Question: Reproduce Ideko’s balance sheet and statement

> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their cash flow statement: a. How much cash did Costco generate from operating activities in fisc

> Roslin Robotics stock has a volatility of 30% and a current stock price of $60 per share. Roslin pays no dividends. The risk-free interest is 5%. Determine the Black-Scholes value of a one year, at-the-money call option on Roslin stock.

> Consider the setting of Problem 9. Suppose that in the event Hema Corp. defaults, $90 million of its value will be lost to bankruptcy costs. Assume there are no other market imperfections. a. What is the present value of these bankruptcy costs, and what

> The current price of Estelle Corporation stock is $25. In each of the next two years, this stock price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year risk-free interest rate is 6% and will remain constant. Using the

> Which of the following positions benefit if the stock price increases? a. Long position in a call b. Short position in a call c. Long position in a put d. Short position in a put

> Explain the difference between a long position in a put and a short position in a call.

> Suppose that in July 2009, Google were to issue $96 billion in zero-coupon senior debt, and another $32 billion in zero-coupon junior debt, both due in January 2011. Use the option data in the preceding table to determine the rate Google would pay on the

> Use the option data from July 13, 2009 in the following table to determine the rate Google would have paid if it had issued $128 billion in zero-coupon debt due in January 2011. Suppose Google currently had 320 million shares outstanding, implying a mark

> Below is an option quote on IBM from the CBOE Web site showing options expiring in October and November 2015. a. Which option contract had the most trades on that day? b. Which option contract is being held the most overall? c. Suppose you purchase one o

> Wesley Corp. stock is trading for $25/share. Wesley has 20 million shares outstanding and a market debt-equity ratio of 0.5. Wesley’s debt is zero-coupon debt with a 5-year maturity and a yield to maturity of 10%. a. Describe Wesley’s equity as a call op

> Suppose the S&P 500 is at 900, and it will pay a dividend of $30 at the end of the year. Suppose also that the interest rate is 2%. If a one-year European put option has a negative time value, what is the lowest possible strike price it could have?

> Suppose a firm’s tax rate is 35%. a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings? b. What effect would a $10 million capital expense have on this year’s earnings if the

> Suppose the S&P 500 is at 900, and a one-year European call option with a strike price of $400 has a negative time value. If the interest rate is 5%, what can you conclude about the dividend yield of the S&P 500?

> The stock of Harford Inc. is about to pay a $0.30 dividend. It will pay no more dividends for the next month. Consider call options that expire in one month. If the interest rate is 6% APR (monthly compounding), what is the maximum strike price where it

> Consider an American put option on XAL stock with a strike price of $55 and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest rate is 10%. If it is optimal to exercise this option

> Explain why an American call option on a non-dividend-paying stock always has the same price as its European counterpart.

> You are watching the option quotes for your favorite stock, when suddenly there is a news announcement. Explain what type of news would lead to the following effects: a. Call prices increase, and put prices fall. b. Call prices fall, and put prices incre

> Consider the data for IBM options in Problem 3. Suppose a new American-style put option on IBM is issued with a strike price of $155 and an expiration date of November 1st. a. What is the maximum possible price for this option? b. What is the minimum pos

> Suppose Amazon stock is trading for $500 per share, and Amazon pays no dividends. a. What is the maximum possible price of a call option on Amazon? b. What is the maximum possible price of a put option on Amazon with a strike price of $550? c. What is th

> In mid-February 2016, European-style options on the S&P 100 index (OEX) expiring in December 2017 were priced as follows: Given an interest rate of 0.40% for a December 2017 maturity (22 months in the future), use put-call parity (with dividends) t

> What is the difference between a European option and an American option? Are European options available exclusively in Europe and American options available exclusively in the United States?

> Consider the October 2015 IBM call and put options in Problem 3. Ignoring the negligible interest you might earn on T-bills over the remaining few days’ life of the options, show that there is no arbitrage opportunity using put-call parity for the option

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2013, and this equipment was depreciated by $4 million per year in 2014, 2015, and 2016.

> Explain the difference between an S corporation and a C corporation.

> It is October 5, 2015, and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in terms of a percentage of the current value of your portfolio: a

> You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against this possibility?

> A forward contract is a contract to purchase an asset at a fixed price on a particular date in the future. Both parties are obligated to fulfill the contract. Explain how to construct a forward contract on a share of stock from a position in options.

> Consider the October 2015 IBM call and put options in Problem 3. Ignoring any interest you might earn over the remaining few days’ life of the options: a. Compute the break-even IBM stock price for each option (i.e., the stock price at

> What position has more downside exposure: a short position in a call or a short position in a put? That is, in the worst case, in which of these two positions would your losses be greater?

> Explain the meanings of the following financial terms: a. Option b. Expiration date c. Strike price d. Call e. Put

> Reproduce Ideko’s balance sheet and statement of cash flows, assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that

> Forecast Ideko’s free cash flow (reproduce Table 19.10), assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvement

> Forecast Ideko’s free cash flow (reproduce Table 19.10), assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvement

> Under the assumptions that Ideko’s market share will increase by 0.5% per year but that the projected improvements in net working capital do not transpire (so the numbers in Table 19.8 remain at their 2005 levels through 2010), calculat

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases 2 million shares each year from 2013 to 2016. What would its earnings per share be in years 2013–2016? (Assume Mydeco pays f

> Under the assumptions that Ideko’s market share will increase by 0.5% per year and that the forecasts in Table 19.8 remain the same, calculate Ideko’s working capital requirements though 2010 (that is, reproduce Table

> Under the assumption that Ideko’s market share will increase by 0.5% per year (and the investment and financing will be adjusted as described in Problem 3), you project the following depreciation: Using this information, project net i

> Under the assumption that Ideko market share will increase by 0.5% per year, you determine that the plant will require an expansion in 2010. The cost of this expansion will be $15 million. Assuming the financing of the expansion will be delayed according

> Assume that Ideko’s market share will increase by 0.5% per year rather than the 1% used in the chapter. What production capacity will Ideko require each year? When will an expansion become necessary (when production volume will exceed the current level b

> Use your answers from Problems 17 and 18 to infer the value today of the projected improvements in working capital under the assumptions that Ideko’s market share will increase by 0.5% per year and that investment, financing, and depreciation will be adj

> Using the APV method, estimate the value of Ideko and the NPV of the deal using the continuation value you calculated in Problem 13 and the unlevered cost of capital estimate in Section 19.4. Assume that the debt cost of capital is 6.8%; Ideko’s market s

> Using the APV method, estimate the value of Ideko and the NPV of the deal using the continuation value you calculated in Problem 13 and the unlevered cost of capital estimate in Section 19.4. Assume that the debt cost of capital is 6.8%; Ideko’s market s

> Approximately what expected future long-run growth rate would provide the same EBITDA multiple in 2010 as Ideko has today (i.e., 9.1)? Assume that the future debt-to-value ratio is held constant at 40%; the debt cost of capital is 6.8%; Ideko’s market sh

> Approximately what expected future long-run growth rate would provide the same EBITDA multiple in 2010 as Ideko has today (i.e., 9.1)? Assume that the future debt-to-value ratio is held constant at 40%; the debt cost of capital is 6.8%; Ideko’s market sh

> How does the assumption on future improvements in working capital affect your answer to Problem 13? Data from Problem 13: Using the information produced in the income statement in Problem 4, use EBITDA as a multiple to estimate the continuation value i

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. By what percentage did Mydeco’s revenues grow each year from 2013–2016? b. By what percentage did net income grow each year? c. Wh

> Using the information produced in the income statement in Problem 4, use EBITDA as a multiple to estimate the continuation value in 2010, assuming the current value remains unchanged (reproduce Table 19.15). Infer the EV/sales and the unlevered and lever

> Calculate Ideko’s unlevered cost of capital when the market risk premium is 6% rather than 5%, the risk-free rate is 5% rather than 4%, and all other required estimates are the same as in the chapter.

> Calculate Ideko’s unlevered cost of capital when Ideko’s unlevered beta is 1.1 rather than 1.2, and all other required estimates are the same as in the chapter.

> You would like to compare Ideko’s profitability to its competitors’ profitability using the EBITDA/ sales multiple. Given Ideko’s current sales of $75 million, use the information in Table 19.2 to com

> You are a consultant who was hired to evaluate a new product line for Markum Enterprises. The upfront investment required to launch the product line is $10 million. The product will generate free cash flow of $750,000 the first year, and this free cash f

> Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.5%, a debt cost of capital of 7%, a marginal corporate tax rate of 35%, and a debt-equity ratio of 2.6. Suppose Goodyear maintains a constant debt-equity ratio. a. What is Goodye

> Acort Industries has 10 million shares outstanding and a current share price of $40 per share. It also has long-term debt outstanding. This debt is risk free, is four years away from maturity, has annual coupons with a coupon rate of 10%, and has a $100

> Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose Alcatel-Lucent’s debt cost of capital is 6.1% and its marginal tax rate is 35%. a. Wh

> Suppose Goodyear Tire and Rubber Company is considering divesting one of its manufacturing plants. The plant is expected to generate free cash flows of $1.5 million per year, growing at a rate of 2.5% per year. Goodyear has an equity cost of capital of 8

> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their income statement: a. What were Costco’s revenues for fiscal year 2015? By what percentage d

> Backcountry Adventures is a Colorado-based outdoor travel agent that operates a series of winter backcountry huts. Currently, the value of the firm (debt + equity) is $3.5 million. But profits will depend on the amount of snowfall: If it is a good year,

> In 2015, Intel Corporation had a market capitalization of $134 billion, debt of $13.2 billion, cash of $13.8 billion, and EBIT of nearly $16 billion. If Intel were to increase its debt by $1 billion and use the cash for a share repurchase, which market i

> Revtek, Inc., has an equity cost of capital of 12% and a debt cost of capital of 6%. Revtek maintains a constant debt-equity ratio of 0.5, and its tax rate is 35%. a. What is Revtek’s WACC given its current debt-equity ratio? b. Assuming no personal taxe

> Gartner Systems has no debt and an equity cost of capital of 10%. Gartner’s current market capitalization is $100 million, and its free cash flows are expected to grow at 3% per year. Gartner’s corporate tax rate is 35%. Investors pay tax rates of 40% on

> Propel Corporation plans to make a $50 million investment, initially funded completely with debt. The free cash flows of the investment and Propel’s incremental debt from the project follow: Propel’s incremental debt

> XL Sports is expected to generate free cash flows of $10.9 million per year. XL has permanent debt of $40 million, a tax rate of 40%, and an unlevered cost of capital of 10%. a. What is the value of XL’s equity using the APV method? b. What is XL’s WACC?

> Arden Corporation is considering an investment in a new project with an unlevered cost of capital of 9%. Arden’s marginal corporate tax rate is 40%, and its debt cost of capital is 5%. a. Suppose Arden adjusts its debt continuously to maintain a constant

> Consider Avco’s RFX project from Section 18.3. Suppose that Avco is receiving government loan guarantees that allow it to borrow at the 6% rate. Without these guarantees, Avco would pay 6.5% on its debt. a. What is Avco’s unlevered cost of capital given

> Your firm is considering a $150 million investment to launch a new product line. The project is expected to generate a free cash flow of $20 million per year, and its unlevered cost of capital is 10%. To fund the investment, your firm will take on $100 m

> DFS Corporation is currently an all-equity firm, with assets with a market value of $100 million and 4 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to raise a fixed amount of permane

> 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 end of each year?

> Parnassus Corporation plans to invest $150 million in a new generator that will produce free cash flows of $20 million per year in perpetuity. The firm is all equity financed, with an equity cost of capital of 10%. a. What is the NPV of the project ignor

> Suppose Caterpillar, Inc., has 665 million shares outstanding with a share price of $74.77, and $25 billion in debt. If in three years, Caterpillar has 700 million shares outstanding trading for $83 per share, how much debt will Caterpillar have if it ma

> Your firm is considering building a $600 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $145 million per year for the next 10 years. The plant will be depreciated on a straight-line basis over 10 years (assuming no

> You are on your way to an important budget meeting. In the elevator, you review the project valuation analysis you had your summer associate prepare for one of the projects to be discussed: Looking over the spreadsheet, you realize that while all of th

> Tybo Corporation adjusts its debt so that its interest expenses are 20% of its free cash flow. Tybo is considering an expansion that will generate free cash flows of $2.5 million this year and is expected to grow at a rate of 4% per year from then on. Su

> You are evaluating a project that requires an investment of $90 today and provides a single cash flow of $115 for sure one year from now. You decide to use 100% debt financing, that is, you will borrow $90. The risk-free rate is 5% and the tax rate is 40

> Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. For each year into the indefinite future, Remex’s free cash flow is expected to equal $25 million. Remex is considering changing its capital str

> Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be $15 million, and you expect the firm’s free cash flows

> Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.20. Its current stock price is $50 per share, with 2.5 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has

> In year 1, AMC will earn $2000 before interest and taxes. The market expects these earnings to grow at a rate of 3% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. As

> WorldCom reclassified $3.85 billion of operating expenses as capital expenditures. Explain the effect this reclassification would have on WorldCom’s cash flows. (Hint: Consider taxes.) WorldCom’s actions were illegal and clearly designed to deceive inves

> Consider Alcatel-Lucent’s project in Problem 6. a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data from Problem 6:

> Consider Alcatel-Lucent’s project in Problem 6. a. What is Alcatel-Lucent’s unlevered cost of capital? b. What is the unlevered value of the project? c. What are the interest tax shields from the project? What is their

> Explain whether each of the following projects is likely to have risk similar to the average risk of the firm. a. The Clorox Company considers launching a new version of Armor All designed to clean and protect notebook computers. b. Google, Inc., plans t

> Suppose you work for Oracle Corporation, and part of your compensation takes the form of stock options. The value of the stock option is equal to the difference between Oracle’s stock price and an exercise price of $10 per share at the time that you exer

> KMS Corporation has assets with a market value of $500 million, $50 million of which are cash. It has debt of $200 million, and 10 million shares outstanding. Assume perfect capital markets. a. What is its current stock price? b. If KMS distributes $50 m

> RFC Corp. has announced a $1 dividend. If RFC’s price last price cum-dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?

> When might it be advantageous to undertake a reverse stock split?

> Explain why most companies choose to pay stock dividends (split their stock).

> AMC Corporation currently has an enterprise value of $400 million and $100 million in excess cash. The firm has 10 million shares outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares. After the share repurchase, news will come o

> Describe the different mechanisms available to a firm to use to repurchase shares.

> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). a. Which auditing firm certified these financial statements? b. Which officers of Costco certified the financial statements?

> Why is an announcement of a share repurchase considered a positive signal?

> Explain under which conditions an increase in the dividend payment can be interpreted as a signal of the following: a. Good news b. Bad news

> Use the data in Table 15.3 to calculate the tax disadvantage of retained cash in the following: a. 1998 b. 1976 Table 15.3: Personal Tax Rates Corporate Tax Rate Average Rate on Equity Income Year Interest Income Dividends Capital Gains 48% 35% 28%

> Raviv Industries has $100 million in cash that it can use for a share repurchase. Suppose instead Raviv invests the funds in an account paying 10% interest for one year. a. If the corporate tax rate is 40%, how much additional cash will Raviv have at the

> Redo Problem 22, but assume the following: a. Investors pay a 15% tax on dividends but no capital gains taxes or taxes on interest income, and Kay does not pay corporate taxes. b. Investors pay a 15% tax on dividends and capital gains, and a 35% tax on i

> Harris Corporation has $250 million in cash, and 100 million shares outstanding. Suppose the corporate tax rate is 35%, and investors pay no taxes on dividends, capital gains, or interest income. Investors had expected Harris to pay out the $250 million

> Redo Problem 22, but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes. Data from Problem 22: Assume capital markets are perfect. Kay Industries currently has $100 million invested in short term Treasury securities paying

> Assume capital markets are perfect. Kay Industries currently has $100 million invested in short term Treasury securities paying 7%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Tr

> Clovix Corporation has $50 million in cash, 10 million shares outstanding, and a current share price of $30. Clovix is deciding whether to use the $50 million to pay an immediate special dividend of $5 per share, or to retain and invest it at the risk-fr

> A stock that you know is held by long-term individual investors paid a large one-time dividend. You notice that the price drop on the ex-dividend date is about the size of the dividend payment. You find this relationship puzzling given the tax disadvanta

> Consider a retailing firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million. a. What is the firm’s current ROE? b. If the firm increased its net profit margin to 4%, wh