You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4.3 million, and it would be depreciated straight-line to zero over four years. Because of radiation contamination, it actually will be completely valueless in four years. You can lease it for $1.275 million per year for four years. Rework Problem 1, assuming that the scanner will be depreciated as three-year property under MACRS (see Chapter 10 for the depreciation allowances). Problem 1: Assume that the tax rate is 21 percent. You can borrow at 8 percent before taxes. Should you lease or buy?
> Landman Corporation (LC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .60. It’s considering building a new $73 million manufacturing facility. This new plant is expected to generate aftertax cash flo
> In the previous problem, suppose you believe that sales in five years will be $45.5 million and the price-sales ratio will be 2.15. What is the share price now? Problem 26: You have looked at the current financial statements for J&R Homes, Co. The compa
> You have looked at the current financial statements for J&R Homes, Co. The company has an EBIT of $3.35 million this year. Depreciation, the increase in net working capital, and capital spending were $295,000, $125,000, and $535,000, respectively. You ex
> In the previous problem, instead of a perpetual growth rate in adjusted cash flow from assets, you decide to calculate the terminal value of the company with the price-sales ratio. You believe that Year 5 sales will be $23.7 million and the appropriate p
> Derry Corp. is expected to have an EBIT of $2.1 million next year. Increases in depreciation, the increase in net working capital, and capital spending are expected to be $165,000, $80,000, and $120,000, respectively. All are expected to grow at 18 perce
> In Problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 3,310 units and all other values remain the same. Problem 14: The Branson Corporation is consid
> Ginger Industries stock has a beta of 1.08. The company just paid a dividend of $.85, and the dividends are expected to grow at 4 percent. The expected return on the market is 11.3 percent, and Treasury bills are yielding 3.4 percent. The most recent sto
> Lebleu, Inc., is considering a project that will result in initial aftertax cash savings of $2.9 million at the end of the first year, and these savings will grow at a rate of 2 percent per year indefinitely. The firm has a target debt-equity ratio of .7
> The Swanson Corporation’s common stock has a beta of 1.07. If the risk-free rate is 3.4 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?
> Shinedown Company needs to raise $95 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 65 percent common st
> Suppose your company needs $43 million to build a new assembly line. Your target debt-equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 percent. Your boss has decided to fund the project by bor
> Explain why the aftertax borrowing rate is the appropriate discount rate to use in lease evaluation.
> In 2019, activist investor Elliott Management was pressuring eBay to sell StubHub. The sale was completed in February 2020, when Ebay sold StubHub to Viagogo. Why might investors prefer that a company split into multiple companies? Is there a possibility
> In 2019, Japan-based Mitsubishi Corporation acquired Dutch power provider Eneco for $4.52 billion. Is this a horizontal or vertical acquisition? How do you suppose Eneco’s nationality affected Mitsubishi’s decision?
> If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk? Would it buy or sell yen futures? In answering, assume that the exchange rate quoted in the futures contract is quoted as d
> On Tuesday, December 5, Hometown Power Co.’s board of directors declares a dividend of 75 cents per share payable on Wednesday, January 17, to shareholders of record as of Wednesday, January 3. When is the ex-dividend date? If a shareholder buys stock be
> How do you think this tax law change affected the relative attractiveness of stock repurchases compared to dividend payments?
> An all-equity firm is considering the following projects: The T-bill rate is 4 percent, and the expected return on the market is 12 percent. a. Which projects have a higher expected return than the firm’s 12 percent cost of capital?
> The following material represents the cover page and summary of the prospectus for the initial public offering of the Pest Investigation Control Corporation (PICC), which is going public tomorrow with a firm commitment initial public offering managed by
> How do you think this tax law change affected ex-dividend stock prices?
> For initial public offerings of common stock, 2017 was a slow year, with about $24.53 billion raised by the process. Relatively few of the 108 firms involved paid cash dividends. Why do you think that most chose not to pay cash dividends? Use the followi
> In the previous two questions, how would it affect your thinking to know that in addition to the 9.68 million shares offered in the IPO, Zipcar had an additional 30 million shares outstanding? Of those 30 million shares, 14.1 million shares were owned by
> In the previous question, how would it affect your thinking to know that the company was incorporated about 10 years earlier, had only $186 million in revenues in 2010, and had never earned a profit? Additionally, the viability of the company’s business
> The Zipcar IPO was underpriced by about 56 percent. Should Zipcar be upset at Goldman over the underpricing?
> Why is underpricing not a great concern with bond offerings? Use the following information to answer the next three questions. Zipcar, the car-sharing company, went public in April 2011. Assisted by the investment bank Goldman, Sachs & Co., Zipcar sold 9
> Why do noninvestment-grade bonds have much higher direct costs than investment-grade issues?
> Why are the costs of selling equity so much larger than the costs of selling debt? Answer: From the previous question, economies of scale are part of the answer. Beyond this, debt issues are easier and less risky to sell from an investment bank’s
> In the aggregate, debt offerings are much more common than equity offerings and typically much larger as well. Why?
> Lingenburger Cheese Corporation has 6.4 million shares of common stock outstanding, 200,000 shares of 3.8 percent preferred stock outstanding, par value of $100, and 120,000 bonds with a semiannual coupon of 4.8 percent outstanding, par value $1,000 each
> You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 12.4 percent and Stock Y with an expected return of 10.1 percent. If your goal is to create a portfolio with an expected return of 10.85 percent, how muc
> You own a portfolio that is invested 15 percent in Stock X, 35 percent in Stock Y, and 50 percent in Stock Z. The expected returns on these three stocks are 9 percent, 15 percent, and 12 percent, respectively. What is the expected return on the portfolio
> You own a portfolio that has $4,450 invested in Stock A and $9,680 invested in Stock B. If the expected returns on these stocks are 8 percent and 11 percent, respectively, what is the expected return on the portfolio?
> What are the portfolio weights for a portfolio that has 145 shares of Stock A that sell for $47 per share and 200 shares of Stock B that sell for $21 per share?
> A stock has an expected return of 10.45 percent, its beta is .85, and the expected return on the market is 11.8 percent. What must the risk-free rate be?
> A stock has an expected return of 11.85 percent, its beta is 1.08, and the risk-free rate is 3.9 percent. What must the expected return on the market be?
> A stock has an expected return of 11.4 percent, the risk-free rate is 3.9 percent, and the market risk premium is 6.8 percent. What must the beta of this stock be?
> A stock has a beta of 1.15, the expected return on the market is 11.3 percent, and the risk-free rate is 3.6 percent. What must the expected return on this stock be?
> You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.34 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?
> You own a stock portfolio invested 15 percent in Stock Q, 20 percent in Stock R, 30 percent in Stock S, and 35 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36, respectively. What is the portfolio beta?
> Given the following information for Lightning Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 12,000 bonds with a 4.6 percent coupon outstanding, $1,000 par value, 25 years to maturity, selling for 105 percent of par; the bon
> Consider the following information: a. Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected return of the portfolio? b. What is the variance of this portfolio? The standard deviation?
> Consider the following information: a. What is the expected return on an equally weighted portfolio of these three stocks? b. What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C?
> A portfolio is invested 45 percent in Stock G, 40 percent in Stock J, and 15 percent in Stock K. The expected returns on these stocks are 11 percent, 9 percent, and 15 percent, respectively. What is the portfolio’s expected return? How do you interpret y
> Based on the following information, calculate the expected return and standard deviation for Stock A and Stock B:
> Based on the following information, calculate the expected return:
> Based on the following information, calculate the expected return:
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pr
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pr
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pr
> Ursala, Inc., has a target debt-equity ratio of .65. Its WACC is 10.4 percent, and the tax rate is 23 percent. a. If the company’s cost of equity is 14 percent, what is its pretax cost of debt? b. If instead you know that the aftertax cost of debt is 5.8
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4.3 million, and it would be depreciated straight-line to zero over
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4.3 million, and it would be depreciated straight-line to zero over
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4.3 million, and it would be depreciated straight-line to zero over
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4.3 million, and it would be depreciated straight-line to zero over
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pr
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pr
> The Wildcat Oil Company is trying to decide whether to lease or buy a new computerassisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.8 million in annual pr
> You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive, high-tech equipment). The scanner costs $4.3 million, and it would be depreciated straight-line to zero over
> In Problem 8, are the shareholders of Firm T better off with the cash offer or the stock offer? At what exchange ratio of B shares to T shares would the shareholders in T be indifferent between the two offers? Problem 8: Consider the following premerger
> Consider the following premerger information about a bidding firm (Firm B) and a target firm (Firm T). Assume that both firms have no debt outstanding. Firm B has estimated that the value of the synergistic benefits from acquiring Firm T is $17,000. a.
> In Problem 12, suppose the most recent dividend was $3.85 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. The tax rate is 21 percent. What is the
> Stock Y has a beta of 1.2 and an expected return of 11.5 percent. Stock Z has a beta of .80 and an expected return of 8.5 percent. If the risk-free rate is 3.2 percent and the market risk premium is 6.8 percent, are these stocks correctly priced?
> The shareholders of Bread Company have voted in favor of a buyout offer from Butter Corporation. Information about each firm is given here: Bread’s shareholders will receive one share of Butter stock for every three shares they hold i
> Three Guys Burgers, Inc., has offered $15.3 million for all of the common stock in Two Guys Fries Corp. The current market capitalization of Two Guys as an independent company is $12.1 million. Assume the required return on the acquisition is 9 percent a
> Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.45 million indefinitely. The current market value of Teller is $31.5 milli
> Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase of interests for accounting purposes. The following balance sheets represent the premerger
> Assume that the following balance sheets are stated at book value. Suppose that Meat Co. purchases Loaf, Inc. The fair market value of Loaf’s fixed assets is $11,500 versus the $8,300 book value shown. Meat pays $18,400 for Loaf and
> Consider the following premerger information about Firm X and Firm Y: Assume that Firm X acquires Firm Y by issuing new long-term debt for all the shares outstanding at a merger premium of $5 per share. Assuming that neither firm has any debt before th
> Harrods PLC has a market value of £85 million and 4.5 million shares outstanding. Selfridge Department Store has a market value of £30 million and 1.8 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that
> Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Delivery. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $345,000 indefinitely. The current marke
> Consider the following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $61 for each share of B’s stock. Both Firm A and Firm B have no debt outstanding. a. What
> Pearl, Inc., has offered $197 million cash for all of the common stock in Jam Corporation. Based on recent market information, Jam is worth $178 million as an independent operation. If the merger makes economic sense for Pearl, what is the minimum estima
> Dani Corp. has 5.5 million shares of common stock outstanding. The current share price is $83, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value of $80 million, a coupon rate of 5.
> You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.35 million. Over the past five years, the price of land in the area has increased 7 percent per year, with an annual standard deviation of 35 percent. A
> What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?
> What are the prices of a call option and a put option with the following characteristics? Stock price = $58 Exercise price = $60 Risk-free rate = 2.7% per year, compounded continuously Maturity = 4 months Standard deviation = 47% per year
> A put option and a call option with an exercise price of $65 and three months to expiration sell for $5.27 and $1.04, respectively. If the risk-free rate is 3.1 percent per year, compounded continuously, what is the current stock price?
> A put option that expires in six months with an exercise price of $45 sells for $4.84. The stock is currently priced at $43, and the risk-free rate is 3.5 percent per year, compounded continuously. What is the price of a call option with the same exercis
> A stock is currently selling for $73 per share. A call option with an exercise price of $70 sells for $5.27 and expires in three months. If the riskfree rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option
> The put-call parity condition is altered when dividends are paid. The dividend-adjusted put-call parity formula is: S × e–dt + P = E × e–Rt + C where d is again the continuously compounded dividend yield. a. What effect do you think the dividend yield wi
> In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black-Scholes option pricing model with dividends is: All of the variables are the same as the Black-Scholes model without dividends except for
> Marshall Corp. has a zero coupon bond that matures in five years with a face value of $75,000. The current value of the company’s assets is $71,000, and the standard deviation of its return on assets is 34 percent per year. The risk-free rate is 7 percen
> Zoso Industries has a zero coupon bond issue that matures in two years with a face value of $50,000. The current value of the company’s assets is $34,600, and the standard deviation of the return on assets is 60 percent per year. a. Assume the risk-free
> Fama’s Llamas has a weighted average cost of capital of 8.4 percent. The company’s cost of equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What is the company’s target debt-equity ratio?
> A company has a single zero coupon bond outstanding that matures in five years with a face value of $16.5 million. The current value of the company’s assets is $15.1 million, and the standard deviation of the return on the firm’s assets is 41 percent per
> If you need $25,000 in 12 years, how much will you need to deposit today if you can earn 7 percent per year compounded continuously?
> Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm’s assets is $23,100. The standard deviation of the return on the firm’s assets is 38 percent per ye
> Suppose the firm in Problem 16 is considering two mutually exclusive investments. Project A has an NPV of $2,400, and Project B has an NPV of $2,800. As the result of taking Project A, the standard deviation of the return on the firm’s assets will increa
> Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm’s assets is $10,900. The standard deviation of the return on the firm’s assets is 31 percent per year, and
> A call option has an exercise price of $70 and matures in six months. The current stock price is $73, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent
> A call option with an exercise price of $25 and four months to expiration has a price of $3.10. The stock is currently priced at $25.19, and the risk-free rate is 2.5 percent per year, compounded continuously. What is the price of a put option with the s
> You are given the following information concerning options on a particular stock: Stock price = $64 Exercise price = $60 Risk-free rate = 2% per year, compounded continuously Maturity = 6 months Standard deviation = 57% per year a. What is the intrinsic
> In Problem 9, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of the transaction today? Problem 9: You own a lot in Key West
> If you have $1,490 today, how much will it be worth in six years at 9 percent per year compounded continuously?
> Brannan Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC?
> A $1,000 par convertible debenture has a conversion price for common stock of $18 per share. With the common stock selling at $25, what is the conversion value of the bond?
> Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,060. The CEO believes that the assets in the company will be worth either $940 or $1,250 in a year. The goin
> Rackin Pinion Corporation’s assets are currently worth $1,030. In one year, they will be worth either $1,000 or $1,270. The risk-free interest rate is 3.7 percent. Suppose the company has an outstanding debt issue with a face value of $1,000. a. What is
> A one-year call option contract on Cheesy Poofs Co. stock sells for $725. In one year, the stock will be worth $64 or $81 per share. The exercise price on the call option is $70. What is the current value of the stock if the risk-free rate is 3 percent?
> The price of Cilantro, Inc., stock will be either $60 or $80 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent. a. Suppose the current price of the company’s stock is $70. What is the value
