Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $27 million. If the DVDR fails, the present value of the payoff is $9 million. If the product goes directly to market, there is a 50 percent chance of success. Alternatively, Ang can delay the launch by one year and spend $1.3 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 80 percent. The appropriate discount rate is 11 percent. Should the firm conduct test marketing?
> A portfolio is invested 20 percent in Stock G, 55 percent in Stock J, and 25 percent in Stock K. The expected returns on these stocks are 9 percent, 11 percent, and 14 percent, respectively. What is the portfolio’s expected return? How do you interpret y
> Using the following returns, calculate the average returns, the variances, and the standard deviations for X and Y: Returns Year Y 9% 12% 2 21 27 3 -27 -32 4 15 14 5 23 36
> You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the dollar price of the bond? Assume semiannual compounding periods.
> Suppose you are evaluating a callable, convertible bond. If the stock price volatility increases, how will this affect the price of the bond?
> The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success. For $125,000 the manager can conduct a focus group that will increase the product’s chance of succ
> Dog Up! Franks is looking at a new sausage system with an installed cost of $345,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage s
> Maxwell Software, Inc., has the following mutually exclusive projects. a. Suppose the company’s payback period cutoff is two years. Which of these two projects should be chosen? b. Suppose the company uses the NPV rule to rank these t
> Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $49. The bonds are available for immediate conversion. The current price of the company’s common stock is $43 per share. The current market price of the convertible bonds
> Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now the company will know whether the new technology is accepted in the market. If the dem
> Super Sonics Entertainment is considering buying a machine that costs $480,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $1
> The Green Hills Co. has just gone public. Under a firm commitment agreement, Green Hills received $29.96 for each of the 7.5 million shares sold. The initial offering price was $32 per share, and the stock rose to $34.56 per share in the first few minute
> The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a stock dividend of 25 percent. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 22,000
> Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.9 percent, and the risk-free rate is 3.5 percent. The company is currently considering a project that will cost $10.6 million and last six years. The project will gener
> Why do firms issue convertible bonds and bonds with warrants?
> Why does a strict NPV calculation typically understate the value of a company or project?
> You are discussing real options with a colleague. During the discussion, the colleague states, “Real option analysis makes no sense because it says that a real option on a risky venture is worth more than a real option on a safe venture.’’ How should you
> What is meant by the term off–balance sheet financing? When do leases provide such financing, and what are the accounting and economic consequences of such activity?
> Refer to the observed capital structures given in Table 17.3 of the text. What do you notice about the types of industries with respect to their average debt–equity ratios? Are certain types of industries more likely to be highly levera
> Chanelle, Inc., is proposing a rights offering. Presently, there are 625,000 shares outstanding at $87 each. There will be 85,000 new shares offered at $78 each. a. What is the new market value of the company? b. How many rights are associated with one o
> Is there an easily identifiable debt–equity ratio that will maximize the value of a firm? Why or why not?
> Both Dow Chemical Company, a large natural gas user, and Superior Oil, a major natural gas producer, are thinking of investing in natural gas wells near Houston. Both are all-equity financed companies. Dow and Superior are looking at identical projects.
> Briefly explain why the covariance of a security with the rest of a well-diversified portfolio is a more appropriate measure of the risk of the security than the security’s variance.
> Two years ago, General Materials’ and Standard Fixtures’ stock prices were the same. During the first year, General Materials’ stock price increased by 10 percent while Standard Fixtures’ stock price decreased by 10 percent. During the second year, Gener
> The Mango Republic has just liberalized its markets and is now permitting foreign investors. Tesla Manufacturing has analyzed starting a project in the country and has determined that the project has a negative NPV. Why might the company go ahead with th
> When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain.
> Why do noninvestment-grade bonds have much higher direct costs than investment-grade issues?
> Based on the dividend growth model, what are the two components of the total return on a share of stock? Which do you think is typically larger?
> If a market is semistrong form efficient, is it also weak form efficient? Explain.
> What is wrong with the simple view that it is cheaper to issue a bond with a warrant or a convertible feature because the required coupon is lower?
> If the risk of a stock increases, what is likely to happen to the price of call options on the stock? To the price of put options? Why?
> Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $215,000 per year in ear
> Zipcar, the car sharing company, went public in April 2011. Assisted by the investment bank Goldman Sachs, Zipcar sold 9.68 million shares at $18 each, thereby raising a total of $174.24 million. By the end of the first day of trading, the stock had zipp
> If increases in dividends tend to be followed by (immediate) increases in share prices, how can it be said that dividend policy is irrelevant?
> Compute the internal rate of return for the cash flows of the following two projects: Cash Flows ($) Year Project A Project B -$5,700 -$3,450 2,750 1,380 2 2,800 1,800 1,600 1,200
> An analyst has recently informed you that at the issuance of a company’s convertible bonds, one of the two following sets of relationships existed: Assume the bonds are available for immediate conversion. Which of the two scenarios do
> Sardano and Sons is a large, publicly held company that is considering leasing a warehouse. One of the company’s divisions specializes in manufacturing steel, and this particular warehouse is the only facility in the area that suits the firm’s operations
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech equipment). The scanner costs $5,800,000, and it would be depreciated straight-line to zero over four ye
> In the previous problem, if the SEC filing fee and associated administrative expenses of the offering are $1,900,000, how many shares need to be sold?
> In the previous problem, suppose the company has announced it is going to repurchase $22,400 worth of stock. What effect will this transaction have on the equity of the company? How many shares will be outstanding? What will the price per share be after
> Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 7.5 percent loan with gross proceeds of $4,450,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.5 percent of gross proceeds and will be
> Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is more levered. Both companies will remain in business for one more year. The companies’ economists agree that the probability of the continuation of the current exp
> Janetta Corp. has EBIT of $850,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a m
> Kolby Corp. is comparing two different capital structures. Plan I would result in 1,300 shares of stock and $80,640 in debt. Plan II would result in 2,900 shares of stock and $19,200 in debt. The interest rate on the debt is 10 percent. a. Ignoring taxes
> Frusciante, Inc., has 290,000 bonds outstanding. The bonds have a par value of $1,000, a coupon rate of 7 percent paid semiannually, and 8 years to maturity. The current YTM on the bonds is 7.5 percent. The company also has 10 million shares of stock out
> The following three stocks are available in the market: Assume the market model is valid. a. Write the market model equation for each stock. b. What is the return on a portfolio with weights of 30 percent Stock A, 45 percent Stock B, and 25 percent Sto
> Based on the following information, calculate the expected return and standard deviation: Probability of State of Economy State of Rate of Return Economy if State Occurs Depression .15 -105 Recession .30 .059 Normal .45 .130 Вoom 10 .211
> What is the main difference between the FTE approach and the other two approaches?
> A Japanese company has a bond outstanding that sells for 106 percent of its ¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and matures in 21 years. What is the yield to maturity of this bond?
> Your firm is contemplating the purchase of a new $530,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $186,000 before tax
> Suppose you know that a company’s stock currently sells for $67 per share and the required return on the stock is 10.8 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s
> What are some of the difficulties that might come up in actual applications of the various criteria we discussed in this chapter? Which one would be the easiest to implement in actual applications? The most difficult?
> Star Mining buys a gold mine, but the cost of extraction is currently too high to make the mine profitable. In option terminology, what type of option(s) does the company have on this mine?
> Music City, Inc., has no debt outstanding and a total market value of $295,000. Earnings before interest and taxes, EBIT, are projected to be $23,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 25 per
> Describe the difference between systematic risk and unsystematic risk.
> Criteria Discuss the IRS criteria for determining whether a lease is tax deductible. In each case give a rationale for the criterion.
> What are the sources of agency costs of equity?
> If you use the stock beta and the security market line to compute the discount rate for a project, what assumptions are you implicitly making?
> How would you answer in the following debate? Q: Isn’t it true that the riskiness of a firm’s equity will rise if the firm increases its use of debt financing? A: Yes, that’s the essence of MM Proposition II. Q: And isn’t it true that, as a firm increase
> A company is contemplating a long-term bond issue. It is debating whether to include a call provision. What are the benefits to the company from including a call provision? What are the costs? How do these answers change for a put provision?
> Suppose Tom O’Bedlam, president of Bedlam Products, Inc., has hired you to determine the firm’s cost of debt and cost of equity capital. a. The stock currently sells for $50 per share, and the dividend per share will probably be about $5. Tom argues, “It
> In contrast to the CAPM, the APT does not indicate which factors are expected to determine the risk premium of an asset. How can we determine which factors should be included? For example, one risk factor suggested is the company size. Why might this be
> Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on s
> Is it possible for the risk premium to be negative before an investment is undertaken? Can the risk premium be negative after the fact? Explain.
> Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?
> Why does traditional NPV analysis tend to underestimate the true value of a capital budgeting project?
> The shareholders of the Stackhouse Company need to elect seven new directors. There are 960,000 shares outstanding currently trading at $48 per share. You would like to serve on the board of directors; unfortunately no one else will be voting for you. Ho
> Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like mini firms in our evaluation process, we include financing costs because they are relevant at the firm level.” Critically evaluate t
> If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If you answer yes to one or both of these qu
> Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?
> What is meant by a firm’s positioning strategy?
> How should a firm go about constructing a product attribute map?
> What is the purpose of having an organized sales process?
> Contrast the advantages of selling direct versus the advantages of selling through an intermediary.
> What is the purpose of writing a blog and establishing a presence on Facebook and Twitter?
> Contrast the roles of advertising and public relations in promoting a firm and its products.
> What is meant by the phrase “price-quality attribution”? How does an understanding of this phrase help an entrepreneur know how to price a product?
> Contrast cost-based pricing and value-based pricing.
> Describe the difference between a core product and an actual product.
> What are the four elements of a firm’s “marketing mix”?
> What are the principal advantages and disadvantages of buying a franchise?
> Justin Coban plans to write an e-mail message to his dad asking for a loan. The purpose of the loan will be to start a company to sell an environmentally friendly line of cleaning supplies that are suitable for light manufacturing facilities. Justin has
> What key insights does the GEM study provide us about entrepreneurship?
> What is a target market? Why is it important for a firm to choose its target market early in the process of launching its venture?
> What is bootstrapping? Provide several examples of how entrepreneurs bootstrap to raise money or cut costs. In your judgment, how important is the art of bootstrapping for an entrepreneurial venture?
> What is a Small Business Innovation Research (SBIR) grant? Why would a firm want to apply for such a grant if it qualifies for it?
> What is meant by the term burn rate? What are the consequences of experiencing a negative burn rate for a relatively long period of time?
> Briefly describe the SBA’s 7(A) Loan Guaranty Program. Do most start-up firms qualify for an SBA guaranteed loan? Why or why not?
> In general, why are commercial banks reluctant to loan money to start-ups?
> What is the purpose of the investment bank in the initial public offering process?
> Describe the purpose of an initial public offering (IPO). Why is an initial public offering considered to be an important milestone for an entrepreneurial firm?
> What are some resources available to you as a prospective franchisee to identify franchise opportunities?
> What is meant by the term venture capital? Where do venture capital firms get their money? What types of firms do venture capitalists commonly want to fund? Why?
> What are the three steps required to effectively engage potential investors or bankers?
> In general, what effects does entrepreneurship have on economies and societies throughout the world?
> What is the purpose of an elevator speech? Why is preparing an elevator speech one of the first things an entrepreneur should do in the process of raising money?
> Do new ventures started by a team have an advantage over new ventures started by a sole entrepreneur, or is the opposite the case?
> What are the guidelines to follow when establishing a board of advisors?
> What are the different ways that advisory boards meet and conduct their business?
> What is the purpose of forming an advisory board?
