Questions and Answers of Principles Corporate Finance

Maple Aircraft has issued a 4¾% convertible subordinated debenture due 2023. The conversion price is $47.00 and the debenture is callable at 102.75% of face value. The market price of the
a. Look at Table 24.1. Suppose that AMAT decides to call the bond one year before it is due to expire. The interest rate on one-year Treasury bonds is 2%. What price must AMAT pay to call the
Suppose that the AMAT bond was issued at face value and that investors continue to demand a yield of 5.85%. Sketch what you think would happen to the bond price as the first interest payment date
Look back at Section 23-4. Suppose that the standard deviation of the return on Upsilon’s assets is 50%. Recalculate the probability that the company will default.
What variables are required to use the Merton model to calculate the risk-neutral probability that a company will default on its debt?
A friend has mentioned that she has read somewhere that the following variables can be used to predict bankruptcy:(a) The company debt ratio;(b) The interest coverage;(c) The amount of cash relative
Square File’s assets are worth $100. It has $80 of zero-coupon debt outstanding that is due to be repaid at the end of two years. The risk-free interest rate is 5%, and the standard deviation of
The difference between the value of a government bond and a similar corporate bond is equal to the value of an option. What is this option, and what is its exercise price?
It is 2030 and the yields on corporate bonds are as follows: Tau Corp wishes to raise $10 million by an issue of 9% 10-year bonds. What will be the likely issue price (as a percent of face value)
In February 2018, Aaa bonds yielded 3.38%, Baa bonds yielded 4.51%, and comparable Treasuries yielded 2.86%.a. What was the credit spread on Aaa bonds?b. What was the spread on Baa bonds?c. What do
a. In Section 21-3, we calculated the risk (beta) of a six-month call option on Amazon stock with an exercise price of $900. Now repeat the exercise for a similar option with an exercise price of
“A call option is always riskier than the stock it is written on.” True or false? How does the risk of an option change when the stock price changes?
In April 2017, Facebook’s stock price was about $145. An eight-month call on the stock, with an exercise price of $145, sold for $10.18. The risk-free interest rate was 1% a year. How much would
To finance the Madison County project (see Problem 10), Wishing Well needs to arrange an additional $80 million of long-term debt and make a $20 million equity issue. Underwriting fees, spreads, and
1. If the law firm takes the lease, it will invest $950,000 and, in effect, borrow $9,050,000, repaid by 19 installments of $950,000. What is the interest rate on this disguised loan?2. The law firm
Here are key financial data for House of Herring Inc.:Earnings per share for 2025 $5.50Number of shares outstanding 40 millionTarget payout ratio 50%Planned dividend per share $2.75Stock price,
In 2017, Entergy paid a regular quarterly dividend of $.89 per share.a. Match each of the following dates.(A1) Friday, October 27(A2) Tuesday, November 7(A3) Wednesday, November 8(A4) Thursday,
Look at Marvin’s first attempt to raise financing. (Refer to Section 15.1 and the Marvin Prospectus in the appendix at the end of this chapter.) Suppose that First Meriam decides that Marvin’s
Some individuals are eager to spend income before it arrives; others want to postpone consumption. Give some examples of intermediaries that provide services to these individuals.
Explain briefly how each of the following allow individuals or companies to spread their risk:a. An exchange traded fund.b. Commodity markets.c. A life insurance company.
Saga City has a declassified board with nine directors.a. How many directors come up for election each year?b. Would Saga be more or less vulnerable to a hostile takeover if it had a classified board?
What do we mean when we say that stockholders have control rights and residual cash flow rights? How in practice do they exercise their control rights?
True or false?a. Banks are huge investors in corporate equity.b. Insurance companies are huge investors in corporate debt.c. Rather than investing directly in corporate equities, most households
Here are alphas and betas for Est?e Lauder and Caterpillar Tractor for the 60 months ending June 2017. Alpha is expressed as a percent per month. Explain how these estimates would be used to
The second column in Table 13.1 shows the monthly return on the British FTSE 100 index from January 2015 through July 2017. The remaining columns show returns on the stocks of two firms?Executive
True or false?a. If markets are efficient, shareholders should expect to receive only the risk-free interest rate on their investment.b. If markets are efficient, investment in the stock market is a
Supply the missing words: “There are three forms of the efficient-market hypothesis. Tests of randomness in stock returns provide evidence for the form of the hypothesis. Tests of stock price
In recent years, several large banks have paid management bonuses partly in bonds and partly in stock. What do you think is the reason for this? Do you think it is a good idea?
The Cambridge Opera Association has come up with a unique door prize for its December 2019 fund-raising ball: Twenty door prizes will be distributed, each one a ticket entitling the bearer to receive
What is the NPV of the electric scooter project under the following scenario?Unit sales are 20% below expectations.Unit price is 10% below expectations.Unit variable cost remains at 50% of
In footnote 4, we noted that the minimum-risk portfolio contained an investment of 53% in Amazon and 47% in Southwest Airlines. Prove it. (Hint: You need a little alculus to do so.)
The scene: John and Marsha hold hands in a cozy French restaurant in downtown Manhattan, several years before the mini-case in Chapter 9. Marsha is a futures-market trader. John manages a $250
Suppose that Sudbury Mechanical Drifters is proposing to invest $10 million in a new factory. It can depreciate this investment straight-line over 10 years. The tax rate is 40%, and the discount rate
1. Calculate the NPV of the proposed investment, using the inputs suggested in this case. How sensitive is this NPV to future sales volume?2. What are the pros and cons of waiting for a year before
EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta?
1. Calculate the NPV of the wildcat oil well, taking account of the probability of a dry hole, the shipping costs, the decline in production, and the forecasted increase in oil prices. How long does
Suppose that in year 2030, investors become much more willing than before to bear risk. As a result, they require a return of 8% to invest in common stocks rather than the 10% that they had required
Integrated Potato Chips (IPC) does not pay a dividend. Its current stock price is $150 and there is an equal probability that the return over the coming year will be –10%, +20%, or +50%.a. What is
The level of the Syldavia market index is 21,000 at the start of the year and 25,500 at the end. The dividend yield on the index is 4.2%.a. What is the return on the index over the year?b. If the
You can allow partial investments, that is, 0 ? x ? 1. Calculate and interpret the shadow prices16 on the capital constraints. Project Co C2 NPV - 10,000 - 10,000 +6,700 +9,000 х -20,000 +5,000 +
Consider the following two projects: a. If the opportunity cost of capital is 11%, which of these two projects would you accept (A, B, or both)? b. Suppose that you can choose only one of these
Plot the NPVs for the following projects for discount rates from 0% to 30%: a. Which one of these projects has no IRR? b. One of the projects has two IRRs. Which is this project and what are the
Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows: Phoenix?s recovery will be complete by 2024, and there
Suppose the horizon date is set at a time when the firm will run out of positive NPV investment opportunities. How would you calculate the horizon value? What is the P/EPS ratio when PVGO = 0?
Under what conditions does r, a stock’s market capitalization rate, equal its earnings–price ratio EPS1/P0?
Here are forecasts for next year for two stocks: a. What are the dividend payout ratios for each firm?b. What are the expected dividend growth rates for each stock?c. If investors require a return
Here is a small part of the order book for Mesquite Foods: a. Georgina Sloberg submits a market order to sell 100 shares. What price will she receive? b. Norman Pilbarra submits a market order to
a. “I would like to sell 1000 shares of Walmart at best.”b. “I would like to buy 500 shares of Hattersley at $50 or better.”Which of these is a limit order and which is a market order? If the

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