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principles corporate finance

Questions and Answers of Principles Corporate Finance

How would your answer to Problem 12 change if you endow it now, but it makes the first award to a student 10 years from today?
You figure that the total cost of college will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of four years of college
Assume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will be paid 45 years from now). If your discount rate is 7%, compounded
You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first investment made one year from now. You think you can earn 10% per year on your
You are thinking about buying a savings bond. The bond costs $100 today and will mature in 10 years with a value of $200. What annual interest rate will the bond earn?
You have an investment account that started with $2,000 ten years ago and which now has grown to $10,000.a. What annual rate of return have you earned (you have made no additional contributions to
You have an investment opportunity that requires an initial investment of $15,000 today and will pay $20,000 in one year. What is the rate of return of this opportunity?
You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an interest rate of 8%. If the bond initially costs $500, what is the payment every year?
You are thinking of purchasing a house. The house costs $3,500,000. You have $500,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price.
You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65.Today is your 22nd birthday, and you decide, starting today and continuing on
You receive a $10,000 check from your grandparents for graduation. You decide to save it toward a down payment on a house. You invest it earning 10% per year and you think you will need to have
A local bank is running the following advertisement: “For just $1000 we will pay you $100 forever!” The fine print says that for a $1000 deposit, the bank will pay $100 every year in perpetuity,
You are thinking of making an investment in a new factory. The factory will generate revenues of $1 million per year for as long as you maintain it. You expect that the maintenance costs will start
What is the difference between annual percentage rate and effective annual rate?
Can the nominal interest rate available to an investor be negative? (Hint Consider the interest rate earned from saving cash “under the mattress.”) Can the real interest rate be negative?
How do interest rates represent the opportunity cost of using money now?
You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $50,000 every six years, starting six years from now. What is the present value
Suppose the interest rate is 12% APR with monthly compounding. What is the present value of an annuity that pays $500 every four months for ten years?
You make monthly payments on your car loan. It has a quoted APR of 8% (quarterly compounding). What percentage of the outstanding principal do you pay in interest each month?
Suppose Capital One is advertising a 20-month, 6% APR motorcycle loan. If you need to borrow $12,000 to purchase your dream Harley-Davidson, what will your monthly payment be?
You have just taken out a $28,000 car loan with a 12% APR, compounded monthly. The loan is for eight years. When you make your first payment in one month, how much of the payment will go toward the
In 2010, interest rates were 6.85% and the rate of inflation was 15.3% in the Virgin Islands. What was the real interest rate in 2010? How would the purchasing power of your savings have changed over
If the rate of inflation is 8%, what nominal interest rate is necessary for you to earn a 2% real interest rate on your investment?
Assume the inflation rate is 5% APR, compounded annually. Would you rather earn a nominal return of 8% APR, compounded semiannually, or a real return of 4% APR, compounded quarterly?
You are pleased to see that you have been given a 7% raise this year. However, you read on the Wall Street Journal Web site that inflation over the past year has been 3%. How much better off are you
Which has greater interest rate risk, a 20-year U.S. Treasury bond or a 20-year BB corporate bond?
Explain the relationship between interest rates and bond prices.
What is the risk-free interest rate for a five-year maturity?The current zero-coupon yield curve for risk-free bonds is as follows: Maturity (years) YTM 3 4 5 8.23% 8.50% 8.67% 8.95% 9.05%
In the Global Financial Crisis box in Section 6.2, Bloomberg.com reported that the three-month Treasury bill sold for $100.002556 per $100 face value. What is the yield to maturity of this bond,
Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for $1034.74.a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?b. If
Suppose a seven-year, $1,000 bond with annual coupons has a price of $930 and a yield to maturity of 8%. What is the bond’s coupon rate?
Suppose a five-year, $1,000 bond with a 10% coupon rate and semiannual coupons is trading with a yield to maturity of 8.5%.a. Is this bond currently trading at a discount, at par, or at a premium?
What was the price of this bond when it was issued?Suppose that General Motors Acceptance Corporation issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 7%
Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?Suppose that General Motors Acceptance Corporation issued a bond
Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?Suppose that General Motors Acceptance Corporation issued a bond
Your company currently has $1000 par, 6% coupon bonds with 10 years to maturity and a price of $1078. If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set? Assume
Suppose you purchase a 10-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when
What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?Consider the following bonds. Bond Coupon Rate (annual payments) Maturity (years) A 0% B 0% C 4% D
Which of the bonds A-D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuition explanation for your answer.Consider the following
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%.You hold the bond for five years before selling it.a. If the bond’s yield to maturity is 6% when you sell it, what is
HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments).
A BBB-rated corporate bond has a yield to maturity of 8.5%. A U.S. Treasury security has a yield to maturity of 6.8%. These yields are quoted as APRs with semiannual compounding. Both bonds pay
Why does the stock value depend on its dividends?
Is it true that according to the constant dividend growth model the growth rates in dividends and in the stock price are the same?
What is a limited company? How does it differ from a limited partnership?
What Is the goal of the firm?
What are the main differences between the NYSE and NASDAQ?
You are a shareholder in a corporation. The corporation earns $5.00 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend. The dividend Is
Rework Example 1.1, assuming the corporation in that example has elected subchapter S tax treatment and your tax rate on non-dividend income is 30%.
Explain the difference between an S and a C corporation in the United States.
What is the difference between a public and a private company?
The following quote on Yahoo! stock appeared on July 10, 2013, on Yahoo! Finance:If you wanted to buy Yahoo!, what price would you pay per share? How much would you receive per share if you wanted to
What are the main financial statements that all public companies must produce?
What is dilution?
What does a high debt-to-equity ratio tell you?
Tequila Crisis (B) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s current account over the period 1992–1996.Break down your analysis among
Tequila Crisis (C) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s capital account over the period 1992–1996. How can you reconcile your findings
Tequila Crisis (D) (web exercise). Log in to IMF International Financial Statistics to present and analyze Mexico’s official reserve account over the period 1992–1996. What can you infer about
What is the carry trade?
Why is hedging value-creating?
What are market-based forecasts?
Sarbanes-Oxley What is the motivation behind the legislation? What does its implementation mean to publicly held corporations?
Initial public offerings Discuss the paperwork that is involved in an IPO. What is included in each and what purpose does it serve?
Goal of the firm Name at least four other potential goals of the firm and discuss what those goals lack in relation to the true goal.
Director voting What is the primary difference between cumulative and straight voting? How does this affect minority shareholder participation?
Capital budgeting, capital structure, and working capital management Suppose you are the CFO for a pencil-making firm that is in need of a new machine. Discuss the basic steps that you must go
Corporations Name at least two advantages associated with a corporation.What are the primary disadvantages?
Sole proprietorships and partnerships What are the primary disadvantages to both the sole proprietorship and partnership forms of business organizations?What are potential benefits?
Agency problems Bob Thomas is the manager of MLP, Inc., a publicly traded firm. Last year, he chose to forego a valuable project so he could give himself a larger bonus. What did Bob create? How do
Agency problems Publicly traded companies are likely to have many different owners. Private companies, however, have relatively few owners. Does this mean that agency problems do not exist for
Primary markets What is the difference between primary and secondary markets? Give an example of each.
Initial public offerings What are the primary “ingredients” in the IPO process?Describe each in detail.
Venture capital and underwriters Describe two financial intermediaries that often help the issuing firms in the going-public process. What roles do each play?
Initial public offerings Johnny Quickset sits three seats across from you in finance class. After class he approached you and asked the following question:“How do underwriters make money?” How do
Lockup agreement Scotty Blow’s lamp store went public on July 14, 2010.Three weeks later, Scotty sold 47 % of his shares for a profit of $2 million. Why is this a bad thing? Discuss the mechanism
Goal of the firm What is the only appropriate goal of the firm? Why?
Goal of the firm and agency problems Suppose the CEO of a Fortune 500 firm superficially inflates year-end earnings reports to increase his bonus.What is this an example of? How does this influence
Proxy voting Discuss how proxy voting affects shareholder influence over the ownership structure. What potential benefits of proxy voting come to mind?Can you think of any potential disadvantages?
Capital budgeting How important is capital budgeting in corporate finance?What types of issues have to be addressed in capital budgeting?
Capital structure How important is capital structure in corporate finance?What types of issues have to be addressed in capital structure?
Capital structure Suppose you are the CFO of a company that just built a $40 million dollar plant. What are your options for paying for this plant?
Capital structure and capital budgeting Your friend is having trouble grasping the concepts of capital structure and capital budgeting, so you decide to explain it to her in terms of her personal
Working capital management How does working capital management fit into the equation? What types of things need to be considered in working capital management?
Income statement Fill in the blanks in the following income statements. Income statement for the year ending Dec. 31, 2012 Sales Cost of goods sold Depreciation EBIT Interest Taxable income Taxes
Finance versus accounting You have a friend that is a rising junior in college and is in the process of making a tough decision. She has narrowed her choice for major to either accounting or finance
Net income During 2012, Patrick’s Dog Salon, Inc., had total sales of $430,000 and costs were 59 % of sales. They also had interest expense of $5,300 and depreciation of $3,400. What is the
Income statement Discuss the form and function of the typical income statement.Why is it important for a firm?
Retained earnings In the preceding problem, if Patrick pays out $15,000 in dividends, what is the addition to retained earnings?
Dividends versus retained earnings Hank from the board of directors has issued a proposal that the firm start paying 98 % of their profits in dividends.“There’s no better way to keep shareholders
EPS and DPS Using the two problems above, suppose Patrick has 34,000 shares outstanding. What is the earnings per share (EPS)? What is the dividend paid per share?
Corporate taxes Julie is getting ready to file both her personal and corporate tax returns. She is confused because the tax rates seem to work differently.Explain to Julie what is going on with
Income statement Last year, Billy’s Boat Barn had net income of $1,285,000 and paid out dividends of $482,000. This year, Billy plans to implement a new project that will increase income by 15 %.
Corporate tax rates Company XYZ is proposing a new multimillion dollar project that is expected to generate revenues for the next 10 years. They are using the average tax rate from last year in their
Market versus book values Your company has a large machine that originally cost $100,000. They just sold it for $20,000 and actually got a tax reward for doing so. How could they have received a tax
Taxes Iam’s Security, LLC, generated taxable income of $483,000 last year.What is her tax bill? What is her average tax rate? What is her marginal tax rate?
Balance sheet Discuss the form and function of the balance sheet. Why is it important for a firm?
Depreciation Benefield’s Matchmaking Company just bought a new computer network designed to match customer compatibilities electronically. The machine cost $87,000 and is classified as a 5-year
Using accounting statements Your neighbor across the office just made the statement, “I don’t understand how accounting statements help in finance at all.Accounting tells us what has happened and
Market and book values In the preceding problem, suppose Benefield sold the machine for $18,000 at the end of the fifth year. What are the tax ramifications?Is it a tax bill or tax savings?
Peer analysis How do you determine if values on accounting statements are“good” or “bad.” Discuss the difficulties of doing so, along with potential solutions to those difficulties.

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