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business
introduction to corporate finance

Questions and Answers of Introduction To Corporate Finance

What factors do you think will affect the beta of a stock? Why do different stocks have different betas?
List five stocks that you think are highly correlated.
You are holding stocks of Ashok Leyland, TELCO, and Grasim. Their individual betas are 0.8, 0.96, and 0.81 respectively.Assuming equal investment, calculate the portfolio beta.
Calculate the expected return for a stock whose beta is 0.8. The T-Bond rate is 12 percent. The monthly return on the market index is 1.7 percent.
Find the present value of the cash flows at 13 percent interest:Year Cash flow (Rs)1 –2 20,000 3 –4 900 n weekly returns 0.52 0.08 Standard deviation 6.98 3.78 If the correlation coefficient =
Find the future value of the following series at the end of the 5th year at 13 percent interest:Year Cash flow (Rs)1 100 2 200 3 300 4 400
You are 55 years old and expect to work for 5 years more, saving Rs 1.25 lac a year. Appropriate interest rate = 10 percent.(a) If you wish to withdraw Rs 75,000 a year for the following 15 years,
Find the present value of the series. Discount rate = 10 percent.Year Amount (Rs)1–5 125,000 6–10 28,000 11–15 136,000
You have taken a 30-year loan for Rs 3 lac. The annual interest on the loan is 12 percent. Estimate your yearly payments.
An advertisement by Vijayashri Bank claims that your money will double in 6 years. What is the implied interest?
Vindhyachala Financial Services Company offers loans at an annual rate of 10 percent. If the interest is compounded monthly, what is the effective rate?
Bank-A pays 13 percent interest compounded annually on deposits. Bank-B pays 12 percent compounded monthly. In which bank would you prefer to deposit your money?
Your company has established a sinking fund to meet an obligation of Rs 8 lac, coming due in 10 years. If the fund can earn 10 percent a year, what annual contributions must be made to accumulate the
You need Rs 150,000 at the end of 15 years. You decide to make equal annual payments into a bank account. Current interest rate is 11 percent (compounded annually). The first payment is to be made at
Suppose you open a savings account with Rs 1,500. The account’s stated interest rate is 12 percent. Calculate the account’s balance after 2 years if interest is paid:(a) annually;(b)
What annual percentage rate is equal to 12 percent compounded monthly?
What is the implied growth rate, if:Production Target for 1997 = 5 million tons Current Production (for 1991) = 2 million tons
You know that the following liabilities must be satisfied:Year from now Liability (Rs in crore)1 2 2 3 3 4 4 5 How much should be invested today to satisfy this stream? You can earn an annual
You have the option of a lump-sum today as against an annuity of Rs 3,000 for 8 years. How large will the lump-sum have to be, to make you indifferent between the options if current interest rate is
The current Earnings per Share (EPS) of the Hindustan Engineering Company is Rs 3.80. Analysts expect it to grow at an annual rate of 8 percent. What will be the EPS in 5 years time?
Introduction to a relatively new financial metric called Economic Value Added (EVA)and contrast it with competing metrics.• Highlight the characteristics of a sound performance measure.•
Record a recent well-publicized merger.• Provide an overview of the banking sector in India.• Highlight the application of theory in a real-life setting.• Highlight the issues surrounding
Introduction to the concept of sustainable growth and its determinants.• Provide a rationale for mergers and acquisitions.• Provide an overview of valuation approaches in an acquisition.•
Provide a link between growth and shareholder value.
Introduction to mutual funds as a class of financial institutions.
Describe the various short-term investment opportunities for companies with excess cash.
Fixed income valuation.• Introduction to steps involved in issuing debt.• Recent theoretical developments in estimating credit risk of debt instruments.• Demonstrate the application of
Introduction to types of fixed income instruments.
Introduction to the air transport industry in India.• Application of credit grading of a borrower in a real-life setting.• Introduction to the domestic debt market.
Introduction to banks as a class of financial institutions.• Introduction to commercial bank lending products.• Practice in calculation of maximum permissible bank finance.• Evaluating
Discuss methods of pricing of Initial Public Offerings.• Summarize empirical findings on performance of Initial Public Offerings.
Introduction to the role of intermediaries.• Introduction to the types of issuance—Fixed price versus Book building.
How do we apply these techniques in real life situations?• Introduction to financial options.• Bring out the analogy between financial and real options.• Introduction to types of real
What are certainty equivalent cash flows and risk adjusted discount rates?
What are the techniques of measuring risk?
What are the risks involved in investments?
What are the risks involved in investments?• What are the techniques of measuring risk?• What are certainty equivalent cash flows and risk adjusted discount rates?• How should risk be
Evaluating a standard capital budgeting decision.• Introduction to make or buy decision.
Be aware of practices in select, large, international companies.• Calculate all the significant financial ratios for firms and interpret them.• Perform DuPont Analysis.• Draw up funds flow
How to measure security return for single and multiple periods.• Different measures of risk for a single and a portfolio of stocks.• The relationship between risk and return.• The intuitive
How much of the income generated from operations should be ret• Calculate the future value of a single cash flow at a given interest rate.• Calculate present value of a single cash flow
How should the company finance those investments? What should be the mix of owners’ contribution—equity and borrowed funds, i.e., debt at any given point in time?
• Introduction to the goal of financial management.• Competitors to the rule of wealth maximization and their limitations.• Factors affecting value creation.• Corporate governance around
RJR Nabsico also had $ 10 billion in bonds outstanding at the time of the dividend increase in problem10.How would you expect Nabisco’s bonds to react to the announcement? Why?
See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.a. What is Mydeco’s market capitalization at the end of each year?b. What is Mydeco’s market-to-book ratio at
The following quote on Altaba (formerly Yahoo!) stock appeared on June 13, 2018, on Yahoo!Finance:If you wanted to buy Altaba, what price would you pay? How much would you receive if you wanted to
Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10 percent perpetual bonds now selling at par. The
The Rivoli Company has no debt outstanding, and its financial position is given by the following data:Assets (book market) $3,000,000 EBIT $500,000 Cost of equity, rs 10%Stock price, P0 $15 Shares
Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million; 50 earth stations are produced and sold each year; profits
Lighter Industrial Corporation (LIC) is considering a large-scale recapitalization. Currently, LIC is financed with 25 percent debt and 75 percent equity. LIC is considering increasing its level of
The Rogers Company is currently in this situation: (1) EBIT $4.7 million; (2) tax rate, T 40%; (3) value of debt, D $2 million; (4) rd 10%; (5) rs 15%; (6) shares of stock outstanding, n0
If a firm went from zero debt to successively higher levels of debt, why would you expect its stock price to first rise, then hit a peak, and then begin to decline?
Why is EBIT generally considered to be independent of financial leverage? Why might EBIT actually be influenced by financial leverage at high debt levels?
Why do public utility companies usually have capital structures that are different from those of retail firms?
“One type of leverage affects both EBIT and EPS. The other type affects only EPS.”Explain this statement.
Firms with relatively high nonfinancial fixed costs are said to have a high degree of what?
What is “financial flexibility,” and is it increased or decreased by a high debt ratio?
How does the firm’s internal condition affect its actual capital structure?
How do lender and rating agency attitudes affect capital structure?
How do taxes affect the target capital structure?
How does sales stability affect the target capital structure?
Is expected EPS maximized at the optimal capital structure?
Using a graph and illustrative data, identify the premiums for financial risk and business risk at different debt levels. Do these premiums vary depending on the debt level? Explain.
Using the Hamada equation, show the effect of financial leverage on beta.
What happens to the costs of debt and equity when the leverage increases?Explain.
How can the use of debt serve to discipline managers?
Explain how “asymmetric information” and “signals” affect capital structure decisions.
Why does MM theory with corporate taxes lead to 100 percent debt?
Explain this statement: “Using leverage has both good and bad effects.”
What is financial risk, and how does it arise?
How does operating leverage affect business risk?
What are some determinants of business risk?
What is business risk, and how can it be measured?
Briefly describe some ways in which the capital structure decision can affect the WACC and FCF.
Q 1.9. What is the difference between the value of the firm and the sum of the values of all outstanding obligations and all outstanding stocks?
Q1.8. What is the difference between investing in the stock and investing in the bond of a corporation? Which one is the less risky investment and why?
Q1.7. A degree program costs $50,000 in total ex- penses: $30,000 in tuition and $20,000 in housing and books. The U.S. government provides a $10,000 grant for the tuition. Moreover, the university
Q 1.6. What is the law of one price?
Q 1.5. What is the main objective of corporate managers that this book assumes?
Q 1.4. Can you use the "law of one price" in your decision of whether to take or reject projects?
Q1.3. If you purchase a house and live in it, what are your inflows and outflows?
Q 1.2. In computing the cost of your M.B.A., should you take into account the loss of salary while going to school? Cite a few nonmonetary benefits that you reap as a student, too, and try to attach
Q1.1. Discuss how easy it is to put a value on the following objects: 1. An envelope containing foreign currency-say, 10,000 euros 2. Paintings 3. The Washington Monument 4. Manhattan 5. The Chrysler
How are the following companies utilizing new technology in the provision of financial services?a. Wealthfrontb. LendingTreec. Metromiled. Acorns AppendixLO1
Why has finance historically been an early adopter of new technology?AppendixLO1
Suppose the following orders are received by an exchange for Cisco stock:■■ Limit Order: Buy 200 shares at $25■■ Limit Order: Sell 200 shares at $26■■ Limit Order: Sell 100 shares at
Explain how the bid-ask spread is determined in most markets today.AppendixLO1
Explain why the bid-ask spread is a transaction cost.AppendixLO1
Describe the important changes that have occurred in stock markets over the last decade.AppendixLO1
What is the difference between a public and a private corporation?AppendixLO1
Are hostile takeovers necessarily bad for firms or their investors? Explain.The Stock Market AppendixLO1
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the
Suppose you are considering renting an apartment. You, the renter, can be viewed as an agent while the company that owns the apartment can be viewed as the principal. What principalagent conflicts do
Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to
When a pharmaceutical company develops a new drug, it often receives patent protection for that medication, allowing it to charge a higher price. Explain how this public policy of providing patent
You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make.AppendixLO1
Repeat Problem 6 assuming the corporation is an S corporation.AppendixLO1
You are a shareholder in a C corporation. The corporation earns $2 per share before taxes.Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax
Explain the difference between an S corporation and a C corporation.AppendixLO1
What are the main advantages and disadvantages of organizing a firm as a corporation?AppendixLO1

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