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business
principles corporate finance

Questions and Answers of Principles Corporate Finance

Consider the following two stocks:Assume the CAPM holds. Based upon the CAPM, what is the return on the market? What is the risk-free rate? Beta Expected Return Murck Pharmaceutical 1.4 25% Pizer
A stock has a beta of 1.8. A security analyst who specializes in studying this stock expects its return to be 18 percent. Suppose the risk-free rate is 5 percent and the market risk premium is 8
Suppose the expected return on the market is 13.8 percent and the risk-free rate is 6.4 percent. Solomon Inc. stock has a beta of 1.2.a. What is the expected return on the Solomon stock?b. If the
Suppose the risk-free rate is 6.3 percent and the market portfolio has an expected rate of return of percent. The market portfolio has a variance of 0.0121. Portfolio Z has a correlation coefficient
The following data have been developed for the Durham Company.Suppose the market risk premium is 9.4 percent and the expected return on Treasury bills is 4.9 percent.a. Write the equation of the
Suppose you have invested \($30,000\) in the following four stocks..The risk-free rate is 4 percent and the expected return on the market portfolio is 15 percent.Based on the CAPM, what is the
Last year, you bought 500 shares of Twedt El Dee stock at \($37\) per share. You have received total dividends of \($1,000\) during the year. Currently, Twedt El Dee stock sells for \($38\).a. How
Mr. Alexander Bell invested \($10,400\) in 200 shares of First Industries stock a year ago and has received total dividends of \($600\) during the period. He sold the stock today at \($54.25\).a.
Suppose a stock had an initial price of \($42\) per share. During the year, the stock paid a dividend of \($2.40\) per share. At the end of the year, the price is \($31\) per share. What is the
Lydian Stock currently sells for \($52\) per share. You intend to buy the stock today and hold it for two years. During those two years, you expect to receive dividends at the year-ends that total
Use the information from Ibbotson and Sinquefield provided in the text to compute the nominal and real annual returns from 1926 to 1997 for each of the following items.a. Common stockb. Long-term
Suppose the current interest rate on U.S. Treasury bills is 6.2 percent. Ibbotson andSinquefield found the average return on Treasury bills from 1926 through 1997 to be 3.8percent. The average return
Sony Electronics, Inc., has developed a new type of VCR. If the firm directly goes to the market with the product, there is only a 50 percent chance of success. On the other hand, if the firm
The marketing manager for a growing consumer products firm is considering launching a new product. To determine consumers’ interest in such a product, the manager can conduct a focus group that
Tandem Bicycles is noticing a decline in sales due to the increase of lower-priced import products from the Far East. The CFO is considering a number of strategies to maintain its market share. The
Samuelson Inc. has invested in a facility to produce calculators. The price of the machine is \($600,000\) and its economic life is five years. The machine is fully depreciated by the straight-line
What is the minimum number of units that a distributor of big-screen TVs must sell in a given period to break even? Sales price Variable costs $1,500 $1,100 Fixed costs $120,000 Depreciation $20,000
Kids & Toys Inc. has purchased a \($200,000\) machine to produce toy cars. The machine will be fully depreciated by the straight-line method for its economic life of five years and will be worthless
The Cornchopper Company is considering the purchase of a new harvester. The company is currently involved in deliberations with the manufacturer and the parties have not come to settlement regarding
Ms. Thompson, as the CFO of a clock maker, is considering an investment of a \($420,000\) machine that has a seven-year life and no salvage value. The machine is depreciated by a straight-line method
You are the financial analyst for a manufacturer of tennis rackets that has identified a graphite-like material that it is considering using in its rackets. Given the following information about the
What would happen to the analysis done above if your competitor introduces a graphite composite that is even lighter than your product? What factors would this likely affect? Do an NPV analysis
Allied Products is thinking about a new product launch. The vice president of marketing suggests that Allied Products can sell 2 million units per year at \($100\) net cash flow per unit for the next
According to the February 7, 1983, issue of The Sporting News, the Kansas City Royals’designated hitter, Hal McRae, signed a three-year contract in January 1983 with the following provisions:•
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
Samsung International has rice fields in California that are expected to produce average annual profits of \($800,000\) in real terms forever. Samsung has no depreciable assets and is an all-equity
Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be \($400,000\) and its economic life five years. The machine will be
Scott Investors, Inc., is considering the purchase of a \($500,000\) computer that has an economic life of five years. The computer will be depreciated based on the system enacted by the Tax Reform
The Gap is considering buying an on-line cash register software from IBM so that it can effectively deal with its retail sales. The software package costs \($750,000\) and will be depreciated down to
Etonic Inc. is considering an investment of \($250,000\) in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses will be \($200,000\)
Commercial Real Estate, Inc., is considering the purchase of a \($4\) million building to lease.The economic life of the building will be 20 years. Assume that the building will be fully depreciated
Royal Dutch Petroleum is considering going into a new project, which is typical for the firm. A capital tool required for the project costs \($2\) million. The marketing department predicts that
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for \($120,000.\) The facility is to be depreciated on a seven-year basis. It is expected to have no value
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
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
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
Sparkling Water, Inc., sells 2 million bottles of drinking water each year. Each bottle sells at \($2.5\) in real terms and costs per bottle are \($0.7\) in real terms. Sales income and costs occur
International Buckeyes is building a factory that can make 1 million buckeyes a year for five years. The factory costs \($6\) million. In year 1, each buckeye will sell for \($3.15\) in nominal
Majestic Mining Company (MMC) is negotiating for the purchase of a new piece of equipment for their current operations. MMC wants to know the maximum price that it should be willing to pay for the
A machine costs \($60,000\) and requires \($5,000\) maintenance for each year of its three-year life. After three years, this machine will be replaced. Assume a tax rate of 34 percent and a discount
United Healthcare, Inc. needs a new admitting system, which costs \($60,000\) and requires \($2,000\) in maintenance for each year of its five-year life. The system will be depreciated straight-line
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 copiers
Fiber Glasses must choose between two kinds of facilities. Facility I costs \($2.1\) million and its economic life is seven years. The maintenance costs for facility I are \($60,000\) per
BYO University is faced with the decision of which word processor to purchase for its typing pool. It can buy 10 Bang word processors which cost \($8,000\) each and have estimated annual, year-end
Station WJXT is considering the replacement of its old, fully depreciated sound mixer.Two new models are available. Mixer X has a cost of \($400,000,\) a five-year expected life, and after-tax cash
Kaul Construction must choose between two pieces of equipment. Tamper A costs\($600,000\) and it will last five years. This tamper will require \($110,000\) of maintenance each year. Tamper B costs
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 every
A firm considers an investment of \($28,000,000\) (purchase price) in new equipment to replace old equipment that has a book value of \($12,000,000\) (market value of\($20,000,000).\) If the firm
Fuji Software, Inc., has the following projects.a. 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
Suppose Peach Paving Company invests \($1\) million today on a new construction project.The project will generate annual cash flows of \($150,000\) in perpetuity. The appropriate annual discount rate
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
Western Printing Co. has an opportunity to purchase a \($2\) million new printing machine. It has an economic life of five years and will be worthless after that time. This new investment is expected
Nokia Group has invested \($8,000\) in a high-tech project. This cost is depreciated on an accelerated basis that yields \($4,000,\) \($2,500,\) \($1,500\) of depreciation, respectively, during its
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 1 2,500 5,000 2 1,000 2,000
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 by
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 the
Consider two streams of cash flows, A and B. Cash flow A consists of \($5,000\) starting three years from today and growing at 4 percent in perpetuity. Cash flow B consists of \($6,000\) starting two
Project A involves an investment of \($1\) million, and project B involves an investment of \($2\) million. Both projects have a unique internal rate of return of 20 percent. Is the following
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 project
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
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 each
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost \($160,000.\) Bill expects the after-tax cash inflows to be \($40,000\) annually for seven years,
Define each of the following investment rules. In your definition state the criteria for accepting or rejecting an investment under each rule.a. Payback periodb. Average accounting returnc. Internal
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 tax
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., you
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Steven Sample, “This is a golden opportunity.” The mine will cost \($600,000\) to open. It
What is the present value of a 10-year, pure discount bond that pays \($1,000\) at maturity and is priced to yield the following rates?a. 5 percentb. 10 percentc. 15 percent
Consider a bond with a face value of \($1,000.\) The coupon is paid semiannually and the market interest rate (effective annual interest rate) is 12 percent. How much would you pay for the bond ifa.
Pettit Trucking has issued an 8-percent, 20-year bond that pays interest semiannually. If the market prices the bond to yield an effective annual rate of 10 percent, what is the price of the bond?
A bond is sold at \($923.14\) (below its par value of \($1,000\). The bond has 15 years to maturity and investors require a 10-percent yield on the bond. What is the coupon rate for the bond if the
You have just purchased a newly issued \($1,000\) five-year Vanguard Company bond at par.This five-year bond pays \($60\) in interest semiannually. You are also considering the purchase of another
Consider two bonds, bond A and bond B, with equal rates of 10 percent and the same face values of \($1,000.\) The coupons are paid annually for both bonds. Bond A has 20 years to maturity while bond
a. If the market interest rate (the required rate of return that investors demand) unexpectedly increases, what effect would you expect this increase to have on the prices of long-term bonds? Why?b.
Consider a bond that pays an \($80\) coupon annually and has a face value of \($1,000\).Calculate the yield to maturity if the bond hasa. 20 years remaining to maturity and it is sold at
The Sue Fleming Corporation has two different bonds currently outstanding. Bond A has a face value of \($40,000\) and matures in 20 years. The bond makes no payments for the first six years and then
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.
Use the following February 12, 1998, WSJ quotation for Merck & Co. to answer the next question.Which of the following statements is false?a. The dividend yield was about 1.6%.b. The 52 weeks’
Use the following stock quote.The 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
You own \($100,000\) worth of Smart Money stock. At the end of the first year you receive a dividend of \($2\) per share; at the end of year 2 you receive a \($4\) dividend. At the end of year 3 you
Consider the stock of Davidson Company that will pay an annual dividend of \($2\) in the coming year. The dividend is expected to grow at a constant rate of 5 percent permanently.The market requires
Easy Type, Inc., is one of a myriad of companies selling word processor programs.Their newest program will cost \($5\) million to develop. First-year net cash flows will be \($2\) million. As a
Whizzkids, Inc., is experiencing a period of rapid growth. Earnings and dividends per share are expected to grow at a rate of 18 percent during the next two years, 15 percent in the third year, and
Allen, Inc., is expected to pay an equal amount of dividends at the end of the first two years. Thereafter, the dividend will grow at a constant rate of 4 percent indefinitely. The stock is currently
Calamity Mining Company’s reserves of ore are being depleted, and its costs of recovering a declining quantity of ore are rising each year. As a result, the company’s earnings are declining at
The Highest Potential, Inc., will pay a quarterly dividend per share of \($1\) at the end of each of the next 12 quarters. Subsequently, the dividend will grow at a quarterly rate of 0.5 percent
The newspaper reported last week that Bradley Enterprises earned \($20\) million. The report also stated that the firm’s return on equity remains on its historical trend of 14 percent.Bradley
Von Neumann Enterprises has just reported earnings of \($10\) million, and it plans to retain 75 percent of its earnings. The company has million shares of common stock outstanding.The stock is
Rite Bite Enterprises sells toothpicks. Gross revenues last year were \($3\) million, and total costs were \($1.5\) million. Rite Bite has 1 million shares of common stock outstanding.Gross revenues
California Electronics, Inc., expects to earn \($100\) million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity that requires an investment of \($15\)
Suppose Smithfield Foods, Inc., has just paid a dividend of \($1.40\) per share. Sales and profits for Smithfield Foods are expected to grow at a rate of 5% per year. Its dividend is expected to grow
In order to buy back its own shares, Pennzoil Co. has decided to suspend its dividends for the next two years. It will resume its annual cash dividend of \($2.00\) a share 3 years from now. This
Four years ago, Ultramar Diamond Inc. paid a dividend of \($0.80\) per share. This year Ultramar paid a dividend of \($1.66\) per share. It is expected that the company will pay dividends growing at
Consider Pacific Energy Company and U.S. Bluechips, Inc., both of which reported recent earnings of \($800,000\) and have 500,000 shares of common stock outstanding. Assume both firms have the same
Lewin Skis Inc. (today) expects to earn \($4.00\) per share for each of the future operating periods (beginning at time 1) if the firm makes no new investments(and returns the earnings as dividends
To determine whether your firm should change its dividend policy, based on an analysis of its investment opportunities and comparable firms.Key Questions• How much could this firm have returned to
Between 1988 and 2008, we saw an increase in the percent of cash returned to stockholders in the form of dividends. Why?
To estimate the optimal mix of debt and equity for your firm and to evaluate the effect on firm value of moving to that mix.Key Questions• Based on the cost of capital approach, what is the optimal
To determine whether your firm should move to its optimal mix (and if so, how) and to analyze the right type of debt for your firm.Key Questions• If your firm’s actual debt ratio is different
To examine how much cash your firm has returned to its stockholders and in what form (dividends or stock buybacks) and to evaluate whether the trade-off favors returning more or less.Key Questions•
RJR Nabisco also had $10 billion in bonds outstanding at the time of the dividend increase in Problem 10. How would you expect the bonds to react to the announcement?Why?Reference from in problem

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