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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

HighGrowth Company has a stock price of \($50\). The firm will pay a dividend next year of \($2.5\), and its dividend is expected to grow at a rate of 3% per year thereafter. What is your estimate of
Slow ’n Steady, Inc., has a stock price of \($80\), will pay a dividend next year of \($5\), and has expected dividend growth of 4% per year. What is your estimate of Slow ’n Steady’s cost of
CoffeeCarts has a cost of equity of 18%, has an effective cost of debt of 7%, and is financed 60% with equity and 40% with debt. What is this firm’s WACC?
Pfd Company has debt with a yield to maturity of 8%, a cost of equity of 18%, and a cost of preferred stock of 12%. The market values of its debt, preferred stock, and equity are \($12\) million,
RiverRocks’ purchase of Raft Adventures (from Problem 19) will cost \($100\) million, and will generate cash flows that start at \($15\) million in one year and then grow at 4% per year forever.
Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the Internet. You have decided that
Find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources:a. From the company’s Web page www.starbucks.com. (Hint: Search for “investor
In early 2022, Abercrombie & Fitch (ANF) had a book equity of $826 million, a price per share of $39.00, and 50.4 million shares outstanding. At the same time, The Gap (GPS) had a book equity of
At the end of 2021, Apple had cash and short-term investments of $62.64 billion, accounts receivable of $26.28 billion, current assets of $134.84 billion, and current liabilities of $125.48
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. By how much did Mydeco increase its debt from 2019 to 2023?b. What was Mydeco’s EBITDA/Interest coverage ratio
Use the data in Problem 8 to determine the change, from 2018 to 2022, in Ford’sa. book debt-equity ratio.b. market debt-equity ratio.
You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):a. What is the market debt-to-equity ratio of each firm?b. What is the book debt-to-equity
In early 2022, United Airlines (UAL) had a market capitalization of $14.3 billion, debt of $39.4 billion, and cash of $18.4 billion. United also had annual revenues of $24.6 billion. Southwest
For fiscal year 2021, Costco Wholesale Corporation (COST) had a net profit margin of 2.60%, asset turnover of 3.24, and a book equity multiplier of 3.28.a. Use this data to compute Costco’s ROE
For fiscal year 2021, Walmart Inc. (WMT) had total revenues of $572.75 billion, net income of$13.67 billion, total assets of $244.86 billion, and total shareholder’s equity of $83.25 billion.a.
WorldCom reclassified $3.85 billion of operating expenses as capital expenditures. Explain the effect this reclassification would have on WorldCom’s cash flows. (Hint : Consider taxes.)WorldCom’s
The table here shows the no-arbitrage prices of securities A and B that we calculated.a. What are the payoffs of a portfolio of one share of security A and one share of security B?b. What is the
Suppose a risky security pays an expected cash flow of $80 in one year. The risk-free rate is 4%, and the expected return on the market index is 10%.a. If the returns of this security are high when
Consider a portfolio of two securities: one share of Johnson and Johnson ( JNJ ) stock and a bond that pays $100 in one year. Suppose this portfolio is currently trading with a bid price of$211.65
Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales
You are an international shrimp trader. A food producer in the Czech Republic offers to pay you 2 million Czech koruna today in exchange for a year’s supply of frozen shrimp. Your Thai supplier
Suppose the current market price of corn is $3.75 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $1.60 per bushel, at
Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for$63 per share.a.
Suppose the risk-free interest rate is 4%.a. Having $200 today is equivalent to having what amount in one year?b. Having $200 in one year is equivalent to having what amount today?c. Which would you
You have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of ¥114 million in one year with no risk. Suppose the risk-free interest rate
Your firm has a risk-free investment opportunity where it can invest $160,000 today and receive$170,000 in one year. For what level of interest rates is this project attractive?Appendix
You run a construction firm. You have just won a contract to construct a government office building. It will take one year to construct it, requiring an investment of $10 million today and$5 million
Your firm has identified three potential investment projects. The projects and their cash flows are shown here:Suppose all cash flows are certain and the risk-free interest rate is 10%.a. What is the
Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.a. What arbitrage opportunity is
Throughout the 1990s, interest rates in Japan were lower than interest rates in the United States.As a result, many Japanese investors were tempted to borrow in Japan and invest the proceeds in the
An American Depositary Receipt (ADR) is security issued by a U.S. bank and traded on a U.S.stock exchange that represents a specific number of shares of a foreign stock. For example, Nokia
The promised cash flows of three securities are listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first
An Exchange-Traded Fund (ETF) is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of Hewlett-Packard(HPQ), one
Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here:a. What is the no-arbitrage price of a security that pays cash flows
Suppose a security with a risk-free cash flow of $150 in one year trades for $140 today. If there are no arbitrage opportunities, what is the current risk-free interest rate?Appendix
You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs$5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at the
You currently have a four-year-old mortgage outstanding on your house. You make monthly payments of $1500. You have just made a payment. The mortgage has 26 years to go (i.e., it had an original term
Calculate the future value of $2000 ina. Five years at an interest rate of 5% per year.b. Ten years at an interest rate of 5% per year.c. Five years at an interest rate of 10% per year.d. Why is the
What is the present value of $10,000 receiveda. Twelve years from today when the interest rate is 4% per year?b. Twenty years from today when the interest rate is 8% per year?c. Six years from today
Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?Appendix
Consider the following alternatives:i. $100 received in one year ii. $200 received in five years iii. $300 received in ten yearsa. Rank the alternatives from most valuable to least valuable if the
Suppose you invest $1000 in an account paying 8% interest per year.a. What is the balance in the account after three years? How much of this balance corresponds to “interest on interest”?b. What
Your daughter is currently eight years old. You anticipate that she will be going to college in 10 years. You would like to have $100,000 in a savings account to fund her education at that time. If
You are thinking of retiring. Your retirement plan will pay you either $250,000 immediately on retirement or $350,000 five years after the date of your retirement. Which alternative should you choose
Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in
Suppose you receive $100 at the end of each year for the next three years.a. If the interest rate is 8%, what is the present value of these cash flows?b. What is the future value in three years of
You have just received a windfall from an investment you made in a friend’s business. He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at
You have a loan outstanding. It requires making three annual payments at the end of the next three years of $1000 each. Your bank has offered to restructure the loan so that instead of making the
You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 10 years from now.a. What is the NPV
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an
Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $100. However, once built, the machine will
How would your answer to Problem 16 change if the machine takes one year to build?Appendix
The British government has a consol bond outstanding paying £100 per year forever. Assume the current interest rate is 4% per year.a. What is the value of the bond immediately after a payment is
What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per year?Appendix
You are head of the Schwartz Family Endowment for the Arts. You have decided to fund an arts school in the San Francisco Bay area in perpetuity. Every five years, you will give the school$1 million.
You are 25 years old and decide to start saving for your retirement. You plan to save $5000 at the end of each year (so the first deposit will be one year from now), and will make the last deposit
Your grandmother has been putting $1000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 3%. How much money will be in
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1000. Each year after that, on the anniversary of the last payment you will receive a
You are thinking of building a new machine that will save you $1000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2% per year forever. What is
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug’s profits will be $2 million in its first year and that this
Your oldest daughter is about to start kindergarten at a private school. Tuition is $10,000 per year, payable at the beginning of the school year. You expect to keep your daughter in private school
A rich aunt has promised you $5000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 5% larger than the last
You are running a hot Internet company. Analysts predict that its earnings will grow at 30% per year for the next five years. After that, as competition increases, earnings growth is expected to slow
Suppose you currently have $5000 in your savings account, and your bank pays interest at a rate of 0.5% per month. If you make no further deposits or withdrawals, how much will you have in the
Your firm spends $5000 every month on printing and mailing costs, sending statements to customers.If the interest rate is 0.5% per month, what is the present value of eliminating this cost by sending
You have just entered an MBA program and have decided to pay for your living expenses using a credit card that has no minimum monthly payment. You intend to charge $1000 per month on the card for the
Your credit card charges an interest rate of 2% per month. You have a current balance of$1000, and want to pay it off. Suppose you can afford to pay off $100 per month. What will your balance be at
You have decided to buy a perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If you initially put $1000 into the bond, what is the payment every
You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The
You would like to buy the house and take the mortgage described in Problem Appendix
You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon
You have just made an offer on a new home and are seeking a mortgage. You need to borrow$600,000.a. The bank offers a 30-year mortgage with fixed monthly payments and an interest rate of 0.5% per
Suppose you take the 30-year mortgage described in Problem 39, part (a). How much will you still owe on the mortgage after 15 years?Appendix
You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment
You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are Appendix
Today is your 30th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the
You realize that the plan in Problem 42 has a flaw. Because your income will increase over your lifetime, it would be more realistic to save less now and more later. Instead of putting the same
You have just turned 30 years old, have just received your MBA, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as follows: Every
You estimate that to live comfortably in retirement, you will need $100,000 per year starting at the end of the first year of retirement and ending on your 100th birthday. You will contribute the
Problem 45 is not very realistic because most retirement plans do not allow you to specify a fixed amount to contribute every year. Instead, you are required to specify a fixed percentage of your
You have an investment opportunity that requires an initial investment of $5000 today and will pay $6000 in one year. What is the IRR of this opportunity?Appendix
Suppose you invest $2000 today and receive $10,000 in five years.a. What is the IRR of this opportunity?b. Suppose another investment opportunity also requires $2000 up front, but pays an equal
You are shopping for a car and read the following advertisement in the newspaper: “Own a new Spitfire! No money down. Four annual payments of just $10,000.” You have shopped around and know that
You bought some stock a year ago at \($80\) per share and sold it today at \($95\) per share. It pays a \($2\) per share dividend today. What was your realized return?
Repeat Problems 1 and 2 assuming instead that the stock fell $12 to $68.a. Is your capital gain different? Why or why not?b. Is your dividend yield different? Why or why not?
You have just purchased a share of stock for \($35\). The company is expected to pay a dividend of \($1.50\) per share in exactly one year. If you want to earn a 12% return on your investment, what
Use the data in SBUX_GOOG.xlsx on MFL to answer the following questions:a. What is the return for SBUX over the period without including its dividends? With the dividends?b. What is the return for
Ten annual returns are listed in the following table.a. What is the arithmetic average return over the 10-year period?b. What is the geometric average return over the 10-year period?c. If you
Using the data in the following table, calculate the return for investing in this stock from January 1 to December 31.Prices are after the dividend has been paid (see MyFinanceLab for the data in
What was your dividend yield from investing in the stock in Problem 11? What was your capital gain?
Explain the difference between the arithmetic average return you calculated in Problem 13a and the geometric average return you calculated in Problem 13b. Are both numbers useful? If so, explain why.
Calculate the 95% prediction intervals for the four different investments included in Figures 11.3 and 11.4.
If returns of S&P 500 stocks are normally distributed, what range of returns would you expect to see 95% of the time? Base your answer on Figures 11.3 and 11.4.
You observe a portfolio for ten years and determine that its average return is 15% and the standard deviation of its returns is 25%. Can you be 95% confident that this portfolio will not lose more
Using the data in Critical Thinking Question 6, calculate the following:a. The expected overall payoff of each bankb. The standard deviation of the overall payoff of each bank
You are considering investing in one of two economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together—in good times
Today is July 31, 2013, and you have just started your new job with a financial planning firm. In addition to studying for all your license exams, you have been asked to review a portion of a
What is the security market line?
What is the most important difference between a corporation and all other organizational forms?Appendix
What does the phrase limited liability mean in a corporate context?Appendix

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