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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

What is the difference between direct paper and dealer paper?Appendix
The Signet Corporation has issued four-month commercial paper with a $6 million face value. The firm netted $5,870,850 on the sale. What effective annual rate is Signet paying for these funds?Appendix
What is the difference between pledging accounts receivable to secure a loan and factoring accounts receivable?Appendix
The Ohio Valley Steel Corporation has borrowed $5 million for one month at a stated annual rate of 9%, using inventory stored in a field warehouse as collateral. The warehouser charges a$5000 fee,
Discuss the three different arrangements under which a firm may use inventory to secure a loan.Appendix
The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $500,000. Interest on the loan will be 10% (APR, annual
Your firm has expected annual sales of $2.0 million, and has been offered a merchant cash advance of $440,000 with a factor rate of 1.25 and a holdback rate of 20%.a. When do you expect the loan will
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $35 per share and LE is trading for $25 per share, implying a premerger value of LE of approximately$4 billion.
Let’s reconsider part (b) of Problem 9. The actual premium that your company will pay for TargetCo will not be 20%, because on the announcement the target price will go up and your price will go
What inherent characteristic of corporations creates the need for a system of checks on manager behavior?Appendix
What are some examples of agency problems?Appendix
What are the advantages and disadvantages of the corporate organizational structure?Appendix
What is the role of the board of directors in corporate governance?Appendix
How does a board become captured by a CEO?Appendix
What role do security analysts play in monitoring?Appendix
How are lenders part of corporate governance?Appendix
What is a whistle-blower?Appendix
What are the advantages and disadvantages of increasing the options granted to CEOs?Appendix
Is it necessarily true that increasing managerial ownership stakes will improve firm performance?Appendix
How can proxy contests be used to overcome a captured board?Appendix
What is a say-on-pay vote?Appendix
What are a board’s options when confronted with dissident shareholders?Appendix
What is an activist hedge fund?Appendix
What is the essential tradeoff faced by government in designing regulation of public firms?Appendix
Many of the provisions of the Sarbanes-Oxley Act of 2002 were aimed at auditors. How does this affect corporate governance?Appendix
The Dodd-Frank Act requires that firms disclose whether employees and directors are permitted to hedge against declines in the firm’s stock price. Why might this matter for corporate
What are the costs and benefits of prohibiting insider trading?Appendix
How do the laws on insider trading differ for merger- versus non-merger-related trading?Appendix
Are the rights of shareholders better protected in the United States or in France?Appendix
How can a controlling family use a pyramidal control structure to benefit itself at the expense of other shareholders?Appendix
You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.25 € and the forward rate
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in the euro area.You are in Etemadi’s corporate finance department and are responsible for deciding whether to undertake
Etemadi Amalgamated, the U.S. manufacturing company in Problem 3, is still considering a new project in the euro area. All information presented in Problem 3 is still accurate, except the spot rate
You work for a U.S. firm, and your boss has asked you to estimate the cost of capital for countries using the euro. You know that S = $1.20 € and F1 = $1.157 €. Suppose the dollar WACC for your
Maryland Light, a U.S. light fixtures manufacturer, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 11%. You are in the corporate treasury department, and you
The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen
Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in the euro area. You are in Manzetti’s corporate finance department and are responsible for deciding
How do GILTI and FDII reduce the incentive for U.S. firms to shift overseas the profits due to intangible assets used to produce foreign goods?Appendix
What is the purpose of the BEAT minimum tax?Appendix
Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free
Assume that in the original Ityesi example in Table 31.1, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping the cost of sales,
Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year.You are trying
Consider the United Studios example in Section 22.2. Suppose United has the rights to produce the first film, but has not yet purchased the sequel rights.a. How much are the sequel rights worth to
Using the information in Problem 2, rework the problem assuming you find out the size of the Everlasting Gobstopper market one year after you make the investment. That is, if you do not make the
Describe the benefits and costs of delaying an investment opportunity.Appendix
Consider again the electric car dealership in Section 22.3. Suppose the current value of a dealership is $5 million because the first-year free cash flow is expected to be $500,000 rather
What decision should you make in Problem 2 if the one-year cost of capital is 15.44% and the profits last forever?Appendix
Repeat Problem 14, but this time assume that all the probabilities are risk-neutral probabilities, which means the cost of capital is always the risk-free rate and risk-free rates are as follows: The
You own a wholesale plumbing supply store. The store currently generates revenues of $1 million per year. Next year, revenues will either decrease by 10% or increase by 5%, with equal probability,
An original silver dollar from the late eighteenth century consists of approximately 24 grams of silver. At a price of $0.19 per gram ($6 per troy ounce), the silver content of the coin is worth
What implicit assumption is made when managers use the equivalent annual benefit method to decide between two projects with different lives that use the same resource?Appendix
Assume that the project in Example 22.5 pays an annual cash flow of $100,000 (instead of$90,000).a. What is the NPV of investing today?b. What is the NPV of waiting and investing tomorrow?c. Verify
Assume that the project in Example 22.5 pays an annual cash flow of $80,000 (instead of $90,000).a. What is the NPV of investing today?b. What is the NPV of waiting and investing tomorrow?c. Verify
What are some of the alternative sources from which private companies can raise equity capital?Appendix
What are the advantages and the disadvantages to a private company of raising money from a corporate investor?Appendix
Starware Software was founded last year to develop software for gaming applications. Initially, the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a
Your robotic automation start-up, Kela Controls, has raised capital as follows:a. How much did Kela raise in each round?b. Assuming no other securities were issued, what fraction of the firm’s
Beru.com recently raised $5 million with a pre-money value of $9 million. They are seeking to raise another $6 million. What is the largest fraction of the firm they can offer and avoid a down
BitBox has raised $10 million in a Series A round with $40 million post-money value and a 1.5x liquidation preference, and $25 million in a Series B round with a $75 million post-money value and a 3x
What are the main advantages and disadvantages of going public?Appendix
Do underwriters face the most risk from a best-efforts IPO, a firm commitment IPO, or an auction IPO? Why?Appendix
Roundtree Software is going public using an auction IPO. The firm has received the following bids:Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will the winning auction
Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your
What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing?Appendix
Margoles Publishing recently completed its IPO. The stock was offered at a price of $14 per share. On the first day of trading, the stock closed at $19 per share. What was the initial return on
Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of
Consider a SPAC with the following terms:■ 100 million units issued at $10 per share.■ Promote equal to 20% of the SPAC ownership.■ 25 million total warrants with an exercise price of $11.50
Consider the same setting as Problem 18, but suppose instead 80% of the shareholders redeem their shares, and no warrants are exercised.a. What is the amount of cash per share contributed by the SPAC
Insight Partners created a SPAC with units priced at $10/share. Each unit consists of 1 share of common stock plus a 3/10 of a warrant with a strike price of $11.50. Insight issued 10 million units
What are the advantages to a company of selling stock in an SEO using a cash offer? What are the advantages of a rights offer?Appendix
Explain some of the differences between a public debt offering and a private debt offering.Appendix
Why do bonds with lower seniority have higher yields than equivalent bonds with higher seniority?Appendix
Explain the difference between a secured corporate bond and an unsecured corporate bond.Appendix
What is the difference between a foreign bond and a Eurobond?Appendix
Describe the kinds of securities the U.S. government uses to finance the federal debt.Appendix
Suppose on January 15, 2022, the U.S. Treasury issued a five-year inflation-indexed note with a coupon of 3%. On the date of issue, the consumer price index (CPI) was 250. By January 15, 2027, the
On January 15, 2030, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 6%. On the date of issue, the CPI was 400. By January 15, 2040, the CPI had decreased to 300.What
Describe what prepayment risk in a GNMA is.Appendix
What is the distinguishing feature of how municipal bonds are taxed?Appendix
Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond issue.Appendix
General Electric has just issued a callable 10-year, 6% coupon bond with annual coupon payments.The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a
Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment
Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature.Appendix
You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?Appendix
Suppose an H1200 supercomputer has a cost of $200,000 and will have a residual market value of $60,000 in five years. The risk-free interest rate is 5% APR with monthly compounding.a. What is the
Suppose the risk-free interest rate is 5% APR with monthly compounding. If a $2 million MRI machine can be leased for seven years for $22,000 per month, what residual value must the lessor recover to
Consider a five-year lease for a $400,000 bottling machine, with a residual market value of$150,000 at the end of the five years. If the risk-free interest rate is 6% APR with monthly compounding,
Sunnyfield Industries will lease a new rock crusher for $30,000 per year for 5 years, paid at the end of each year. These lease terms are consistent with an annual interest rate of 6%. How will the
Your firm is considering leasing a $50,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9% APR with monthly compounding.Classify each
Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the
Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based computing. In total, it will purchase$48 million
Answer the following questions:a. What is the difference between a firm’s cash cycle and its operating cycle?b. How will a firm’s cash cycle be affected if a firm increases its inventory, all
Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash poorly?Appendix
Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will
The Green Connection had sales of $32 million in 2022, and a cost of goods sold of $20 million.A simplified balance sheet for the firm appears below:a. Calculate The Green Connection’s net working
Assume the credit terms offered to your firm by your suppliers are 3/5, Net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.Appendix
Your supplier offers terms of 1/10, Net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45?Appendix
The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide.The owner of the firm is investigating the benefit of employing a billing firm to do her billing and
What are the three steps involved in establishing a credit policy?Appendix
The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?Appendix

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