
You have been accepted into college. The college guarantees that your tuition will not increase for the four years you attend. The first $10,000 tuition payment is due in six months. After that, the
You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly I8V2
You have just purchased a car and taken out a $50,000 loan. The loan has a five-year term with monthly payments and an APR of 6%.a. How much will you pay in interest, and how much will you pay in
Consider again the setting of Problem 21.Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can
You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in India and is expecting a 400 million rupee cash inflow in one year. (The currency of India is the rupee). The
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are employed in Etemadi’s corporate finance department and are responsible for deciding whether to
Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. Tax law in the Unites States requires U.S. corporations to pay taxes on their foreign
Parnassus Corporation plans to invest $150 million in a new generator that will produce free cash flows of $20 million per year in perpetuity. The firm is all equity financed, with an equity cost of
Cisoft is a highly profitable technology firm that currently has $5 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these
Schwartz Industry is an industrial company with 100 million shares outstanding and a market capitalization (equity value) of $4 billion. It has $2 billion of debt outstanding. Management have decided
Zetatron is an all-equity firm with 100 million shares outstanding, which are currently trading for $7.50 per share. A month ago, Zetatron announced it will change its capital structure by borrowing
Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3).Suppose she funds the project by borrowing $750 rather than $500.a. According to MM Proposition I, what is
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.a. Suppose
Global Pistons (GP) has common stock with a market value of $200 million and debt with a value of $100 million. Investors expect a 15% return on the stock and a 6% return on the debt.Assume perfect
Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one
Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below.
Your firm needs to raise $100 million in funds. You can borrow short term at a spread of 1%over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year
Xia Corporation is a company whose sole assets are $100,000 in cash and three projects that it will undertake. The projects are risk-free and have the following cash flows:Xia plans to invest any
Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this
Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store
Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit,
Your friend tells you he has a very simple trick for shortening the time it takes to repay your mortgage by one-third: Use your holiday bonus to make an extra payment on January 1 of each year (that
You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm’s manufacturing facility.
Which of the following companies are likely to have high short-term financing needs? Why?a. A clothing retailerb. A professional sports teamc. An electric utilityd. A company that operates toll
Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment.The following table contains financial forecasts as well as current (month 0) working capital levels.
What is the difference between permanent working capital and temporary working capital?Appendix
Quarterly working capital levels for your firm for the next year are included in the following table. What are the permanent working capital needs of your company? What are the temporary
Why might a company choose to finance permanent working capital with short-term debt?Appendix
Consider two loans with a 1-year maturity and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement.Which loan would
What is the difference between evergreen credit and a revolving line of credit?Appendix
Which of the following one-year $1000 bank loans offers the lowest effective annual rate?a. A loan with an APR of 6%, compounded monthlyb. A loan with an APR of 6%, compounded annually, that also has
The Spendit Corporation borrowed $10,000 from Bank Ease. According to the terms of the loan, Spendit must pay the bank $400 in interest every three months for the three-year life of the loan, with
The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for
Magna Corporation has an issue of commercial paper with a face value of $1,000,000 and a maturity of six months. Magna received net proceeds of $973,710 when it sold the paper. What is the effective

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