All Related Questions of Corporate Finance

Q: The shareholders of the Stackhouse Company need to elect seven new directors

The shareholders of the Stackhouse Company need to elect seven new directors. There are 850,000 shares outstanding currently trading at $43 per share. You would like to serve on the board of directors...

Q: Do you agree or disagree with the following statement? A firm’s

Do you agree or disagree with the following statement? A firm’s stockholders will never want the firm to invest in projects with negative net present values. Why?

Q: Tom Scott is the owner, president, and primary salesperson for

Tom Scott is the owner, president, and primary salesperson for Scott Manufacturing. Because of this, the company’s profits are driven by the amount of work Tom does. If he works 40 hours each week, th...

Q: What are the differences between preferred stock and debt?

What are the differences between preferred stock and debt?

Q: The shareholders of Motive Power Corp. need to elect three new

The shareholders of Motive Power Corp. need to elect three new directors to the board. There are 13,000,000 shares of common stock outstanding, and the current share price is $10.50. If the company us...

Q: In a world with no taxes, no transaction costs, and

In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? Moderate borrowing will not increase the required return on a...

Q: Suppose the company in Problem 1 has a market-to-

Suppose the company in Problem 1 has a market-to-book ratio of 1.0. a. Calculate return on equity, ROE, under each of the three economic scenarios efore any debt is issued. Also calculate the percent...

Q: Due to large losses incurred in the past several years, a

Due to large losses incurred in the past several years, a firm has $2 billion in tax loss carryforwards. This means that the next $2 billion of the firm’s income will be free from corporate income tax...

Q: Dream, Inc., has debt outstanding with a face value of

Dream, Inc., has debt outstanding with a face value of $6 million. The value of the firm if it were entirely financed by equity would be $17.85 million. The company also has 350,000 shares of stock ou...

Q: Preferred stock doesn’t offer a corporate tax shield on the dividends paid

Preferred stock doesn’t offer a corporate tax shield on the dividends paid. Why do we still observe some firms issuing preferred stock?

Q: Candle box Inc. is going to elect six board members next

Candle box Inc. is going to elect six board members next month. Betty Brown owns 17.4 percent of the total shares outstanding. How confident can she be of having one of her candidate friends elected u...

Q: List the three assumptions that lie behind the Modigliani–Miller theory

List the three assumptions that lie behind the Modigliani–Miller theory in a world without taxes. Are these assumptions reasonable in the real world? Explain.

Q: Rolston Corporation is comparing two different capital structures, an all-

Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 265,000 shares of stock outstanding. Under...

Q: What steps can stockholders take to reduce the costs of debt?

What steps can stockholders take to reduce the costs of debt?

Q: Dream, Inc., has debt outstanding with a face value of

Dream, Inc., has debt outstanding with a face value of $6 million. The value of the firm if it were entirely financed by equity would be $17.85 million. The company also has 350,000 shares of stock ou...

Q: The yields on nonconvertible preferred stock are lower than the yields on

The yields on nonconvertible preferred stock are lower than the yields on corporate bonds. Why is there a difference? Which investors are the primary holders of preferred stock? Why?

Q: KIC, Inc., plans to issue $5 million of bonds

KIC, Inc., plans to issue $5 million of bonds with a coupon rate of 8 percent and 30 years to maturity. The current market interest rates on these bonds are 7 percent. In one year, the interest rate o...

Q: Explain what is meant by business and financial risk. Suppose Firm

Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain.

Q: Rolston Corporation is comparing two different capital structures, an all-

Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 265,000 shares of stock outstanding. Under...

Q: How does the existence of financial distress costs and agency costs affect

How does the existence of financial distress costs and agency costs affect Modigliani and Miller’s theory in a world where corporations pay taxes?

Q: Edwards Construction currently has debt outstanding with a market value of $

Edwards Construction currently has debt outstanding with a market value of $85,000 and a cost of 9 percent. The company has EBIT of $7,650 that is expected to continue in perpetuity. Assume there are...

Q: What are the main differences between corporate debt and equity? Why

What are the main differences between corporate debt and equity? Why do some firms try to issue equity in the guise of debt?

Q: Money, Inc., has no debt outstanding and a total market

Money, Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong e...

Q: New Business Ventures, Inc., has an outstanding perpetual bond with

New Business Ventures, Inc., has an outstanding perpetual bond with a 10 percent coupon rate that can be called in one year. The bond makes annual coupon payments. The call premium is set at $150 over...

Q: How would you answer in the following debate? Q :

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 Propo...

Q: Kolby Corp. is comparing two different capital structures. Plan I

Kolby Corp. is comparing two different capital structures. Plan I would result in 900 shares of stock and $65,700 in debt. Plan II would result in 1,900 shares of stock and $29,200 in debt. The intere...

Q: What are the sources of agency costs of equity?

What are the sources of agency costs of equity?

Q: Steinberg Corporation and Dietrich Corporation are identical firms except that Dietrich is

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...

Q: A company is contemplating a long-term bond issue. It

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...

Q: Is there an easily identifiable debt–equity ratio that will maximize

Is there an easily identifiable debt–equity ratio that will maximize the value of a firm? Why or why not?

Q: Kolby Corp. is comparing two different capital structures. Plan I

Kolby Corp. is comparing two different capital structures. Plan I would result in 900 shares of stock and $65,700 in debt. Plan II would result in 1,900 shares of stock and $29,200 in debt. The intere...

Q: Refer to the observed capital structures given in Table 17.3

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 certa...

Q: Fountain Corporation’s economists estimate that a good business environment and a bad

Fountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Fountain must choos...

Q: What are the direct and indirect costs of bankruptcy? Briefly explain

What are the direct and indirect costs of bankruptcy? Briefly explain each.

Q: Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon

Bowdeen Manufacturing intends to issue callable, perpetual bonds with annual coupon payments. The bonds are callable at $1,175. One-year interest rates are 9 percent. There is a 60 percent probability...

Q: Illinois Industries has decided to borrow money by issuing perpetual bonds with

Illinois Industries has decided to borrow money by issuing perpetual bonds with a coupon rate of 7 percent, payable annually. The one-year interest rate is 7 percent. Next year, there is a 35 percent...

Q: Star, Inc., a prominent consumer products firm, is debating

Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 35 percent debt. Currently there are 6,000 shares outstanding and...

Q: As mentioned in the text, some firms have filed for bankruptcy

As mentioned in the text, some firms have filed for bankruptcy because of actual or likely litigation-related losses. Is this a proper use of the bankruptcy process?

Q: Good Time Company is a regional chain department store. It will

Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It...

Q: Do you think preferred stock is more like debt or equity?

Do you think preferred stock is more like debt or equity? Why?

Q: An outstanding issue of Public Express Airlines debentures has a call provision

An outstanding issue of Public Express Airlines debentures has a call provision attached. The total principal value of the bonds is $250 million, and the bonds have an annual coupon rate of 9 percent....

Q: ABC Co. and XYZ Co. are identical firms in all

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $750,000 in stock. XYZ uses both stock and perpetual debt; its stock is wort...

Q: When personal taxes on interest income and bankruptcy costs are considered,

When personal taxes on interest income and bankruptcy costs are considered, the general expression for the value of a levered firm in a world in which the tax rate on equity distributions equals zero...

Q: New equity issues are generally only a small portion of all new

New equity issues are generally only a small portion of all new issues. At the same time, companies continue to issue new debt. Why do companies tend to issue little new equity but continue to issue n...

Q: Janetta Corp. has an EBIT rate of $975,000

Janetta Corp. has an EBIT rate of $975,000 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. Th...

Q: Continental Airlines once filed for bankruptcy, at least in part,

Continental Airlines once filed for bankruptcy, at least in part, as a means of reducing labor costs. Whether this move was ethical or proper was hotly debated. Give both sides of the argument.

Q: Overnight Publishing Company (OPC) has $2.5 million

Overnight Publishing Company (OPC) has $2.5 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm’s debt is held by one...

Q: Charles River Associates is considering whether to call either of the two

Charles River Associates is considering whether to call either of the two perpetual bond issues the company currently has outstanding. If the bond is called, it will be refunded, that is, a new bond i...

Q: Nina Corp. uses no debt. The weighted average cost of

Nina Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT? Suppose the corporate tax ra...

Q: Consider the prices of the following three Treasury issues as of February

Consider the prices of the following three Treasury issues as of February 24, 2012: The bond in the middle is callable in February 2013. What is the implied value of the call feature? (there a way t...

Q: The following Treasury bond quote appeared in The Wall Street Journal on

The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004: Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?

Q: Weston Industries has a debt–equity ratio of 1.5

Weston Industries has a debt–equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent. a. What is Weston’s cost of equity capital? b. What i...

Q: Several publicly traded companies have issued more than one class of stock

Several publicly traded companies have issued more than one class of stock. Why might a company issue more than one class of stock?

Q: Shadow Corp. has no debt but can borrow at 8 percent

Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent. a. What is Shadow’s cost of equity? b. If the firm converts to 25 percent...

Q: Do you agree or disagree with the following statement: In an

Do you agree or disagree with the following statement: In an efficient market, callable and noncallable bonds will be priced in such a way that there will be no advantage or disadvantage to the call p...

Q: What are the main features of a corporate bond that would be

What are the main features of a corporate bond that would be listed in the indenture?

Q: Bruce & Co. expects its EBIT to be $185,

Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9 percent. Bruce currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent, what...

Q: If interest rates fall, will the price of noncallable bonds move

If interest rates fall, will the price of noncallable bonds move up higher than that of callable bonds? Why or why not?

Q: Bruce & Co. expects its EBIT to be $185,

Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9 percent. Bruce currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent, what...

Q: Sinking funds have both positive and negative characteristics for bondholders. Why

Sinking funds have both positive and negative characteristics for bondholders. Why?

Q: Levered, Inc., and Unlevered, Inc., are identical in

Levered, Inc., and Unlevered, Inc., are identical in every way except their capital structures. Each company expects to earn $29 million before interest per year in perpetuity, with each company distr...

Q: Tool Manufacturing has an expected EBIT of $57,000 in

Tool Manufacturing has an expected EBIT of $57,000 in perpetuity and a tax rate of 35 percent. The firm has $90,000 in outstanding debt at an interest rate of 8 percent, and its unlevered cost of capi...

Q: Cavo Corporation expects an EBIT of $19,750 every year

Cavo Corporation expects an EBIT of $19,750 every year forever. The company currently has no debt, and its cost of equity is 15 percent. a. What is the current value of the company? b. Suppose the com...

Q: The Maxwell Company is financed entirely with equity. The company is

The Maxwell Company is financed entirely with equity. The company is considering a loan of $1.8 million. The loan will be repaid in equal installments over the next two years, and it has an interest r...

Q: Alpha Corporation and Beta Corporation are identical in every way except

Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an allequity firm, has 15,000 shares of stock outstanding, currently worth $30 pe...

Q: Acetate, Inc., has equity with a market value of $

Acetate, Inc., has equity with a market value of $23 million and debt with a market value of $7 million. Treasury bills that mature in one year yield 5 percent per year, and the expected return on the...

Q: An election is being held to fill three seats on the board

An election is being held to fill three seats on the board of directors of a firm in which you hold stock. The company has 7,600 shares outstanding. If the election is conducted under cumulative votin...

Q: The Veblen Company and the Knight Company are identical in every respect

The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. The market value of Knight Company’s 6 percent bonds is $1.4 million. Fina...

Q: Locomotive Corporation is planning to repurchase part of its common stock by

Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 35 percent to 50 percent. The fi...

Q: Green Manufacturing, Inc., plans to announce that it will issue

Green Manufacturing, Inc., plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6 percent...

Q: Williamson, Inc., has a debt–equity ratio of 2

Williamson, Inc., has a debt–equity ratio of 2.5. The firm’s weighted average cost of capital is 10 percent, and its pretax cost of debt is 6 percent. Williamson is subject to a corporate tax rate of...

Q: In a world of corporate taxes only, show that the R

In a world of corporate taxes only, show that the R WACC can be written as R WACC = R0 × [1 – tC ( B/V )].

Q: Assuming a world of corporate taxes only, show that the cost

Assuming a world of corporate taxes only, show that the cost of equity, R S, is as given in the chapter by MM Proposition II with corporate taxes.

Q: Assume a firm’s debt is risk-free, so that the

Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, R f . Define βA as the firm’s asset beta—that is, the systematic risk of the firm’s assets. Define βS to be the b...

Q: Suppose a firm’s business operations mirror movements in the economy as a

Suppose a firm’s business operations mirror movements in the economy as a whole very closely—that is, the firm’s asset beta is 1.0. Use the result of previous problem to find the equity beta for this...

Q: Beginning with the cost of capital equation—that is:

Beginning with the cost of capital equation—that is: show that the cost of equity capital for a levered firm can be written as follows:

Q: In a world with no taxes, no transaction costs, and

In a world with no taxes, no transaction costs, and no costs of financial distress, is the following statement true, false, or uncertain? If a firm issues equity to repurchase some of its debt, the pr...

Q: Money, Inc., has no debt outstanding and a total market

Money, Inc., has no debt outstanding and a total market value of $275,000. Earnings before interest and taxes, EBIT, are projected to be $21,000 if economic conditions are normal. If there is strong e...

Q: In broad terms, why is some risk diversifiable? Why are

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 sys...

Q: For each of the following scenarios, discuss whether profit opportunities exist

For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the marke...

Q: Suppose Tom O’Bedlam, president of Bedlam Products, Inc., has

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 dividen...

Q: Security F has an expected return of 10 percent and a standard

Security F has an expected return of 10 percent and a standard deviation of 43 percent per year. Security G has an expected return of 15 percent and a standard deviation of 62 percent per year. a. Wha...

Q: Prospectors, Inc., is a publicly traded gold prospecting company in

Prospectors, Inc., is a publicly traded gold prospecting company in Alaska. Although the firm’s searches for gold usually fail, the prospectors occasionally find a rich vein of ore. What pattern would...

Q: Suppose the returns on large-company stocks are normally distributed.

Suppose the returns on large-company stocks are normally distributed. Based on the historical record, use the NORMDIST function in Excel ® to determine the probability that in any given year you will...

Q: Suppose the expected returns and standard deviations of Stocks A and B

Suppose the expected returns and standard deviations of Stocks A and B are E( R A ) = .09, E( RB ) = .15, αA = .36, and αB 5 .62. a. Calculate the expected return and standard deviation of a portfolio...

Q: You have been provided the following data about the securities of three

You have been provided the following data about the securities of three firms, the market portfolio, and the risk-free asset: a. Fill in the missing values in the table. b. Is the stock of Firm A co...

Q: David McClemore, the CFO of Ultra Bread, has decided to

David McClemore, the CFO of Ultra Bread, has decided to use an APT model to estimate the required return on the company’s stock. The risk factors he plans to use are the risk premium on the stock mark...

Q: Suppose a factor model is appropriate to describe the returns on a

Suppose a factor model is appropriate to describe the returns on a stock. The current expected return on the stock is 10.5 percent. Information about those factors is presented in the following chart:...

Q: Shanken Corp. issued a 30-year, 6.2

Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent. a. What is the pretax cost of...

Q: Which of the following statements are true about the efficient market hypothesis

Which of the following statements are true about the efficient market hypothesis? a. It implies perfect forecasting ability. b. It implies that prices reflect all available information. c. It implies...

Q: Assume that the returns on individual securities are generated by the following

Assume that the returns on individual securities are generated by the following two-factor model: R it = E ( R it ) + β ij F 1 t + β i 2 F 2 t Here: Rit is the return on Securi...

Q: Is it possible for the risk premium to be negative before an

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.

Q: The following figures present the results of four cumulative abnormal returns (

The following figures present the results of four cumulative abnormal returns (CAR) studies. Indicate whether the results of each study support, reject, or are inconclusive about the semi-strong form...

Q: Suppose a stock had an initial price of $75 per share

Suppose a stock had an initial price of $75 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $86. Assuming the ending share price is $67. Compute the pe...

Q: The market portfolio has an expected return of 12 percent and a

The market portfolio has an expected return of 12 percent and a standard deviation of 22 percent. The risk-free rate is 5 percent. a. What is the expected return on a well-diversified portfolio with a...

Q: A portfolio that combines the risk-free asset and the market

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the expected ret...

Q: Suppose the risk-free rate is 4.2 percent and

Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of .0382. Portfolio Z has a correlation coefficient with...

Q: Consider the following information about Stocks I and II:

Consider the following information about Stocks I and II: The market risk premium is 7.5 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the mos...

Q: Suppose you observe the following situation: /

Suppose you observe the following situation: Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? What is the risk-free rate?

Q: There are three securities in the market. The following chart shows

There are three securities in the market. The following chart shows their possible payoffs: a. What are the expected return and standard deviation of each security? b. What are the covariances and c...

Q: Suppose you observe the following situation: /

Suppose you observe the following situation: a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock A’s beta is greater than St...

Q: There are two stocks in the market, Stock A and Stock

There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $75. The price of Stock A next year will be $64 if the economy is in a recession, $87 if the economy is normal,...

Q: The historical asset class returns presented in the chapter are not adjusted

The historical asset class returns presented in the chapter are not adjusted for inflation. What would happen to the estimated risk premium if we did account for inflation? The returns are also not ad...

Q: What factors determine the beta of a stock? Define and describe

What factors determine the beta of a stock? Define and describe each.

Q: Assume Stocks A and B have the following characteristics:

Assume Stocks A and B have the following characteristics: The covariance between the returns on the two stocks is .001. a. Suppose an investor holds a portfolio consisting of only Stock A and Stock...

Q: You have $10,000 to invest in a stock portfolio

You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 9 percent. If your goal is to create a portfolio...

Q: You own stock in the Lewis-Striden Drug Company. Suppose

You own stock in the Lewis-Striden Drug Company. Suppose you had expected the following events to occur last month: a. The government would announce that real GNP had grown 1.2 percent during the prev...

Q: Suppose stock returns can be explained by the following three factor model

Suppose stock returns can be explained by the following three factor model: R i = R F + β 1 F 1 + β 2 F 2 β 3 F 3 Assume there is no firm-specific risk. The inform...

Q: What are the advantages of using the SML approach to finding the

What are the advantages of using the SML approach to finding the cost of equity capital? What are the disadvantages? What are the specific pieces of information needed to use this method? Are all of t...

Q: For the firm in the previous problem, suppose the book value

For the firm in the previous problem, suppose the book value of the debt issue is $70 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 12 years left to...

Q: Explain why a characteristic of an efficient market is that investments in

Explain why a characteristic of an efficient market is that investments in that market have zero NPVs.

Q: A study analyzed the behavior of the stock prices of firms that

A study analyzed the behavior of the stock prices of firms that had lost antitrust cases. Included in the diagram are all firms that lost the initial court decision, even if the decision was later ove...

Q: Suppose you bought a 6 percent coupon bond one year ago for

Suppose you bought a 6 percent coupon bond one year ago for $1,040. The bond sells for $1,063 today. a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past...

Q: Using the following returns, calculate the average returns, the variances

Using the following returns, calculate the average returns, the variances, and the standard deviations for X and Y:

Q: Based on the following information, calculate the expected return and standard

Based on the following information, calculate the expected return and standard deviation for the two stocks:

Q: Briefly explain why the covariance of a security with the rest of

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.

Q: A portfolio is invested 10 percent in Stock G, 65 percent

A portfolio is invested 10 percent in Stock G, 65 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 t...

Q: You are forming an equally weighted portfolio of stocks. Many stocks

You are forming an equally weighted portfolio of stocks. Many stocks have the same beta of .84 for Factor 1 and the same beta of 1.69 for Factor 2. All stocks also have the same expected return of 11...

Q: Both Dow Chemical Company, a large natural gas user, and

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...

Q: Fama’s Llamas has a weighted average cost of capital of 9.

Fama’s Llamas has a weighted average cost of capital of 9.8 percent. The company’s cost of equity is 13 percent, and its cost of debt is 6.5 percent. The tax rate is 35 percent. What is Fama’s debt–eq...

Q: Two years ago, General Materials’ and Standard Fixtures’ stock prices were

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...

Q: Suppose stock returns can be explained by a two-factor model

Suppose stock returns can be explained by a two-factor model. The firm-specific risks for all stocks are independent. The following table shows the information for two diversified portfolios: If the...

Q: Refer to Table 10.1 in the text and look at

Refer to Table 10.1 in the text and look at the period from 1973 through 1978. a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period. b. Calculate the s...

Q: Consider the following quotation from a leading investment manager: “The

Consider the following quotation from a leading investment manager: “The shares of Southern Co. have traded close to $12 for most of the past three years. Since Southern’s stock has demonstrated very...

Q: Consider the following information: / a.

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,...

Q: You own a portfolio equally invested in a risk-free asset

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.65 and the total portfolio is equally as risky as the market, what must the beta be for t...

Q: There are two stock markets, each driven by the same common

There are two stock markets, each driven by the same common force, F, with an expected value of zero and standard deviation of 10 percent. There are many securities in each market; thus, you can inves...

Q: Under what circumstances would it be appropriate for a firm to use

Under what circumstances would it be appropriate for a firm to use different costs of capital for its different operating divisions? If the overall firm WACC was used as the hurdle rate for all divisi...

Q: Two years ago, the Lake Minerals and Small Town Furniture stock

Two years ago, the Lake Minerals and Small Town Furniture stock prices were the same. The average annual return for both stocks over the past two years was 10 percent. Lake Minerals’ stock price incre...

Q: You’ve observed the following returns on Mary Ann Data Corporation’s stock over

You’ve observed the following returns on Mary Ann Data Corporation’s stock over the past five years: 27 percent, 13 percent, 18 percent, 214 percent, and 9 percent. a. What was the arithmetic average...

Q: A broker has advised you not to invest in oil industry stocks

A broker has advised you not to invest in oil industry stocks because they have high standard deviations. Is the broker’s advice sound for a risk-averse investor like yourself? Why or why not?

Q: Consider the following information: / a.

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 portf...

Q: How do you determine the appropriate cost of debt for a company

How do you determine the appropriate cost of debt for a company? Does it make a difference if the company’s debt is privately placed as opposed to being publicly traded? How would you estimate the cos...

Q: What is data mining? Why might it overstate the relation between

What is data mining? Why might it overstate the relation between some stock attribute and returns?

Q: Assume that the following market model adequately describes the return generating behavior

Assume that the following market model adequately describes the return generating behavior of risky assets: R it = α i + β i R M t + € it Here: R it = The re...

Q: Consider a levered firm’s projects that have similar risks to the firm

Consider a levered firm’s projects that have similar risks to the firm as a whole. Is the discount rate for the projects higher or lower than the rate computed using the security market line? Why?

Q: Filer Manufacturing has 8.3 million shares of common stock outstanding

Filer Manufacturing has 8.3 million shares of common stock outstanding. The current share price is $53, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. Th...

Q: Given the following information for Huntington Power Co., find the WACC

Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 35 percent. Debt: 5,000 6 percent coupon bonds outstanding, $1,000 par value, 25 years to ma...

Q: Several celebrated investors and stock pickers frequently mentioned in the financial press

Several celebrated investors and stock pickers frequently mentioned in the financial press have recorded huge returns on their investments over the past two decades. Does the success of these particul...

Q: What is the difference between arithmetic and geometric returns? Suppose you

What is the difference between arithmetic and geometric returns? Suppose you have invested in a stock for the last 10 years. Which number is more important to you, the arithmetic or geometric return?...

Q: What would a technical analyst say about market efficiency?

What would a technical analyst say about market efficiency?

Q: Suppose the average inflation rate over this period was 4.2

Suppose the average inflation rate over this period was 4.2 percent, and the average T-bill rate over the period was 5.1 percent, what was the average real risk-free rate over this time period? What w...

Q: Titan Mining Corporation has 9.3 million shares of common stock

Titan Mining Corporation has 9.3 million shares of common stock outstanding and 260,000 6.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per sh...

Q: What was the arithmetic average annual return on large-company stocks

What was the arithmetic average annual return on large-company stocks from 1926 through 2011? a. In nominal terms? b. In real terms?

Q: A technical analysis tool that is sometimes used to predict market movements

A technical analysis tool that is sometimes used to predict market movements is an investor sentiment index. AAII, the American Association of Individual Investors, publishes an investor sentiment ind...

Q: A stock has had returns of 16.12 percent, 12

A stock has had returns of 16.12 percent, 12.11 percent, 5.83 percent, 26.14 percent, and −13.19 percent over the past five years, respectively. What was the holding period return for the stock?

Q: A stock has an expected return of 10.2 percent,

A stock has an expected return of 10.2 percent, the risk-free rate is 4 percent, and the market risk premium is 7 percent. What must the beta of this stock be?

Q: Describe the difference between systematic risk and unsystematic risk.

Describe the difference between systematic risk and unsystematic risk.

Q: An all-equity firm is considering the following projects:

An all-equity firm is considering the following projects: The T-bill rate is 3.5 percent, and the expected return on the market is 11 percent. a. Which projects have a higher expected return than th...

Q: In the middle to late 1990s, the performance of the pros

In the middle to late 1990s, the performance of the pros was unusually poor—on the order of 90 percent of all equity mutual funds underperformed a passively managed index fund. How does this bear on t...

Q: You purchased a zero coupon bond one year ago for $109

You purchased a zero coupon bond one year ago for $109.83. The market interest rate is now 9 percent. If the bond had 25 years to maturity when you originally purchased it, what was your total return...

Q: Suppose your company needs $20 million to build a new assembly

Suppose your company needs $20 million to build a new assembly line. Your target debt–equity ratio is .75. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 3 per...

Q: A hundred years ago or so, companies did not compile annual

A hundred years ago or so, companies did not compile annual reports. Even if you owned stock in a particular company, you were unlikely to be allowed to see the balance sheet and income statement for...

Q: You bought a share of 4 percent preferred stock for $94

You bought a share of 4 percent preferred stock for $94.89 last year. The market price for your stock is now $96.12. What was your total return for last year?

Q: What is the historical real return on long-term government bonds

What is the historical real return on long-term government bonds? On long-term corporate bonds?

Q: Southern Alliance Company needs to raise $55 million to start a

Southern Alliance Company needs to raise $55 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...

Q: Aerotech, an aerospace technology research firm, announced this morning that

Aerotech, an aerospace technology research firm, announced this morning that it has hired the world’s most knowledgeable and prolific space researchers. Before today Aerotech’s stock had been selling...

Q: You bought a stock three months ago for $43.18

You bought a stock three months ago for $43.18 per share. The stock paid no dividends. The current share price is $46.21. What is the APR of your investment? The EAR?

Q: A stock has a beta of 1.13 and an expected

A stock has a beta of 1.13 and an expected return of 12.1 percent. A risk-free asset currently earns 5 percent. a. What is the expected return on a portfolio that is equally invested in the two assets...

Q: What rule should a firm follow when making financing decisions? How

What rule should a firm follow when making financing decisions? How can firms create valuable financing opportunities?

Q: Och, Inc., is considering a project that will result in

Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefini...

Q: When the 56-year-old founder of Gulf & Western

When the 56-year-old founder of Gulf & Western, Inc., died of a heart attack, the stock price immediately jumped from $18.00 a share to $20.25, a 12.5 percent increase. This is evidence of market inef...

Q: Refer to Table 10.1. What was the average real

Refer to Table 10.1. What was the average real return for Treasury bills from 1926 through 1932? Table 10.1

Q: Asset W has an expected return of 12.3 percent and

Asset W has an expected return of 12.3 percent and a beta of 1.3. If the risk-free rate is 4 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the relat...

Q: The Saunders Investment Bank has the following financing outstanding. What is

The Saunders Investment Bank has the following financing outstanding. What is the WACC for the company? Debt: 60,000 bonds with a coupon rate of 6 percent and a current price quote of 109.5; the bo...

Q: Is it possible that a risky asset could have a beta of

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? Wha...

Q: Today, the following announcement was made: “Early today the

Today, the following announcement was made: “Early today the Justice Department reached a decision in the Universal Product Care (UPC) case. UPC has been found guilty of discriminatory practices in hi...

Q: Refer back to Table 10.2. What range of returns

Refer back to Table 10.2. What range of returns would you expect to see 68 percent of the time for long-term corporate bonds? What about 95 percent of the time? Table 10.2

Q: Stock Y has a beta of 1.35 and an expected

Stock Y has a beta of 1.35 and an expected return of 14 percent. Stock Z has a beta of .80 and an expected return of 11.5 percent. If the risk-free rate is 4.5 percent and the market risk premium is 7...

Q: Goodbye, Inc., recently issued new securities to finance a new

Goodbye, Inc., recently issued new securities to finance a new TV show. The project cost $19 million, and the company paid $1,150,000 in flotation costs. In addition, the equity issued had a flotation...

Q: Newtech Corp. is going to adopt a new chip-testing

Newtech Corp. is going to adopt a new chip-testing device that can greatly improve its production efficiency. Do you think the lead engineer can profit from purchasing the firm’s stock before the news...

Q: Delta, United, and American Airlines announced purchases of planes on

Delta, United, and American Airlines announced purchases of planes on July 18 (7/18), February 12 (2/12), and October 7 (10/7), respectively. Given the following information, calculate the cumulative...

Q: Refer back to Table 10.2. What range of returns

Refer back to Table 10.2. What range of returns would you expect to see 68 percent of the time for large-company stocks? What about 95 percent of the time? Table 10.2

Q: In the previous problem, what would the risk-free rate

In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?

Q: Floyd Industries stock has a beta of 1.3. The

Floyd Industries stock has a beta of 1.3. The company just paid a dividend of $.95, and the dividends are expected to grow at 4.5 percent per year. The expected return on the market is 11 percent, and...

Q: TransTrust Corp. has changed how it accounts for inventory. Taxes

TransTrust Corp. has changed how it accounts for inventory. Taxes are unaffected, although the resulting earnings report released this quarter is 20 percent higher than what it would have been under t...

Q: Based on the following information, calculate the expected return and standard

Based on the following information, calculate the expected return and standard deviation:

Q: You find a certain stock that had returns of 12 percent,

You find a certain stock that had returns of 12 percent, 221 percent, 9 percent, and 32 percent for four of the last five years. If the average return of the stock over this period was 11 percent, wha...

Q: You own a portfolio that has $2,100 invested in

You own a portfolio that has $2,100 invested in Stock A and $3,200 invested in Stock B. If the expected returns on these stocks are 11 percent and 14 percent, respectively, what is the expected return...

Q: Advance, Inc., is trying to determine its cost of debt

Advance, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 17 years to maturity that is quoted at 95 percent of face value. The issue makes semiannual payments...

Q: Using the CAPM, show that the ratio of the risk premiums

Using the CAPM, show that the ratio of the risk premiums on two assets is equal to the ratio of their betas.

Q: Happy Times, Inc., wants to expand its party stores into

Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Par...

Q: A stock has had the following year-end prices and dividends

A stock has had the following year-end prices and dividends: What are the arithmetic and geometric returns for the stock?

Q: Consider the following information about three stocks: /

Consider the following information about three stocks: a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The variance? The stand...

Q: Photochronograph Corporation (PC) manufactures time series photographic equipment. It

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of .55. It’s considering building a new $50 million manufacturing fac...

Q: Refer to T able 10.1 in the text and look

Refer to T able 10.1 in the text and look at the period from 1973 through 1980. a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this...

Q: You’ve observed the following returns on Mary Ann Data Corporation’s stock over

You’ve observed the following returns on Mary Ann Data Corporation’s stock over the past five years: 27 percent, 13 percent, 18 percent, 214 percent, and 9 percent. Suppose the average inflation rate...

Q: You want to create a portfolio equally as risky as the market

You want to create a portfolio equally as risky as the market, and you have $1,000,000 to invest. Given this information, fill in the rest of the following table:

Q: Trower Corp. has a debt–equity ratio of .85

Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that will cost $145 million to build. When the company issues new equity, it incurs a flotation cost of 8 percent. T...

Q: The following three stocks are available in the market:

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 p...

Q: Define the three forms of market efficiency.

Define the three forms of market efficiency.

Q: Suppose the market is semistrong form efficient. Can you expect to

Suppose the market is semistrong form efficient. Can you expect to earn excess returns if you make trades based on: a. Your broker’s information about record earnings for a stock? b. Rumors about a me...

Q: You bought one of Bergen Manufacturing Co.’s 7 percent coupon

You bought one of Bergen Manufacturing Co.’s 7 percent coupon bonds one year ago for $1,080.50. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds to...

Q: You have $100,000 to invest in a portfolio containing

You have $100,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11.2...

Q: Suppose you have been hired as a financial consultant to Defense Electronics

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company i...

Q: Imagine that a particular macroeconomic variable that influences your firm’s net earnings

Imagine that a particular macroeconomic variable that influences your firm’s net earnings is positively serially correlated. Assume market efficiency. Would you expect price changes in your stock to b...

Q: Suppose the returns on long-term government bonds are normally distributed

Suppose the returns on long-term government bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than 23.7 p...

Q: Based on the following information, calculate the expected return and standard

Based on the following information, calculate the expected return and standard deviation of each of the following stocks. Assume each state of the economy is equally likely to happen. What are the cov...

Q: Assuming that the returns from holding small company stocks are normally distributed

Assuming that the returns from holding small company stocks are normally distributed, what is the approximate probability that your money will double in value in a single year? Triple in value?

Q: Is the following statement true or false? A risky security cannot

Is the following statement true or false? A risky security cannot have an expected return that is less than the risk-free rate because no risk-averse investor would be willing to hold this asset in eq...

Q: Based on the following information, calculate the expected return and standard

Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks...

Q: The following diagram shows the cumulative abnormal returns (CAR) for

The following diagram shows the cumulative abnormal returns (CAR) for 386 oil exploration companies announcing oil discoveries between 1950 and 1980. Month 0 in the diagram is the announcement month....

Q: Suppose a stock had an initial price of $75 per share

Suppose a stock had an initial price of $75 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $86. Compute the percentage total return.

Q: Suppose a stock had an initial price of $75 per share

Suppose a stock had an initial price of $75 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $86. What was the dividend yield? The capital gains yield?

Q: Schultz Industries is considering the purchase of Arras Manufacturing. Arras is

Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The cur...

Q: The Durkin Investing Agency has been the best stock picker in the

The Durkin Investing Agency has been the best stock picker in the country for the past two years. Before this rise to fame occurred, the Durkin newsletter had 200 subscribers. Those subscribers beat t...

Q: In contrast to the CAPM, the APT does not indicate which

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 fa...

Q: A stock has had returns of 27 percent, 12 percent,

A stock has had returns of 27 percent, 12 percent, 32 percent, 212 percent, 19 percent, and 231 percent over the last six years. What are the arithmetic and geometric returns for the stock?

Q: Suppose a three-factor model is appropriate to describe the returns

Suppose a three-factor model is appropriate to describe the returns of a stock. Information about those three factors is presented in the following chart: a. What is the systematic risk of the stock...

Q: Why might a firm choose to engage in a sale and

Why might a firm choose to engage in a sale and leaseback transaction? Give two reasons.

Q: In the previous problem, assume that the exercise style on the

In the previous problem, assume that the exercise style on the option is American rather than European. What is the price of the option now? Previous problem The stock price is $73, and the standard d...

Q: What is a call option? A put option? Under what

What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?

Q: Gary Levin is the chief executive officer of Mountainbrook Trading Company.

Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 30,000 at-the-money European call options on the company’s stock, which is...

Q: If a firm is selling futures contracts on lumber as a

If a firm is selling futures contracts on lumber as a hedging strategy, what must be true about the firm’s exposure to lumber prices?

Q: Refer to Table 25.2 in the text to answer this

Refer to Table 25.2 in the text to answer this question. Suppose you purchase a March 2012 cocoa futures contract on November 22, 2011, at the last price of the day. What will your profit or loss be i...

Q: Indicate the impact of the following corporate actions on cash, using

Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs. a. A dividend is paid with funds received from a sale...

Q: Use the option quote information shown here to answer the questions that

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114. a. Suppose you buy 10 contracts of the February 110 call option. How much wi...

Q: Zoso is a rental car company that is trying to determine whether

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...

Q: Complete the following sentence for each of these investors: a

Complete the following sentence for each of these investors: a. A buyer of call options. b. A buyer of put options. c. A seller (writer) of call options. d. A seller (writer) of put options. “The (buy...

Q: Jared Lazarus has just been named the new chief executive officer of

Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $410,000, his three-year contract states that his compensation wil...

Q: Explain the following limits on the prices of warrants: a

Explain the following limits on the prices of warrants: a. If the stock price is below the exercise price of the warrant, the lower bound on the price of a warrant is zero. b. If the stock price is ab...

Q: In the previous problem, suppose you wanted the option to sell

In the previous problem, 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 pric...

Q: If a firm is buying call options on pork belly futures as

If a firm is buying call options on pork belly futures as a hedging strategy, what must be true about the firm’s exposure to pork belly prices?

Q: Refer to Table 25.2 in the text to answer this

Refer to Table 25.2 in the text to answer this question. Suppose you sell five March 2012 silver futures contracts on November 22, 2011, at the last price of the day. What will your profit or loss be...

Q: McConnell Corp. has a book value of equity of $13

McConnell Corp. has a book value of equity of $13,205. Long-term debt is $8,200. Net working capital, other than cash, is $2,205. Fixed assets are $18,380. How much cash does the company have? If curr...

Q: Gemini, Inc., an all-equity firm, is considering

Gemini, Inc., an all-equity firm, is considering a $1.7 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate e...

Q: What are some of the potential problems with looking at IRRs when

What are some of the potential problems with looking at IRRs when evaluating a leasing decision?

Q: What would the lease payment have to be for both the lessor

What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease? You work for a nuclear research laboratory that is contemplating leasing a diagnostic scan...

Q: The price of Ervin Corp. stock will be either $74

The price of Ervin Corp. stock will be either $74 or $96 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price...

Q: What is the difference between an American option and a European option

What is the difference between an American option and a European option?

Q: Gasworks, Inc., has been approached to sell up to 5

Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $3.65 per gallon. Gasoline is currently selling on the wholesale market at $3.30 per gallo...

Q: Eckely, Inc., recently issued bonds with a conversion ratio of

Eckely, Inc., recently issued bonds with a conversion ratio of 17.5. If the stock price at the time of the bond issue was $48.53, what was the conversion premium?

Q: When should a firm force conversion of convertibles? Why?

When should a firm force conversion of convertibles? Why?

Q: What is the difference between a forward contract and a futures contract

What is the difference between a forward contract and a futures contract? Why do you think that futures contracts are much more common? Are there any circumstances under which you might prefer to use...

Q: Suppose a financial manager buys call options on 50,000 barrels

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $95 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise p...

Q: For the year just ended, you have gathered the following information

For the year just ended, you have gathered the following information about the Holly Corporation: a. A $200 dividend was paid. b. Accounts payable increased by $500. c. Fixed asset purchases were $900...

Q: Indicate the effect that the following will have on the operating cycle

Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change. a. Receivables average g...

Q: Milano Pizza Club owns three identical restaurants popular for their specialty pizzas

Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt–equity ratio of 40 percent and makes interest payments of $41,000 at the end of each y...

Q: Comment on the following remarks: a. Leasing reduces risk

Comment on the following remarks: a. Leasing reduces risk and can reduce a firm’s cost of capital. b. Leasing provides 100 percent financing. c. If the tax advantages of leasing were eliminated, leasi...

Q: Assume that your company does not contemplate paying taxes for the next

Assume that your company does not contemplate paying taxes for the next several years. What are the cash flows from leasing in this case? You work for a nuclear research laboratory that is contemplati...

Q: The price of Tara, Inc., stock will be either $

The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price...

Q: Utility companies often face a decision to build new plants that burn

Utility companies often face a decision to build new plants that burn coal, oil, or both. If the prices of both coal and gas are highly volatile, how valuable is the decision to build a plant that can...

Q: The Webber Company is an international conglomerate with a real estate division

The Webber Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This buil...

Q: General Modems has five-year warrants that currently trade in the

General Modems has five-year warrants that currently trade in the open market. Each warrant gives its owner the right to purchase one share of common stock for an exercise price of $55. a. Suppose the...

Q: What happens to the price of a convertible bond if interest rates

What happens to the price of a convertible bond if interest rates increase?

Q: Hannon Home Products, Inc., recently issued $2 million worth

Hannon Home Products, Inc., recently issued $2 million worth of 8 percent convertible debentures. Each convertible bond has a face value of $1,000. Each convertible bond can be converted into 21.50 sh...

Q: Bubbling Crude Corporation, a large Texas oil producer, would like

Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements in the price of oil because this is the firm’s primary source of revenue. What should the firm do?...

Q: You are long 10 gold futures contracts, established at an initial

You are long 10 gold futures contracts, established at an initial settle price of $1,580 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at $1...

Q: Indicate the impact of the following on the cash and operating cycles

Indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change. a. The terms...

Q: If Wild Widgets, Inc., were an all-equity company

If Wild Widgets, Inc., were an all-equity company, it would have a beta of .85. The company has a target debt–equity ratio of .40. The expected return on the market portfolio is 11 percent, and Treasu...

Q: North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would

North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.10 if both were all equity financed. The market value information for each...

Q: Discuss the accounting criteria for determining whether a lease must be reported

Discuss the accounting criteria for determining whether a lease must be reported on the balance sheet. In each case give a rationale for the criterion.

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $57 Exercise price = $60 Risk-free rate = 6% per year, compounded continuously Maturity...

Q: In the previous question, over what range of lease payments will

In the previous question, over what range of lease payments will the lease be profitable for both parties? Required information You work for a nuclear research laboratory that is contemplating leasing...

Q: Explain why a swap is effectively a series of forward contracts.

Explain why a swap is effectively a series of forward contracts. Suppose a firm enters a swap agreement with a swap dealer. Describe the nature of the default risk faced by both parties.

Q: Jet Black is an international conglomerate with a petroleum division and is

Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current...

Q: What is dilution, and why does it occur when warrants are

What is dilution, and why does it occur when warrants are exercised?

Q: A warrant gives its owner the right to purchase three shares of

A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $53 per share. The current market price of the stock is $58. What is the minimum value of the warra...

Q: A company produces an energy-intensive product and uses natural gas

A company produces an energy-intensive product and uses natural gas as the energy source. The competition primarily uses oil. Explain why this company is exposed to fluctuations in both oil and natura...

Q: You are short 25 gasoline futures contracts, established at an initial

You are short 25 gasoline futures contracts, established at an initial settle price of $2.46 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline...

Q: Is it possible for a firm’s cash cycle to be longer than

Is it possible for a firm’s cash cycle to be longer than its operating cycle? Explain why or why not.

Q: The Litzenberger Company has projected the following quarterly sales amounts for the

The Litzenberger Company has projected the following quarterly sales amounts for the coming year: a. Accounts receivable at the beginning of the year are $310. Litzenberger has a 45-day collection pe...

Q: What are the two types of risk that are measured by a

What are the two types of risk that are measured by a levered beta?

Q: Discuss the IRS criteria for determining whether a lease is tax deductible

Discuss the IRS criteria for determining whether a lease is tax deductible. In each case give a rationale for the criterion.

Q: What are the prices of a call option and a put option

What are the prices of a call option and a put option with the following characteristics? Stock price = $93 Exercise price = $90 Risk-free rate = 4% per year, compounded continuously Maturity...

Q: Refer to Table 25.2 given below to answer this question

Refer to Table 25.2 given below to answer this question. Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2012 for an upcoming pro...

Q: Rework Problem 1 assuming that the scanner will be depreciated as three

Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS Problem 1 Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should yo...

Q: Star Mining buys a gold mine, but the cost of extraction

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?

Q: An analyst has recently informed you that at the issuance of a

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...

Q: An analyst has recently informed you that at the issuance of a company’s

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 f...

Q: If a textile manufacturer wanted to hedge against adverse movements in cotton

If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could buy cotton futures contracts or buy call options on cotton futures contracts. What would be the pros and...

Q: What is the duration of a bond with three years to maturity

What is the duration of a bond with three years to maturity and a coupon of 7 percent paid annually if the bond sells at par?

Q: What are the costs of shortages? Describe them.

What are the costs of shortages? Describe them.

Q: Consider the following financial statement information for the Bulldog Icers Corporation:

Consider the following financial statement information for the Bulldog Icers Corporation: Calculate the operating and cash cycles. How do you interpret your answer?

Q: Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10

Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 8 percent loan with gross proceeds of $5,850,000. The interest payments on the loan will be made annually. Flotation costs are estim...

Q: What is meant by the term off–balance sheet financing?

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?

Q: The following is the sales budget for Shleifer, Inc., for

The following is the sales budget for Shleifer, Inc., for the first quarter of 2013: Credit sales are collected as follows: 65 percent in the month of the sale. 20 percent in the month after the sale...

Q: What are the deltas of a call option and a put option

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? Stock price = $67 Exercise price = $70 Risk-free rate = 5%...

Q: Super Sonics Entertainment is considering buying a machine that costs $540

Super Sonics Entertainment is considering buying a machine that costs $540,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The comp...

Q: You are discussing real options with a colleague. During the discussion

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...

Q: Wet for the Summer, Inc., manufactures filters for swimming pools

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 th...

Q: Why do firms issue convertible bonds and bonds with warrants?

Why do firms issue convertible bonds and bonds with warrants?

Q: Sportime Fitness Center, Inc., issued convertible bonds with a conversion

Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $51. The bonds are available for immediate conversion. The current price of the company’s common stock is $44 per sha...

Q: Explain why a put option on a bond is conceptually the same

Explain why a put option on a bond is conceptually the same as a call option on interest rates.

Q: What is the duration of a bond with four years to maturity

What is the duration of a bond with four years to maturity and a coupon of 8 percent paid annually if the bond sells at par?

Q: In an ideal economy, net working capital is always zero.

In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?

Q: Lewellen Products has projected the following sales for the coming year:

Lewellen Products has projected the following sales for the coming year: Sales in the year following this one are projected to be 15 percent greater in each quarter. a. Calculate payments to supplier...

Q: Bolero, Inc., has compiled the following information on its financing

Bolero, Inc., has compiled the following information on its financing costs: The company is in the 35 percent tax bracket and has a target debt–equity ratio of 60 percent. The targ...

Q: Shattered Glass, Inc., is an all-equity firm.

Shattered Glass, Inc., is an all-equity firm. The cost of the company’s equity is currently 11 percent, and the risk-free rate is 3.5 percent. The company is currently considering a project that will...

Q: Why wouldn’t China Eastern Airlines purchase the planes if they were obviously

Why wouldn’t China Eastern Airlines purchase the planes if they were obviously needed for the company’s operations?

Q: Suppose it is estimated that the equipment will have an after tax

Suppose it is estimated that the equipment will have an after tax residual value of $700,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat now? Required information...

Q: Quartz Corporation is a relatively new firm. Quartz has experienced enough

Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carry forwards. Thus, Quartz’s effective ta...

Q: When you take out an ordinary student loan, it is usually

When you take out an ordinary student loan, it is usually the case that whoever holds that loan is given a guarantee by the U.S. government, meaning that the government will make up any payments you s...

Q: How would the analysis of real options change if a company has

How would the analysis of real options change if a company has competitors?

Q: You are given the following information concerning options on a particular stock

You are given the following information concerning options on a particular stock: Stock price = $83 Exercise price = $80 Risk-free rate = 6% per year, compounded continuously Maturity = 6 mont...

Q: You are in discussions to purchase an option on an office building

You are in discussions to purchase an option on an office building with a strike price of $63 million. The building is currently valued at $60 million. The option will allow you to purchase the buildi...

Q: A warrant with six months until expiration entitles its owner to buy

A warrant with six months until expiration entitles its owner to buy 10 shares of the issuing firm ’ s common stock for an exercise price of $31 per share. If the current market price of the stock is...

Q: Bernanke Corp. has just issued a 30-year callable,

Bernanke Corp. has just issued a 30-year callable, convertible bond with a coupon rate of 6 percent annual coupon payments. The bond has a conversion price of $93. The company’s stock is selling for $...

Q: ABC Company and XYZ Company need to raise funds to pay for

ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit rating in the debt market...

Q: Here are some important figures from the budget of Cornell, Inc

Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2013: The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sa...

Q: Triad Corporation has established a joint venture with Tobacco Road Construction,

Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $80 million. The equipment...

Q: Why would ALC be willing to buy planes from Boeing and Airbus

Why would ALC be willing to buy planes from Boeing and Airbus and then lease the planes to China Eastern Airlines? How is this different from just lending money to China Eastern Airlines to buy the pl...

Q: There is a European put option on a stock that expires in

There is a European put option on a stock that expires in two months. The stock price is $73, and the standard deviation of the stock returns is 70 percent. The option has a strike price of $80, and t...

Q: Many lessors require a security deposit in the form of a cash

Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $500,000 security deposit at the inception of the lease. If...

Q: What is the impact of lengthening the time to expiration on an

What is the impact of lengthening the time to expiration on an option’s value? Explain.

Q: Rob Stevens is the chief executive officer of Isner Construction, Inc

Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 950,000 shares of stock. The company currently has 6 million shares of stock and convertible bonds with a face value of...

Q: A stock is currently priced at $73. The stock will

A stock is currently priced at $73. The stock will either increase or decrease by 15 percent over the next year. There is a call option on the stock with a strike price of $70 and one year until expir...

Q: What is the difference between transactions and economic exposure? Which can

What is the difference between transactions and economic exposure? Which can be hedged more easily? Why?

Q: Ted and Alice Hansel have a son who will begin college 10

Ted and Alice Hansel have a son who will begin college 10 years from today. School expenses of $30,000 will need to be paid at the beginning of each of the four years that their son plans to attend co...

Q: Here are the most recent balance sheets for Country Kettles, Inc

Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:

Q: MVP, Inc., has produced rodeo supplies for over 20 years

MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt–equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm’s levered eq...

Q: An asset costs $550,000 and will be depreciated in

An asset costs $550,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The corporate tax rate is 34 percent, and the appropriate interest ra...

Q: An insurance policy is considered analogous to an option. From the

An insurance policy is considered analogous to an option. From the policyholder’s point of view, what type of option is an insurance policy? Why?

Q: The capital structure of Ricketti Enterprises, Inc., consists of 20

The capital structure of Ricketti Enterprises, Inc., consists of 20 million shares of common stock and 1.5 million warrants. Each warrant gives its owner the right to purchase one share of common stoc...

Q: For the following scenarios, describe a hedging strategy using futures contracts

For the following scenarios, describe a hedging strategy using futures contracts that might be considered. a. A public utility is concerned about rising costs. b. A candy manufacturer is concerned abo...

Q: Blue Steel Community Bank has the following market value balance sheet:

Blue Steel Community Bank has the following market value balance sheet: a. What is the duration of the assets? b. What is the duration of the liabilities? c. Is the bank immune to interest rate risk?...

Q: The forward price (F) of a contract on an asset

The forward price (F) of a contract on an asset with neither carrying costs nor convenience yield is the current spot price of the asset (S0) multiplied by 1, plus the appropriate interest rate betwee...

Q: Wildcat, Inc., has estimated sales (in millions) for

Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows: Sales for the first quarter of the year after this one are projected at $120 million. Accounts receivable at th...

Q: Neon Corporation’s stock returns have a covariance with the market portfolio of

Neon Corporation’s stock returns have a covariance with the market portfolio of .0415. The standard deviation of the returns on the market portfolio is 20 percent, and the expected market risk premium...

Q: Wolfson Corporation has decided to purchase a new machine that costs $

Wolfson Corporation has decided to purchase a new machine that costs $3.2 million. The machine will be depreciated on a straight-line basis and will be worthless after four years. The corporate tax ra...

Q: For the company in the previous problem, what is the value

For the company in the previous problem, what is the value of being able to issue subsidized debt instead of having to issue debt at the terms it would normally receive? Assume the face amount and mat...

Q: It is said that the equityholders of a levered firm can be

It is said that the equityholders of a levered firm can be thought of as holding a call option on the firm’s assets. Explain what is meant by this statement.

Q: Sunburn Sunscreen has a zero coupon bond issue outstanding with a $

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firm’s assets is $26,300. The standard deviation of the r...

Q: You have been hired to value a new 20-year callable

You have been hired to value a new 20-year callable, convertible bond. The bond has a 5.8 percent coupon rate, payable annually. The conversion price is $150, and the stock currently sells for $32.20....

Q: You enter into a forward contract to buy a 10-year

You enter into a forward contract to buy a 10-year, zero coupon bond that will be issued in one year. The face value of the bond is $1,000, and the 1-year and 11-year spot interest rates are 5 percent...

Q: Rework Problem 13 assuming the following: a. Wildcat maintains

Rework Problem 13 assuming the following: a. Wildcat maintains a minimum cash balance of $20 million. b. Wildcat maintains a minimum cash balance of $10 million. Based on your answers in (a) and (b),...

Q: Stackhouse Industries has a new project available that requires an initial investment

Stackhouse Industries has a new project available that requires an initial investment of $4.5 million. The project will provide unlevered cash flows of $675,000 per year for the next 20 years. The com...

Q: The Thakor Corporation’s purchases from suppliers in a quarter are equal to

The Thakor Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages,...

Q: An asset costs $620,000 and will be depreciated in

An asset costs $620,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee can borrow at 9 per...

Q: You are the CEO of Titan Industries and have just been awarded

You are the CEO of Titan Industries and have just been awarded a large number of employee stock options. The company has two mutually exclusive projects available. The first project has a large NPV an...

Q: Superior Clamps, Inc., has a capital structure consisting of 7

Superior Clamps, Inc., has a capital structure consisting of 7 million shares of common stock and 900,000 warrants. Each warrant gives its owner the right to purchase one share of newly issued common...

Q: Monster Magnet Manufacturing is considering leasing some equipment. The annual lease

Monster Magnet Manufacturing is considering leasing some equipment. The annual lease payment would be $375,000 per year for six years. The appropriate interest rate is 8 percent and the company is in...

Q: William Santiago is interested in entering the import/export business.

William Santiago is interested in entering the import/export business. During a recent visit with his financial advisers, he said, “If we play the game right, this is the safest business in the world....

Q: This morning you agreed to buy a one-year Treasury bond

This morning you agreed to buy a one-year Treasury bond in six months. The bond has a face value of $1,000. Use the spot interest rates listed here to answer the following questions: Time EAR...

Q: Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their

Cleveland Compressor and Pnew York Pneumatic are competing manufacturing firms. Their financial statements are printed here. a. How are the current assets of each firm financed? b. Which firm has the...

Q: Suppose the firm in the previous problem is considering two mutually exclusive

Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,200, and Project B has an NPV of $1,600. As a result of taking Project A, the sta...

Q: Seger, Inc., is an unlevered firm with expected annual earnings

Seger, Inc., is an unlevered firm with expected annual earnings before taxes of $21 million in perpetuity. The current required return on the firm’s equity is 16 percent, and the firm distributes all...

Q: Automobiles are often leased, and there are several terms unique to

Automobiles are often leased, and there are several terms unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $36,000. This is the ba...

Q: You find a put and a call with the same exercise price

You find a put and a call with the same exercise price and maturity. What do you know about the relative prices of the put and call? Prove your answer and provide an intuitive explanation.

Q: National Electric Company (NEC) is considering a $45 million

National Electric Company (NEC) is considering a $45 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the...

Q: Omega Airline ’ s capital structure consists of 2.7 million

Omega Airline ’ s capital structure consists of 2.7 million shares of common stock and zero coupon bonds with a face value of $18 million that mature in six months. The firm just announced that it wil...

Q: Kevin Nomura is a Japanese student who is planning a one year

Kevin Nomura is a Japanese student who is planning a one year stay in the United States. He expects to arrive in the United States in eight months. He is worried about depreciation of the yen relative...

Q: A company has a large bond issue maturing in one year.

A company has a large bond issue maturing in one year. When it matures, the company will float a new issue. Current interest rates are attractive, and the company is concerned that rates next year wil...

Q: Suppose there were call options and forward contracts available on coal,

Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available contracts. What does your a...

Q: Mojito Mint Company has a debt–equity ratio of .35

Mojito Mint Company has a debt–equity ratio of .35. The required return on the company’s unlevered equity is 13 percent, and the pretax cost of the firm’s debt is 7 percent. Sales revenue for the comp...

Q: Return to the case of the diagnostic scanner discussed in Problems 1

Return to the case of the diagnostic scanner discussed in Problems 1 through 6. Suppose the entire $5,200,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan...

Q: A put and a call have the same maturity and strike price

A put and a call have the same maturity and strike price. If they have the same price, which one is in the money? Prove your answer and provide an intuitive explanation.

Q: Lone Star Industries just issued $235,000 of perpetual 8

Lone Star Industries just issued $235,000 of perpetual 8 percent debt and used the proceeds to repurchase stock. The company expects to generate $118,000 of earnings before interest and taxes in perpe...

Q: Frostbite Thermalwear has a zero coupon bond issue outstanding with a face

Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $30,000 that matures in one year. The current market value of the firm’s assets is $36,400. The standard deviation o...

Q: High electricity costs have made Farmer Corporation’s chicken plucking machine economically worthless

High electricity costs have made Farmer Corporation’s chicken plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is...

Q: Blue Angel, Inc., a private firm in the holiday gift

Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is ....

Q: What is the NAL for Wildcat? What is the maximum lease

What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to the company? Required information The Wildcat Oil Company is trying to decide whether to lease or buy a new c...

Q: Survivor, Inc., an all-equity firm, has eight

Survivor, Inc., an all-equity firm, has eight shares of stock outstanding. Yesterday, the firm ’ s assets consisted of nine ounces of platinum, currently worth $1,750 per ounce. Today, the company iss...

Q: Brozik Corp. has a zero coupon bond that matures in five

Brozik Corp. has a zero coupon bond that matures in five years with a face value of $60,000. The current value of the company’s assets is $57,000, and the standard deviation of its return on assets is...

Q: Insurance, whether purchased by a corporation or an individual, is

Insurance, whether purchased by a corporation or an individual, is in essence an option. What type of option is an insurance policy?

Q: If a U.S. company exports its goods to Japan

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? Does the way the exchange rate is q...

Q: Strudler Real Estate, Inc., a construction firm financed by both

Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $280 million, bu...

Q: In addition to the five factors discussed in the chapter, dividends

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: C = S × e–dt × N(d1) – E × e–Rt × N(d2...

Q: The put–call parity condition is altered when dividends are paid

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 yi...

Q: In the chapter we noted that the delta for a put option

In the chapter we noted that the delta for a put option is N( d 1 ) − 1. Is this the same thing as −N(− d 1 )?

Q: Use the option quote information shown here to answer the questions that

Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83. a. Are the call options in the money? What is the intrinsic value of an RWJ C...

Q: Use the Black–Scholes model for pricing a call, put

Use the Black–Scholes model for pricing a call, put–call parity, and the previous question to show that the Black–Scholes model for directly pricing a put can be written as follows: P = E × e–Rt ×N(–d...

Q: A stock is currently priced at $50. The stock will

A stock is currently priced at $50. The stock will never pay a dividend. The risk-free rate is 12 percent per year, compounded continuously, and the standard deviation of the stock’s return is 60 perc...

Q: Suppose Sunburn Sunscreen and Frostbite Thermalwear in the previous problems have decided

Suppose Sunburn Sunscreen and Frostbite Thermalwear in the previous problems have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a stan...

Q: You purchase one call and sell one put with the same strike

You purchase one call and sell one put with the same strike price and expiration date. What is the delta of your portfolio? Why?

Q: What are the key differences between leasing and borrowing? Are they

What are the key differences between leasing and borrowing? Are they perfect substitutes?

Q: Assume that the tax rate is 35 percent. You can borrow

Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy? You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanne...

Q: What is the duration of a bond with two years to maturity

What is the duration of a bond with two years to maturity if the bond has a coupon rate of 7 percent paid semiannually, and the market interest rate is 5 percent?

Q: The sales budget for your company in the coming year is based

The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent with the first-quarter sales projection at $225 million. In addition to this basic trend, the sea...

Q: In the previous problem, assume the risk-free rate is

In the previous problem, assume the risk-free rate is only 5 percent. What is the risk-neutral value of the option now? What happens to the risk-neutral probabilities of a stock price increase and a s...

Q: A company has a single zero coupon bond outstanding that matures in

A company has a single zero coupon bond outstanding that matures in 10 years with a face value of $15 million. The current value of the company’s assets is $13.4 million, and the standard deviation of...

Q: T-bills currently yield 4.8 percent. Stock in

T-bills currently yield 4.8 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year. a. Wh...

Q: Ken is interested in buying a European call option written on Southeastern

Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend–paying common stock, with a strike price of $75 and one year until expiration. Currently, Sout...

Q: Rob wishes to buy a European put option on BioLabs, Inc

Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend–paying common stock, with a strike price of $40 and six months until expiration. BioLabs’ common stock is currently selling for...

Q: Maverick Manufacturing, Inc., must purchase gold in three months for

Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,530 per ounce, the firm...

Q: An investor is said to take a position in a “collar

An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options sh...

Q: McLemore Industries has a zero coupon bond issue that matures in two

McLemore 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 $29,000, and the standard deviation of the return...

Q: Bishop, Inc., has current assets of $5,700

Bishop, Inc., has current assets of $5,700, net fixed assets of $27,000, current liabilities of $4,400, and long-term debt of $12,900. What is the value of the shareholders’ equity account for this fi...

Q: In a typical month, the Jeremy Corporation receives 140 checks totaling

In a typical month, the Jeremy Corporation receives 140 checks totaling $124,000. These are delayed four days on average. What is the average daily float?

Q: Are there any circumstances under which an investor might be more concerned

Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?

Q: A Japanese company has a bond outstanding that sells for 92 percent

A Japanese company has a bond outstanding that sells for 92 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 mat...

Q: Based on the dividend growth model, what are the two components

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?

Q: Suppose you know that a company’s stock currently sells for $72

Suppose you know that a company’s stock currently sells for $72 per share and the required return on the stock is 11.5 percent. You also know that the total return on the stock is evenly divided betwe...

Q: A mail-order firm processes 5,700 checks per month

A mail-order firm processes 5,700 checks per month. Of these, 60 percent are for $55 and 40 percent are for $80. The $55 checks are delayed two days on average; the $80 checks are delayed three days o...

Q: In each of the following pairings, indicate which firm would probably

In each of the following pairings, indicate which firm would probably have a longer credit period and explain your reasoning. a. Firm A sells a miracle cure for baldness; Firm B sells toupees. b. Firm...

Q: Describe the advantages and disadvantages of a taxable merger as opposed to

Describe the advantages and disadvantages of a taxable merger as opposed to a tax-free exchange. What is the basic determinant of tax status in a merger? Would an LBO be taxable or nontaxable? Explain...

Q: In the previous problem, construct the balance sheet for the new

In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Miningâ&...

Q: What is the absolute priority rule?

What is the absolute priority rule?

Q: Given that many multinationals based in many countries have much greater sales

Given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?

Q: Describe each of the following: a. Sight draft.

Describe each of the following: a. Sight draft. b. Time draft. c. Banker’s acceptance. d. Promissory note. e. Trade acceptance.

Q: Use Figure 31.1 to answer the following questions. Suppose

Use Figure 31.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.9 percent. What must the six-month risk-free r...

Q: Suppose you own stock in a company. The current price per

Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding s...

Q: The following table presents the long-term liabilities and stockholders’ equity

The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago: Long-term debt………………………….………….……………… $ 65,000,000 Preferred stock……………………….…...

Q: Assuming the following ratios are constant, what is the sustainable growth

Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover 5 2.20 Profit margin 5 7.4% Equity multiplier 5 1.40 Payout ratio 5 40%

Q: TMCC has the right to buy back the securities on the anniversary

TMCC has the right to buy back the securities on the anniversary date at a price established when the securities were issued (this feature is a term of this particular deal). What impact does this fea...

Q: Imprudential, Inc., has an unfunded pension liability of $630

Imprudential, Inc., has an unfunded pension liability of $630 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to...

Q: Are the capital budgeting criteria we discussed applicable to not-for

Are the capital budgeting criteria we discussed applicable to not-for-profit corporations? How should such entities make capital budgeting decisions? What about the U.S. government? Should it evaluate...

Q: Bill plans to open a self-serve grooming center in a

Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $385,000, to be paid immediately. Bill expects aftertax cash inflows of $84,000 annually for seven yea...

Q: When is EAC analysis appropriate for comparing two or more projects?

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.

Q: Dog Up! Franks is looking at a new sausage system with

Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sau...

Q: You place an order for 500 units of inventory at a unit

You place an order for 500 units of inventory at a unit price of $135. The supplier offers terms of 1/10, net 30. a. How long do you have to pay before the account is overdue? If you take the full per...

Q: The Mango Republic has just liberalized its markets and is now permitting

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...

Q: The manager for a growing firm is considering the launch of a

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 $175,000 the manager can conduct a focus...

Q: If Treasury bills are currently paying 4.5 percent and the

If Treasury bills are currently paying 4.5 percent and the inflation rate is 2.1 percent, what is the approximate real rate of interest? The exact real rate?

Q: Gruber Corp. pays a constant $9 dividend on its stock

Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock...

Q: Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection

Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following: The total collection time will be reduced by three days if the lockbox...

Q: What are the different inventory types? How do the types differ

What are the different inventory types? How do the types differ? Why are some types said to have dependent demand, whereas other types are said to have independent demand?

Q: Essence of Skunk Fragrances, Ltd., sells 4,900 units

Essence of Skunk Fragrances, Ltd., sells 4,900 units of its perfume collection each year at a price per unit of $495. All sales are on credit with terms of 1/10, net 40. The discount is taken by 40 pe...

Q: Penn Corp. is analyzing the possible acquisition of Teller Company.

Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $1.1 million indefinite...

Q: What are DIP loans? Where do DIP loans fall in the

What are DIP loans? Where do DIP loans fall in the APR?

Q: Are the following statements true or false? Explain why.

Are the following statements true or false? Explain why. a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound to appreciate relative to...

Q: Explain the purchase accounting method for mergers. What is the effect

Explain the purchase accounting method for mergers. What is the effect on cash flows? On EPS?

Q: The treasurer of a major U.S. firm has $

The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .21 percent per month. The interest rate in Great Britain is .57 percent...

Q: Corporate ownership varies around the world. Historically, individuals have owned

Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large...

Q: Could a company’s change in net working capital be negative in a

Could a company’s change in net working capital be negative in a given year? Explain how this might come about. What about net capital spending?

Q: The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed

The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed long-term debt of $1.45 million, and the 2012 balance sheet showed longterm debt of $1.52 million. The 2012 income statement showed an intere...

Q: The most recent financial statements for Bradley, Inc., are shown

The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next ye...

Q: Would you be willing to pay $24,099 today in

Would you be willing to pay $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to re...

Q: Although appealing to more refined tastes, art as a collectible has

Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkies under the Shower, a painting by renowned Australian p...

Q: The investment in Project A is $1 million, and the

The investment in Project A is $1 million, and the investment in Project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? F...

Q: Suppose the following two independent investment opportunities are available to Greenplain,

Suppose the following two independent investment opportunities are available to Greenplain, Inc. The appropriate discount rate is 10 percent. a. Compute the profitability index for each of the two p...

Q: “When evaluating projects, we’re only concerned with the relevant incremental

“When evaluating projects, we’re only concerned with the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating pr...

Q: When the Beacon Computer Company filed for bankruptcy under Chapter 7 of

When the Beacon Computer Company filed for bankruptcy under Chapter 7 of the U.S. bankruptcy code, it had the following balance sheet information: Assuming there are no legal fees associated with t...

Q: An asset used in a four-year project falls in the

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,400,000 at the end of the project. If...

Q: B&B has a new baby powder ready to market.

B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment resear...

Q: U.S. Treasury bonds are not rated. Why?

U.S. Treasury bonds are not rated. Why? Often, junk bonds are not rated. Why?

Q: Suppose the real rate is 2.4 percent and the inflation

Suppose the real rate is 2.4 percent and the inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill?

Q: For each of the short-term marketable securities given here,

For each of the short-term marketable securities given here, provide an example of the potential disadvantages the investment has for meeting a corporation’s cash management goals: a. U.S. Treasury bi...

Q: It takes Cookie Cutter Modular Homes, Inc., about five days

It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection tim...

Q: The Arizona Bay Corporation sells on credit terms of net 30.

The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 6 days past due. If annual credit sales are $9.3 million, what is the company’s balance sheet amount in accou...

Q: What types of actions might the management of a firm take to

What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive tactics of their ma...

Q: The shareholders of Flannery Company have voted in favor of a buyout

The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here: Flannery’s shareholders will receive o...

Q: Firms sometimes use the threat of a bankruptcy filing to force creditors

Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword rather than a shield.” Is...

Q: Suppose the exchange rate for the Swiss franc is quoted as SF

Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market. a. Is the dollar selling at a premium or a discount relative to the fran...

Q: Some countries encourage movements in their exchange rate relative to those of

Some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign trade imbalances. For each of the following scenarios, eva...

Q: In recent years, large financial institutions such as mutual funds and

In recent years, large financial institutions such as mutual funds and pension funds have become the dominant owners of stock in the United States, and these institutions are becoming more active in c...

Q: The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed

The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed $490,000 in the common stock account and $3.4 million in the additional paid-in surplus account. The 2012 balance sheet showed $525,000 and $...

Q: Consider the ratio EBITD/Assets. What does this ratio tell

Consider the ratio EBITD/Assets. What does this ratio tell us? Why might it be more useful than ROA in comparing two companies?

Q: Cheryl Colby, CFO of Charming Florist Ltd., has created the

Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 10 percent to $420 million. Current assets, fixed as...

Q: An investor purchasing a British consol is entitled to receive annual payments

An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $150 annually if the next payment occurs one...

Q: Consider the following two mutually exclusive projects available to Global Investments,

Consider the following two mutually exclusive projects available to Global Investments, Inc.: The appropriate discount rate for the projects is 10 percent. Global Investments chose to undertake Proj...

Q: A project has an initial cost of I, has a required

A project has an initial cost of I, has a required return of R, and pays C annually for N years. a. Find C in terms of I and N such that the project has a payback period just equal to its life. b. Fin...

Q: A major college textbook publisher has an existing finance textbook. The

A major college textbook publisher has an existing finance textbook. The publisher is debating whether to produce an “essentialized” version, meaning a shorter (and lower-priced) book. What are some o...

Q: Howell Petroleum is considering a new project that complements its existing business

Howell Petroleum is considering a new project that complements its existing business. The machine required for the project costs $3.8 million. The marketing department predicts that sales related to t...

Q: Take a look back at Figure 31.1 to answer the

Take a look back at Figure 31.1 to answer the following questions: a. If you have $100, how many euros can you get? b. How much is one euro worth in dollars? c. If you have 5 million euros, how many d...

Q: An option can often have more than one source of value.

An option can often have more than one source of value. Consider a logging company. The company can log the timber today or wait another year (or more) to log the timber. What advantages would waiting...

Q: You are considering investing in a company that cultivates abalone for sale

You are considering investing in a company that cultivates abalone for sale to local restaurants. Use the following information: Sales price per abalone…………………………… =$35 Variable costs per abalone…………...

Q: An investment offers a 14 percent total return over the coming year

An investment offers a 14 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 10 percent. What does Alan believe the inflation rate wi...

Q: The newspaper reported last week that Bennington Enterprises earned $34 million

The newspaper reported last week that Bennington Enterprises earned $34 million this year. The report also stated that the firm’s return on equity is 16 percent. Bennington retains 80 percent of its e...

Q: Air Spares is a wholesaler that stocks engine components and test equipment

Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increa...

Q: Cholern Electric Company (CEC) is a public utility that provides

Cholern Electric Company (CEC) is a public utility that provides electricity to the central Colorado area. Recent events at its Mile-High Nuclear Station have been discouraging. Several shareholders h...

Q: Several firms have entered bankruptcy, or threatened to enter bankruptcy,

Several firms have entered bankruptcy, or threatened to enter bankruptcy, at least in part as a means of reducing labor costs. Whether this move is ethical, or proper, is hotly debated. Is this an eth...

Q: Suppose your company imports computer motherboards from Singapore. The exchange rate

Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 31.1. You have just placed an order for 30,000 motherboards at a cost to you of 141.30 Singapore...

Q: Critics have charged that compensation to top managers in the United States

Critics have charged that compensation to top managers in the United States is simply too high and should be cut back. For example, focusing on large corporations, Larry Ellison of Oracle has been one...

Q: Given the information for Anna’s Tennis Shop, Inc., in the

Given the information for Anna’s Tennis Shop, Inc., in the previous two problems, suppose you also know that the firm’s net capital spending for 2012 was $945,000 and that the firm reduced its net wor...

Q: Who owns a corporation? Describe the process whereby the owners control

Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this...

Q: The Steiben Company has an ROE of 13.1 percent and

The Steiben Company has an ROE of 13.1 percent and a payout ratio of 40 percent. a. What is the company’s sustainable growth rate? b. Can the company’s actual growth rate be different from its sustain...

Q: The TMCC security is bought and sold on the New York Stock

The TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the $24,099 original price? Why? If you looked in the year 20...

Q: Compute the future value of $1,900 continuously compounded for

Compute the future value of $1,900 continuously compounded for a. 7 years at a stated annual interest rate of 12 percent. b. 5 years at a stated annual interest rate of 10 percent. c. 12 years at a st...

Q: Projects A and B have the following cash flows:

Projects A and B have the following cash flows: a. If the cash flows from the projects are identical, which of the two projects would have a higher IRR? Why? b. If C1B = 2C1A, C2B = 2C2A, and C3B =...

Q: Suppose you are offered $7,000 today but must make

Suppose you are offered $7,000 today but must make the following payments: Year ………………………Cash Flows ($) 0 ……………………………………………….$ 7,000 1 …………………………………………………−3,700 2 ………………………………………………..−2,400 3 …………………...

Q: You are evaluating two different silicon wafer milling machines. The Techron

You are evaluating two different silicon wafer milling machines. The Techron I costs $215,000, has a three-year life, and has pretax operating costs of $35,000 per year. The Techron II costs $270,000,...

Q: You are discussing a project analysis with a coworker. The project

You are discussing a project analysis with a coworker. The project involves real options, such as expanding the project if successful, or abandoning the project if it fails. Your coworker makes the fo...

Q: Niko has purchased a brand new machine to produce its High Flight

Niko has purchased a brand new machine to produce its High Flight line of shoes. The machine has an economic life of five years. The depreciation schedule for the machine is straight-line with no salv...

Q: Say you own an asset that had a total return last year

Say you own an asset that had a total return last year of 12.5 percent. If the inflation rate last year was 5.3 percent, what was your real return?

Q: The Germinating Flower Co. has earnings of $1.75

The Germinating Flower Co. has earnings of $1.75 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?

Q: Why might the revenue and cost figures shown on a standard income

Why might the revenue and cost figures shown on a standard income statement not represent the actual cash inflows and outflows that occurred during a period?

Q: No More Books Corporation has an agreement with Floyd Bank, whereby

No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $3.2 million in collections a day and requires a $350,000 compensating balance. No More Books is contemplating canc...

Q: At least part of Dell’s corporate profits can be traced to its

At least part of Dell’s corporate profits can be traced to its inventory management. Using just-in-time inventory, Dell typically maintains an inventory of three to four days’ sales. Competitors such...

Q: Lealos, Inc., is considering a change in its cash-

Lealos, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Lealos should proceed or not. Descri...

Q: Acquiring firm stockholders seem to benefit little from takeovers. Why is

Acquiring firm stockholders seem to benefit little from takeovers. Why is this finding a puzzle? What are some of the reasons offered for it?

Q: Consider the following premerger information about a bidding firm (Firm B

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 syne...

Q: Why do so many firms file for legal bankruptcy when private workouts

Why do so many firms file for legal bankruptcy when private workouts are so much less expensive?

Q: Suppose the spot and six-month forward rates on the Norwegian

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.61 and Kr 5.72, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate in...

Q: Why is the goal of financial management to maximize the current share

Why is the goal of financial management to maximize the current share price of the company’s stock? In other words, why isn’t the goal to maximize the future share price?

Q: Firm A and Firm B have debt–total asset ratios of

Firm A and Firm B have debt–total asset ratios of 35 percent and 55 percent and returns on total assets of 9 percent and 7 percent, respectively. Which firm has a greater return on equity?

Q: Conoly Co. has identified an investment project with the following cash

Conoly Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percen...

Q: You are evaluating Project A and Project B. Project A has

You are evaluating Project A and Project B. Project A has a short period of future cash flows, while Project B has relatively long future cash flows. Which project will be more sensitive to changes in...

Q: In Problem 10, are the shareholders of Firm T better off

In Problem 10, 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 t...

Q: The next dividend payment by ECY, Inc., will be $

The next dividend payment by ECY, Inc., will be $3.20 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. If ECY stock currently sells for $63.50 per share, what...

Q: Mau Corporation stock currently sells for $58.32 per share

Mau Corporation stock currently sells for $58.32 per share. The market requires a return of 11.5 percent on the firm’s stock. If the company maintains a constant 5 percent growth rate in dividends, wh...

Q: In Problem 14, what is the break-even price per

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 3,400 units and all other values remain th...

Q: The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have

The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated. Both companies are exactly alike except that they are located in different tow...

Q: We know that the actual relationship between a nominal rate, R

We know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as follows: 1 + r = (1 + R)y(1 + h) This is the domestic Fisher effect. a. Wha...

Q: During 2012, Raines Umbrella Corp. had sales of $630

During 2012, Raines Umbrella Corp. had sales of $630,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $470,000, $95,000, and $140,000, respectively. In addi...

Q: Thorpe Mfg., Inc., is currently operating at only 90 percent

Thorpe Mfg., Inc., is currently operating at only 90 percent of fixed asset capacity. Current sales are $725,000. How much can sales increase before any new fixed assets are needed?

Q: One of your customers is delinquent on his accounts payable balance.

One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $700 per month. You will charge 1.3 percent per month interest on the overdue bal...

Q: Consider two mutually exclusive new product launch projects that Nagano Golf is

Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for Nagano Golf is 15 percent. Project A: Nagano NP-30. Professional clubs that...

Q: Bridgton Golf Academy is evaluating different golf practice equipment. The “

Bridgton Golf Academy is evaluating different golf practice equipment. The “Dimple-Max” equipment costs $94,000, has a three-year life, and costs $8,600 per year to operate. The relevant discount rate...

Q: A financial ratio by itself tells us little about a company because

A financial ratio by itself tells us little about a company because financial ratios vary a great deal across industries. There are two basic methods for analyzing financial ratios for a company: Time...

Q: You purchase a bond with an invoice price of $950.

You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

Q: Each business day, on average, a company writes checks totaling

Each business day, on average, a company writes checks totaling $17,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its...

Q: You purchase a bond with an invoice price of $950.

You purchase a bond with an invoice price of $950. The bond has a coupon rate of 6.8 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?

Q: Fifth National Bank just issued some new preferred stock. The issue

Fifth National Bank just issued some new preferred stock. The issue will pay an annual dividend of $8 in perpetuity, beginning five years from now. If the market requires a return of 5.6 percent on th...

Q: In Problem 15, what is the break-even price per

In Problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same. Problem 15

Q: In Problem 18, suppose Raines Umbrella Corp. paid out $

In Problem 18, suppose Raines Umbrella Corp. paid out $34,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued duri...

Q: For the company in the previous problem, suppose fixed assets are

For the company in the previous problem, suppose fixed assets are $690,000 and sales are projected to grow to $830,000. How much in new fixed assets are required to support this growth in sales?

Q: Friendly’s Quick Loans, Inc., offers you “three for four

Friendly’s Quick Loans, Inc., offers you “three for four or I knock on your door.” This means you get $3 today and repay $4 when you get your paycheck in one week (or else). What’s the effective annua...

Q: You are evaluating a project that costs $75,000 today

You are evaluating a project that costs $75,000 today. The project has an inflow of $155,000 in one year and an outflow of $65,000 in two years. What are the IRRs for the project? What discount rate r...

Q: Scott Investors, Inc., is considering the purchase of a $

Scott Investors, Inc., is considering the purchase of a $360,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. Th...

Q: Nuber Company has a debt–equity ratio of .80.

Nuber Company has a debt–equity ratio of .80. Return on assets is 9.7 percent, and total equity is $735,000. What is the equity multiplier? Return on equity? Net income?

Q: Your buddy comes to you with a sure-fire way to

Your buddy comes to you with a sure-fire way to make some quick money and help pay off your student loans. His idea is to sell T-shirts with the words “I get” on them. “You get it?” He says, “You see...

Q: You purchase a bond with a coupon rate of 5.9

You purchase a bond with a coupon rate of 5.9 percent and a clean price of $1,053. If the next semiannual coupon payment is due in four months, what is the invoice price?

Q: If Jares, Inc., has an equity multiplier of 1.

If Jares, Inc., has an equity multiplier of 1.55, total asset turnover of 1.75, and a profit margin of 4.3 percent, what is its ROE?

Q: Indicate whether you think the following claims regarding takeovers are true or

Indicate whether you think the following claims regarding takeovers are true or false. In each case, provide a brief explanation for your answer. a. By merging competitors, takeovers have created mono...

Q: You have found the following stock quote for RJW Enterprises, Inc

You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What is the annual dividend? What was the closing price for this stoc...

Q: Saché, Inc., expects to sell 700 of its designer suits

Saché, Inc., expects to sell 700 of its designer suits every week. The store is open seven days a week and expects to sell the same number of suits every day. The company has an EOQ of 500 suits and a...

Q: Cusic Industries had the following operating results for 2012: sales =

Cusic Industries had the following operating results for 2012: sales = $19,900; cost of goods sold = $14,200; depreciation expense = $2,700; interest expense = $670; dividends paid = $650. At the begi...

Q: The most recent financial statements for Moose Tours, Inc., appear

The most recent financial statements for Moose Tours, Inc., appear below. Sales for 2012 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payou...

Q: What is the future value in six years of $1,

What is the future value in six years of $1,000 invested in an account with a stated annual interest rate of 9 percent, a. Compounded annually? b. Compounded semiannually? c. Compounded monthly? d. Co...

Q: An investment under consideration has a payback of six years and a

An investment under consideration has a payback of six years and a cost of $434,000. If the required return is 12 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash flows...

Q: Suppose it is your task to evaluate two different investments in new

Suppose it is your task to evaluate two different investments in new subsidiaries for your company, one in your own country and the other in a foreign country. You calculate the cash flows of both pro...

Q: A firm is considering an investment in a new machine with a

A firm is considering an investment in a new machine with a price of $18 million to replace its existing machine. The current machine has a book value of $6 million and a market value of $4.5 million....

Q: Young screenwriter Carl Draper has just finished his first script. It

Young screenwriter Carl Draper has just finished his first script. It has action, drama, and humor, and he thinks it will be a blockbuster. He takes the script to every motion picture studio in town a...

Q: Argos Corp. has 9 percent coupon bonds making annual payments with

Argos Corp. has 9 percent coupon bonds making annual payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How many years do these bonds have left until they mature?

Q: You own $100,000 worth of Smart Money stock.

You own $100,000 worth of Smart Money stock. One year from now, you will receive a dividend of $2.25 per share. You will receive a $2.40 dividend two years from now. You will sell the stock for $65 pe...

Q: Consider the following premerger information about firm X and firm Y :

Consider the following premerger information about firm X and firm Y : Assume that Firm X acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $5 per share. Assuming t...

Q: Solar Engines manufactures solar engines for tractor trailers. Given the fuel

Solar Engines manufactures solar engines for tractor trailers. Given the fuel savings available, new orders for 125 units have been made by customers requesting credit. The variable cost is $11,400 pe...

Q: Consider the following abbreviated financial statements for Weston Enterprises:

Consider the following abbreviated financial statements for Weston Enterprises: a. What is owners’ equity for 2011 and 2012? b. What is the change in net working capital for 2012?...

Q: This problem is useful for testing the ability of financial calculators and

This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this project?...

Q: Sanders Enterprises, Inc., has been considering the purchase of a

Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $270,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expe...

Q: Hickock Mining is evaluating when to open a gold mine. The

Hickock Mining is evaluating when to open a gold mine. The mine has 48,000 ounces of gold left that can be mined, and mining operations will produce 6,000 ounces per year. The required return on the g...

Q: You observe that the inflation rate in the United States is 1

You observe that the inflation rate in the United States is 1.8 percent per year and that T-bills currently yield 2.3 percent annually. What do you estimate the inflation rate to be in: a. Australia i...

Q: Suppose the following bond quote for IOU Corporation appears in the financial

Suppose the following bond quote for IOU Corporation appears in the financial page of today’s newspaper. Assume the bond has a face value of $1,000 and the current date is April 15,...

Q: Pasqually Mineral Water, Inc., will pay a quarterly dividend per

Pasqually Mineral Water, Inc., will pay a quarterly dividend per share of $.80 at the end of each of the next 12 quarters. Thereafter, the dividend will grow at a quarterly rate of 1 percent, forever....

Q: In the previous problem, assume that the probability of default is

In the previous problem, assume that the probability of default is 15 percent. Should the orders be filled now? Assume the number of repeat customers is affected by the defaults. In other words, 30 pe...

Q: First Simple Bank pays 5 percent simple interest on its investment accounts

First Simple Bank pays 5 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match...

Q: The Yurdone Corporation wants to set up a private cemetery business.

The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash inflow of...

Q: When the Master Printing Company filed for bankruptcy, it filed under

When the Master Printing Company filed for bankruptcy, it filed under Chapter 11 of the U.S. bankruptcy code. Key information is shown here: As a trustee, what reorganization plan would you accept?...

Q: With the growing popularity of casual surf print clothing, two recent

With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a “surf lifestyle for the home.” With limited capital, they...

Q: Allied Products, Inc., is considering a new product launch.

Allied Products, Inc., is considering a new product launch. The firm expects to have an annual operating cash flow of $10.5 million for the next 10 years. Allied Products uses a discount rate of 13 pe...

Q: You’ve just found a 10 percent coupon bond on the market that

You’ve just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?

Q: Briley, Inc., is expected to pay equal dividends at the

Briley, Inc., is expected to pay equal dividends at the end of each of the next two years. Thereafter, the dividend will grow at a constant annual rate of 4 percent, forever. The current stock price i...

Q: Ritter Corporation’s accountants prepared the following financial statements for year-end

Ritter Corporation’s accountants prepared the following financial statements for year-end 2012: a. Explain the change in cash during 2012. b. Determine the change in net working capi...

Q: You are planning to save for retirement over the next 30 years

You are planning to save for retirement over the next 30 years. To do this, you will invest $800 a month in a stock account and $350 a month in a bond account. The return of the stock account is expec...

Q: Suppose an investment offers to quadruple your money in 12 months (

Suppose an investment offers to quadruple your money in 12 months (don’t believe it). What rate of return per quarter are you being offered?

Q: The Utah Mining Corporation is set to open a gold mine near

The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, “This is a golden opportunity.” The mine will cost $2,400,000 to open and will hav...

Q: You have been hired as a consultant for Pristine Urban-Tech

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago...

Q: Applied Nanotech is thinking about introducing a new surface cleaning machine.

Applied Nanotech is thinking about introducing a new surface cleaning machine. The marketing department has come up with the estimate that Applied Nanotech can sell 15 units per year at $305,000 net c...

Q: Tesla Corporation needs to raise funds to finance a plant expansion,

Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 7 percent. a. W...

Q: Use the information in Figure 31.1 to answer the following

Use the information in Figure 31.1 to answer the following questions: a. Which would you rather have, $100 or £100? Why? b. Which would you rather have, 100 Swiss francs (SF) or Â&p...

Q: Juggernaut Satellite Corporation earned $18 million for the fiscal year ending

Juggernaut Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30...

Q: You are researching Time Manufacturing and have found the following accounting statement

You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $98 million in current taxes and ha...

Q: You’re trying to choose between two different investments, both of which

You’re trying to choose between two different investments, both of which have up-front costs of $65,000. Investment G returns $125,000 in six years. Investment H returns $185,000 in 10 years. Which of...

Q: : The Grandmother Calendar Company clearly had a cash flow problem.

The Grandmother Calendar Company clearly had a cash flow problem. In the context of the cash flow analysis we developed, what was the impact of customers not paying until orders were shipped?

Q: Butler International Limited is evaluating a project in Erewhon. The project

Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year ………………..Cash Flow 0…………………..……….−$950,000 1……………..………..……….285,000 2………………….….…...

Q: Pilot Plus Pens is deciding when to replace its old machine.

Pilot Plus Pens is deciding when to replace its old machine. The machine’s current salvage value is $2.2 million. Its current book value is $1.4 million. If not sold, the old machine will require main...

Q: You are the financial analyst for a tennis racket manufacturer. The

You are the financial analyst for a tennis racket manufacturer. The company is considering using a graphite like material in its tennis rackets. The company has estimated the information in the follow...

Q: Suppose your company needs to raise $45 million and you want

Suppose your company needs to raise $45 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you’re evaluating two issue a...

Q: Four years ago, Bling Diamond, Inc., paid a dividend

Four years ago, Bling Diamond, Inc., paid a dividend of $1.35 per share. Bling paid a dividend of $1.77 per share yesterday. Dividends will grow over the next five years at the same rate they grew ove...

Q: On the balance sheet, the net fixed assets (NFA)

On the balance sheet, the net fixed assets (NFA) account is equal to the gross fixed assets (FA) account, which records the acquisition cost of fixed assets, minus the accumulated depreciation (AD) ac...

Q: Bulla Recording, Inc., wishes to maintain a growth rate of

Bulla Recording, Inc., wishes to maintain a growth rate of 12 percent per year and a debt–equity ratio of .40. Profit margin is 5.3 percent, and the ratio of total assets to sales is constant at .75....

Q: Suppose you were the financial manager of a not-for-

Suppose you were the financial manager of a not-for- profit business (a not-for-profit hospital, perhaps). What kinds of goals do you think would be appropriate?

Q: Consider two streams of cash flows, A and B. Stream

Consider two streams of cash flows, A and B. Stream A’s first cash flow is $8,900 and is received three years from today. Future cash flows in Stream A grow by 4 percent in perpetuity. Stream B’s firs...

Q: Office Automation, Inc., must choose between two copiers, the

Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $900 and will last for three years. The copier will require a real aftertax cost of $120 per year after a...

Q: Prince Albert Canning PLC had a net loss of £37,

Prince Albert Canning PLC had a net loss of £37,543 on sales of £345,182. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any difference? W...

Q: Consider a project to supply Detroit with 35,000 tons of

Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project sta...

Q: Bond P is a premium bond with a 9 percent coupon.

Bond P is a premium bond with a 9 percent coupon. Bond D is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and have 10 years to matu...

Q: Consider Pacific Energy Company and U.S. Blue chips,

Consider Pacific Energy Company and U.S. Blue chips, Inc., both of which reported earnings of $950,000. Without new projects, both firms will continue to generate earnings of $950,000 in perpetuity. A...

Q: Refer to the corporate marginal tax rate information in Table 2.

Refer to the corporate marginal tax rate information in Table 2.3. a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back...

Q: A prestigious investment bank designed a new security that pays a quarterly

A prestigious investment bank designed a new security that pays a quarterly dividend of $4.50 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the...

Q: Darin Clay, the CFO of MakeMoney.com, has to

Darin Clay, the CFO of MakeMoney.com, has to decide between the following two projects: The expected rate of return for either of the two projects is 12 percent. What is the range of initial investm...

Q: Dickinson Brothers, Inc., is considering investing in a machine to

Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $975,000, and its economic life is five years. The machine will be fully...

Q: Consider a project to supply Detroit with 35,000 tons

Consider a project to supply Detroit with 35,000 tons of machine screws annually for automobile production. You will need an initial $2,900,000 investment in threading equipment to get the project st...

Q: Why do you think most long-term financial planning begins with

Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the key input?

Q: The YTM on a bond is the interest rate you earn on

The YTM on a bond is the interest rate you earn on your investment if interest rates don’t change. If you actually sell the bond before it matures, your realized return is known as the holding period...

Q: Investment X offers to pay you $4,500 per year

Investment X offers to pay you $4,500 per year for nine years, whereas Investment Y offers to pay you $7,000 per year for five years. Which of these cash flow streams has the higher present value if t...

Q: The Stambaugh Corporation currently has earnings per share of $9.

The Stambaugh Corporation currently has earnings per share of $9.40. The company has no growth and pays out all earnings as dividends. It has a new project that will require an investment of $1.95 per...

Q: Define the following: S = Previous year’s sales

Define the following: S = Previous year’s sales A = Total assets E = Total equity g = Projected growth in sales PM = Profit margin b = Retention (plowback) ratio Assuming that all debt is constant, sh...

Q: McKeekin Corp. has a project with the following cash flows:

McKeekin Corp. has a project with the following cash flows: Year …………………Cash Flow 0 ……………………………….$20,000 1 ………………………………..−26,000 2 …………………………………..13,000 What is the IRR of the project? What is happe...

Q: Aguilera Acoustics, Inc. (AAI), projects unit sales for

Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows: Year Unit Sales 1 ……………………….……….. 83,000 2 ………….…………………….. 92,000 3 …………….………………… 104,00...

Q: Consider the following project for Hand Clapper, Inc. The company

Consider the following project for Hand Clapper, Inc. The company is considering a four-year project to manufacture clap-command garage door openers. This project requires an initial investment of $8...

Q: The Morgan Corporation has two different bonds currently outstanding. Bond M

The Morgan Corporation has two different bonds currently outstanding. Bond M has a face value of $30,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $800 eve...

Q: Rite Bite Enterprises sells toothpicks. Gross revenues last year were $

Rite Bite Enterprises sells toothpicks. Gross revenues last year were $7.5 million, and total costs were $3.4 million. Rite Bite has 1 million shares of common stock outstanding. Gross revenues and co...

Q: What is the present value of an annuity of $6,

What is the present value of an annuity of $6,500 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 7 percent.

Q: What is the value today of a 15-year annuity that

What is the value today of a 15-year annuity that pays $650 a year? The annuity’s first payment occurs six years from today. The annual interest rate is 11 percent for Years 1 through 5, and 13 percen...

Q: Y3K, Inc., has sales of $2,700,

Y3K, Inc., has sales of $2,700, total assets of $1,310, and a debt–equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?

Q: A proposed cost-saving device has an installed cost of $

A proposed cost-saving device has an installed cost of $640,000. The device will be used in a five-year project but is classified as three year MACRS property for tax purposes. The required initial ne...

Q: Ramsay Corp. currently has an EPS of $2.35

Ramsay Corp. currently has an EPS of $2.35, and the benchmark PE for the company is 21. Earnings are expected to grow at 7 percent per year. a. What is your estimate of the current stock price? b. Wha...

Q: The following premerger information about Firm A and Firm B:

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 $18 for each share of B ’s stock. Both A and B...

Q: In the chapter, we used Rosengarten Corporation to demonstrate how to

In the chapter, we used Rosengarten Corporation to demonstrate how to calculate EFN. The ROE for Rosengarten is about 7.3 percent, and the plowback ratio is about 67 percent. If you calculate the sust...

Q: The most recent financial statements for Martin, Inc., are shown

The most recent financial statements for Martin, Inc., are shown here: Assets and costs are proportional to sales. Debt and equity are not. A dividend of $2,500 was paid, and Martin wishes to mainta...

Q: Solve for the unknown interest rate in each of the following:

Solve for the unknown interest rate in each of the following:

Q: A project has perpetual cash flows of C per period, a

A project has perpetual cash flows of C per period, a cost of I , and a required return of R . What is the relationship between the project’s payback and its IRR? What implications does your answer ha...

Q: An investment project costs $15,000 and has annual cash

An investment project costs $15,000 and has annual cash flows of $3,800 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10 percent?...

Q: Fuji Software, Inc., has the following mutually exclusive projects.

Fuji Software, Inc., has the following mutually exclusive projects. Year Project a. Suppose Fuji’s payback period cutoff is two years. Which of these two projects should be chosen?...

Q: Given the choice, would a firm prefer to use MACRS depreciation

Given the choice, would a firm prefer to use MACRS depreciation or straight-line depreciation? Why?

Q: Toys Inc. just purchased a $390,000 machine to

Toys Inc. just purchased a $390,000 machine to produce toy cars. The machine will be fully depreciated by the straight-line method over its five-year economic life. Each toy sells for $25. The variabl...

Q: Rhiannon Corporation has bonds on the market with 11.5 years

Rhiannon Corporation has bonds on the market with 11.5 years to maturity, a YTM of 7.6 percent, and a current price of $1,060. The bonds make semiannual payments. What must the coupon rate be on these...

Q: Consider the following cash flows on two mutually exclusive projects for the

Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent. As a financial analyst for BR...

Q: Under what two assumptions can we use the dividend growth model presented

Under what two assumptions can we use the dividend growth model presented in the chapter to determine the value of a share of stock? Comment on the reasonableness of these assumptions.

Q: An investment in a foreign subsidiary is estimated to have a positive

An investment in a foreign subsidiary is estimated to have a positive NPV after the discount rate used in the calculations is adjusted for political risk and any advantages from diversification. Does...

Q: White Wedding Corporation will pay a $2.65 per share

White Wedding Corporation will pay a $2.65 per share dividend next year. The company pledges to increase its dividend by 4.75 percent per year, indefinitely. If you require a return of 11 percent on y...

Q: Your neighbor goes to the post office once a month and picks

Your neighbor goes to the post office once a month and picks up two checks, one for $11,000 and one for $3,400. The larger check takes four days to clear after it is deposited; the smaller one takes f...

Q: What are the five Cs of credit? Explain why each is

What are the five Cs of credit? Explain why each is important.

Q: In July 2011, fast food restaurant chain Wendy’s/Arby’s announced

In July 2011, fast food restaurant chain Wendy’s/Arby’s announced that it had sold its Arby’s restaurants and would change its name back to Wendy’s. Arby’s was purchased by the private equity firm Roa...

Q: In the previous problem, suppose the fair market value of James’s

In the previous problem, suppose the fair market value of James’s fixed assets is $15,000 versus the $8,900 book value shown. Jurion pays $23,000 for James and raises the needed fund...

Q: Jon Fulkerson has also received a credit application from Seether, LLC

Jon Fulkerson has also received a credit application from Seether, LLC, a private company. An abbreviated portion of the financial information provided by the company is shown below: Total assets ………...

Q: We are evaluating a project that costs $644,000,

We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected a...

Q: Suppose the spot exchange rate for the Canadian dollar is Can$

Suppose the spot exchange rate for the Canadian dollar is Can$1.05 and the six-month forward rate is Can$1.03. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP hold...

Q: The Robb Computer Corporation is trying to choose between the following two

The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects: a. If the required return is 10 percent and Robb Computer applies the profitability in...

Q: Can the goal of maximizing the value of the stock conflict with

Can the goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior? In particular, do you think subjects like customer and employee safety, the...

Q: Ranney, Inc., has sales of $18,700,

Ranney, Inc., has sales of $18,700, costs of $10,300, depreciation expense of $1,900, and interest expense of $1,250. If the tax rate is 40 percent, what is the operating cash flow, or OCF?

Q: Massey Machine Shop is considering a four-year project to improve

Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $640,000 is estimated to result in $270,000 in annual pretax cost savings. T...

Q: Suppose the spot and three-month forward rates for the yen

Suppose the spot and three-month forward rates for the yen are ¥80.13 and ¥78.96, respectively. a. Is the yen expected to get stronger or weaker? b. What would you estimate is the difference between t...

Q: Broslofski Co. maintains a positive retention ratio and keeps its debt

Broslofski Co. maintains a positive retention ratio and keeps its debt–equity ratio constant every year. When sales grow by 20 percent, the firm has a negative projected EFN. What does this tell you a...

Q: The most recent financial statements for Fontenot Co. are shown here

The most recent financial statements for Fontenot Co. are shown here: Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant deb...

Q: Solve for the unknown number of years in each of the following

Solve for the unknown number of years in each of the following:

Q: In October 2010, BMW announced plans to spend $1 billion

In October 2010, BMW announced plans to spend $1 billion to expand production at its plant in South Carolina. The plant produced the second generation BMW X3 as well as the company’s X5 and X6 models....

Q: Stone Sour, Inc., has a project with the following cash

Stone Sour, Inc., has a project with the following cash flows: Year ………………………..Cash Flows ($) 0 ………………………………….………….−$20,000 1 …………………………………………………….8,500 2 …………………………………………………..10,200 3 ……………………………………...

Q: In our capital budgeting examples, we assumed that a firm would

In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

Q: For each of the following, compute the present value:

For each of the following, compute the present value:

Q: Assume a firm is considering a new project that requires an initial

Assume a firm is considering a new project that requires an initial investment and has equal sales and costs over its life. Will the project reach the accounting, cash, or financial break-even point f...

Q: What is the price of a 15-year, zero coupon

What is the price of a 15-year, zero coupon bond paying $1,000 at maturity if the YTM is: a. 5 percent? b. 10 percent? c. 15 percent?

Q: Your company is deciding whether to invest in a new machine.

Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $475,000 per year. You believe the technology used in the machine has a 10-year life; in other w...

Q: How does a bond issuer decide on the appropriate coupon rate to

How does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.

Q: The Stancil Corporation provided the following current information: Proceeds

The Stancil Corporation provided the following current information: Proceeds from long-term borrowing……………….………… $17,000 Proceeds from the sale of common stock…………..…………. 4,000 Purchases of fixed ass...

Q: Even though most corporate bonds in the United States make coupon payments

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par val...

Q: Siblings, Inc., is expected to maintain a constant 6.

Siblings, Inc., is expected to maintain a constant 6.4 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.3 percent, what is the required return on the compan...

Q: Your firm has an average receipt size of $117. A

Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,500 checks per...

Q: What are some of the factors that determine the length of the

What are some of the factors that determine the length of the credit period? Why is the length of the buyer’s operating cycle often considered an upper bound on the length of the credit period?

Q: A firm offers terms of 1/10, net 30.

A firm offers terms of 1/10, net 30. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this...

Q: Use the sustainable growth rate equations from the previous problem to answer

Use the sustainable growth rate equations from the previous problem to answer the following questions. No Return, Inc., had total assets of $285,000 and equity of $176,000 at the beginning of the year...

Q: Silver Enterprises has acquired All Gold Mining in a merger transaction.

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 for accounting purposes. The market...

Q: Suppose the Japanese yen exchange rate is ¥85 = $1

Suppose the Japanese yen exchange rate is ¥85 = $1, and the British pound exchange rate is £ 1 = $1.53. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is ¥131.4 = £ 1....

Q: Under standard accounting rules, it is possible for a company’s liabilities

Under standard accounting rules, it is possible for a company’s liabilities to exceed its assets. When this occurs, the owners’ equity is negative. Can this happen with market values? Why or why not?...

Q: The Starr Co. just paid a dividend of $2.

The Starr Co. just paid a dividend of $2.15 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a return of 11 perce...

Q: Gordon Driving School’s 2011 balance sheet showed net fixed assets of $

Gordon Driving School’s 2011 balance sheet showed net fixed assets of $1.42 million, and the 2012 balance sheet showed net fixed assets of $1.69 million. The company’s 2012 income statement showed a d...

Q: The Optical Scam Company has forecast a 15 percent sales growth rate

The Optical Scam Company has forecast a 15 percent sales growth rate for next year. The current financial statements are shown here: a. Using the equation from the chapter, calculate the external fu...

Q: One tool of financial analysis is common-size financial statements.

One tool of financial analysis is common-size financial statements. Why do you think common-size income statements and balance sheets are used? Note that the accounting statement of cash flows is not...

Q: If the Layla Corp. has a 13 percent ROE and a

If the Layla Corp. has a 13 percent ROE and a 20 percent payout ratio, what is its sustainable growth rate?

Q: At 8 percent interest, how long does it take to double

At 8 percent interest, how long does it take to double your money? To quadruple it?

Q: What are some of the difficulties that might come up in actual

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? Th...

Q: The technique for calculating a bid price can be extended to many

The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV...

Q: Compute the internal rate of return for the cash flows of the

Compute the internal rate of return for the cash flows of the following two projects:

Q: Suppose a financial manager is quoted as saying, “Our firm

Suppose a financial manager is quoted as saying, “Our firm uses the stand-alone principle. Because we treat projects like minifirms in our evaluation process, we include financing costs because they a...

Q: Your firm is contemplating the purchase of a new $670,

Your firm is contemplating the purchase of a new $670,000 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 t...

Q: Why does traditional NPV analysis tend to underestimate the true value of

Why does traditional NPV analysis tend to underestimate the true value of a capital budgeting project?

Q: Ang Electronics, Inc., has developed a new DVDR. If

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 $34 million. If the DVDR fails, the present value...

Q: An investment offers $4,900 per year for 15 years

An investment offers $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of the investment? What would the value be...

Q: Suppose a project has conventional cash flows and a positive NPV.

Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.

Q: Cutler Petroleum, Inc., is trying to evaluate a generation project

Cutler Petroleum, Inc., is trying to evaluate a generation project with the following cash flows: Year …………………….Cash Flow 0 ………………………….−$ 85,000,000 1 …………..………………….125, 000,000 2 ……………………………..−15,00...

Q: You are considering a new product launch. The project will cost

You are considering a new product launch. The project will cost $820,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 450 units per...

Q: You buy a zero coupon bond at the beginning of the year

You buy a zero coupon bond at the beginning of the year that has a face value of $1,000, a YTM of 7 percent, and 25 years to maturity. If you hold the bond for the entire year, how much in interest in...

Q: You are planning to save for retirement over the next 30 years

You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $900 a month in a stock account in real dollars and $300 a month in a bond account in real dolla...

Q: Bucksnort, Inc., has an odd dividend policy. The company

Bucksnort, Inc., has an odd dividend policy. The company has just paid a dividend of $12 per share and has announced that it will increase the dividend by $3 per share for each of the next five years,...

Q: Prove that when carrying costs and restocking costs are as described in

Prove that when carrying costs and restocking costs are as described in the chapter, the EOQ must occur at the point where the carrying costs and restocking costs are equal.

Q: Consider a project with a required return of R percent that costs

Consider a project with a required return of R percent that costs $ I and will last for N years. The project uses straight-line depreciation to zero over the N -year life; there are neither salvage va...

Q: If a U.S. firm raises funds for a foreign

If a U.S. firm raises funds for a foreign subsidiary, what are the disadvantages to borrowing in the United States? How would you overcome them?

Q: Suppose the spot exchange rate for the Hungarian forint is HUF 206

Suppose the spot exchange rate for the Hungarian forint is HUF 206. The inflation rate in the United States is 2.8 percent per year and is 3.7 percent in Hungary. What do you predict the exchange rate...

Q: During the year, the Senbet Discount Tire Company had gross sales

During the year, the Senbet Discount Tire Company had gross sales of $1.06 million. The firm’s cost of goods sold and selling expenses were $525,000 and $215,000, respectively. Senbet also had notes p...

Q: A company has net income of $265,000, a

A company has net income of $265,000, a profit margin of 9.3 percent, and an accounts receivable balance of $145,300. Assuming 80 percent of sales are on credit, what is the company’s days’ sales in r...

Q: The Perpetual Life Insurance Co. is trying to sell you an

The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $15,000 per year forever. If the required return on this investment is 5.2 percent, how muc...

Q: An investment project provides cash inflows of $840 per year for

An investment project provides cash inflows of $840 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,800? What if it is $7,300...

Q: It is sometimes stated that “the internal rate of return approach

It is sometimes stated that “the internal rate of return approach assumes reinvestment of the intermediate cash flows at the internal rate of return.” Is this claim correct? To answer, suppose you cal...

Q: FFDP Corp. has yearly sales of $28 million and costs

FFDP Corp. has yearly sales of $28 million and costs of $12 million. The company’s balance sheet shows debt of $54 million and cash of $18 million. There are 950,000 shares outstanding and the industr...

Q: Mario Brothers, a game manufacturer, has a new idea for

Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash...

Q: Vandalay Industries is considering the purchase of a new machine for the

Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35 percent of sales, and fixed...

Q: McGilla Golf has decided to sell a new line of golf clubs

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that dete...

Q: Why it that municipal bonds are not is taxed at the federal

Why it that municipal bonds are not is taxed at the federal level, but are taxable across state lines? Why it is that U.S. Treasury bonds are not taxable at the state level?

Q: Miller Corporation has a premium bond making semiannual payments. The bond

Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani Company has a discount bond...

Q: Lohn Corporation is expected to pay the following dividends over the next

Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends...

Q: The Harrington Corporation is considering a change in its cash-only

The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. Th...

Q: Fly-By-Night Couriers is analyzing the possible acquisition of

Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual after...

Q: Lakonishok Equipment has an investment opportunity in Europe. The project costs

Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of €3.6 million in Year 1,€4.1 million in Year 2, and €5.1 million in...

Q: Schwert Corp. shows the following information on its 2012 income statement

Schwert Corp. shows the following information on its 2012 income statement: sales = $185,000; costs = $98,000; other expenses = $6,700; depreciation expense = $16,500; interest expense = $9,000; taxes...

Q: You receive a credit card application from Shady Banks Savings and Loan

You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.40 percent per year, compounded monthly for the first six months, increasing thereafter to 18...

Q: Which of the following should be treated as an incremental cash flow

Which of the following should be treated as an incremental cash flow when computing the NPV of an investment? a. A reduction in the sales of a company’s other products caused by the investment. b. An...

Q: The Le Bleu Company has a ratio of long-term debt

The Le Bleu Company has a ratio of long-term debt to total assets of .35 and a current ratio of 1.25. Current liabilities are $950, sales are $5,780, profit margin is 9.4 percent, and ROE is 18.2 perc...

Q: Find the EAR in each of the following cases:

Find the EAR in each of the following cases:

Q: Hanmi Group, a consumer electronics conglomerate, is reviewing its annual

Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication...

Q: Locate the Treasury bond in Figure 8.4 maturing in February

Locate the Treasury bond in Figure 8.4 maturing in February 2037. What is its coupon rate? What is its bid price? What was the previous day’s asked price?

Q: Consider the following cash flows on two mutually exclusive projects:

Consider the following cash flows on two mutually exclusive projects: The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropri...

Q: McGilla Golf has decided to sell a new line of golf

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that det...

Q: The 100-year bonds we discussed in the chapter have something

The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues here...

Q: Laurel, Inc., and Hardy Corp. both have 7 percent

Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas...

Q: Hughes Co. is growing quickly. Dividends are expected to grow

Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required ret...

Q: Happy Times currently has an all-cash credit policy. It

Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend?...

Q: Sparkling Water, Inc., expects to sell 2.8 million

Sparkling Water, Inc., expects to sell 2.8 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.25 in real terms and will cost $.90 in real terms. Sales in...

Q: A check-cashing store is in the business of making personal

A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 7 percent interest per week. a. What APR must the store report to its cus...

Q: A 5-year annuity of ten $5,300 semiannual

A 5-year annuity of ten $5,300 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 12 percent compounded monthly, what is the val...

Q: Suppose you are going to receive $20,000 per year

Suppose you are going to receive $20,000 per year for five years. The appropriate interest rate is 7 percent. a. What is the present value of the payments if they are in the form of an ordinary annuit...

Q: You want to buy a new sports car from Muscle Motors for

You want to buy a new sports car from Muscle Motors for $73,000. The contract is in the form of a 60-month annuity due at a 6.45 percent APR. What will your monthly payment be?

Q: Locate the Treasury bond in Figure 8.4 maturing in November

Locate the Treasury bond in Figure 8.4 maturing in November 2039. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread? Figure 8.4...

Q: Find the APR, or stated rate, in each of the

Find the APR, or stated rate, in each of the following cases:

Q: You want to lease a set of golf clubs from Pings Ltd

You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at a 10.4 percent stated annual interest rate, compounded monthly. Because the club...

Q: You are saving for the college education of your two children.

You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate yo...

Q: Tom Adams has received a job offer from a large investment bank

Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $55,000. He will receive his first annual salary payment one year from the da...

Q: Audrey Sanborn has just arranged to purchase a $550,000

Audrey Sanborn has just arranged to purchase a $550,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 6.1 percent stated annual interest rate, compounded monthly, and...

Q: You have recently won the super jackpot in the Washington State Lottery

You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options: a. You will receive 31 annual payments of $250...

Q: What is the equation for the present value of a growing perpetuity

What is the equation for the present value of a growing perpetuity with a payment of C one period from today if the payments grow by C each period?

Q: You have 30 years left until retirement and want to retire with

You have 30 years left until retirement and want to retire with $2 million. Your salary is paid annually, and you will receive $70,000 at the end of the current year. Your salary will increase at 3 pe...

Q: Down Under Boomerang, Inc., is considering a new three-

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1.4 million. The fixed asset will be depreciated straight-line to zero...

Q: On September 1, 2009, Susan Chao bought a motorcycle for

On September 1, 2009, Susan Chao bought a motorcycle for $30,000. She paid $1,000 down and financed the balance with a five-year loan at a stated annual interest rate of 7.2 percent, compounded monthl...

Q: Bilbo Baggins wants to save money to meet three objectives. First

Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $23,000 per month for 20 years, with the first payme...

Q: After deciding to buy a new car, you can either lease

After deciding to buy a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $31,000. The dealer has a special leasing arrangement where you pay $...

Q: Consider the following cash flows of two mutually exclusive projects for AZ

Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 10 percent. a. Based on the payback period, which project should b...

Q: An All-Pro defensive lineman is in contract negotiations. The

An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: Time………….………….……... Salary 0………..…….….….…. $8, 500,000 1…………….….………….3, 900,000 2………………....

Q: Metallica Bearings, Inc., is a young start-up company

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company wil...

Q: This question illustrates what is known as discount interest. Imagine you

This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 15 pe...

Q: You are serving on a jury. A plaintiff is suing the

You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff i...

Q: M.V.P. Games, Inc., has hired

M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $7 million initial investment. M.V.P. expects a total annual operating cash flow of $1.3 million fo...

Q: Another utilization of cash flow analysis is setting the bid price on

Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price repres...

Q: You are looking at a one-year loan of $10

You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes simil...

Q: Two banks in the area offer 30-year, $200

Two banks in the area offer 30-year, $200,000 mortgages at 5.3 percent and charge a $2,400 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the...

Q: This problem illustrates a deceptive way of quoting interest rates called add

This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,000 In...

Q: Your Christmas ski vacation was great, but it unfortunately ran a

Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $10,000 balance from your current credit car...

Q: In each of the following cases, find the unknown variable.

In each of the following cases, find the unknown variable. Ignore taxes.

Q: A useful rule of thumb for the time it takes an investment

A useful rule of thumb for the time it takes an investment to double with discrete compounding is the “Rule of 72.” To use the Rule of 72, you simply divide 72 by the interest rate to determine the nu...

Q: A corollary to the Rule of 72 is the Rule of 69

A corollary to the Rule of 72 is the Rule of 69.3. The Rule of 69.3 is exactly correct except for rounding when interest rates are compounded continuously. Prove the Rule of 69.3 for continuously comp...

Q: Watters Umbrella Corp. issued 15-year bonds 2 years ago

Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 6.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM...

Q: For the company in the previous problem, what is the dividend

For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?

Q: Purple Feet Wine, Inc., receives an average of $16

Purple Feet Wine, Inc., receives an average of $16,000 in checks per day. The delay in clearing is typically three days. The current interest rate is .018 percent per day. a. What is the company’s flo...

Q: The Trektronics store begins each week with 750 phasers in stock.

The Trektronics store begins each week with 750 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $65 per year and the fixed order cost is $395, what...

Q: When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to

When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former...

Q: An insurance company is offering a new policy to its customers.

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: Th...

Q: Kyoto Joe, Inc., sells earnings forecasts for Japanese securities.

Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/15, net 30. Based on experience, 65 percent of all customers will take the discount. a. What is the average co...

Q: Explain why diversification per se is probably not a good reason for

Explain why diversification per se is probably not a good reason for merger.

Q: Assume that the following balance sheets are stated at book value.

Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $15,000 for James and raises t...

Q: Paul Adams owns a health club in downtown Los Angeles. He

Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 600. Paul plans to raise the annual fee by 6 percent every ye...

Q: Fair-to-Midland Manufacturing, Inc., (FMM)

Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financia...

Q: If a project with conventional cash flows has a payback period less

If a project with conventional cash flows has a payback period less than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted p...

Q: The exchange rate for the Australian dollar is currently A$1

The exchange rate for the Australian dollar is currently A$1.40. This exchange rate is expected to rise by 10 percent over the next year. a. Is the Australian dollar expected to get stronger or weaker...

Q: Use the information in Figure 31.1 to answer the following

Use the information in Figure 31.1 to answer the following questions: a. What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a premium or a discount?...

Q: Klingon Cruisers, Inc., purchased new cloaking machinery three years ago

Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.5 million. The machinery can be sold to the Romulans today for $6.5 million. Klingon’s current balance sheet shows net f...

Q: How do financial cash flows and the accounting statement of cash flows

How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?

Q: You have just won the lottery. You will receive $2

You have just won the lottery. You will receive $2,500,000 today, and then receive 40 payments of $1,250,000. These payments will start one year from now and will be paid every six months. A represent...

Q: The Locker Co. had $273,000 in taxable income

The Locker Co. had $273,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s income taxes. What is the average tax rate? What is the marginal...

Q: McGilla Golf would like to know the sensitivity of NPV to changes

McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?

Q: a. What is the relationship between the price of a bond

a. What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relati...

Q: The Faulk Corp. has a 6 percent coupon bond outstanding.

The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 10 perce...

Q: Janicek Corp. is experiencing rapid growth. Dividends are expected to

Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year indefinit...

Q: We are evaluating a project that costs $644,000,

We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected a...

Q: The Silver Spokes Bicycle Shop has decided to offer credit to its

The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 600 bicycles. The average cost to the shop of a bicycle is $525....

Q: Bird’s Eye Tree houses, Inc., a Kentucky company, has

Bird’s Eye Tree houses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox sy...

Q: Harrods PLC has a market value of £400 million and 30

Harrods PLC has a market value of £400 million and 30 million shares outstanding. Selfridge Department Store has a market value of £160 million and 18 million shares outstanding. Harrods is contemplat...

Q: Bentley Corp. and Rolls Manufacturing are considering a merger. The

Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here: Bentley currently has a bon...

Q: A financial planning service offers a college savings program. The plan

A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $11,000 each, with the first payment occurring today, your child’s 12th birthday. B...

Q: Atreides International has operations in Arrakis. The balance sheet for this

Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 34,000 solaris, debt in the amount of 12,000 solaris, and equity of 22,000 sol...

Q: Huang, Inc., is obligated to pay its creditors $10

Huang, Inc., is obligated to pay its creditors $10,900 very soon. a. What is the market value of the shareholders’ equity if assets have a market value of $12,400? b. What if assets equal $9,600?

Q: Eberhart Manufacturing has projected sales of $145 million next year.

Eberhart Manufacturing has projected sales of $145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of these values is expected to grow at...

Q: The DuPont identity presented in the chapter is commonly referred to as

The DuPont identity presented in the chapter is commonly referred to as the three-factor DuPont identity. Another common way that the DuPont identity is expressed is the five-factor model, which is:...

Q: First National Bank charges 11.2 percent compounded monthly on its

First National Bank charges 11.2 percent compounded monthly on its business loans. First United Bank charges 11.4 percent compounded semiannually. As a potential borrower, to which bank would you go f...

Q: The treasurer of Amaro Canned Fruits, Inc., has projected the

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Suppose the relevant discount rate is 12 percent a year. a. Compute the profitability ind...

Q: Etonic Inc. is considering an investment of $365,000

Etonic Inc. is considering an investment of $365,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year...

Q: Hacker Software has 6.2 percent coupon bonds on the market

Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bond...

Q: All else being the same, which has more interest rate risk

All else being the same, which has more interest rate risk, a long term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon bond...

Q: The Best Manufacturing Company is considering a new investment. Financial projections

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received...

Q: Cow Chips, Inc., a large fertilizer distributor based in California

Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank...

Q: Microhard has issued a bond with the following characteristics: Par

Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 15 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 p...

Q: Redan Manufacturing uses 1,700 switch assemblies per week and then

Redan Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. If the relevant carrying cost per switch assembly is $7, and the fixed order cost is $725, is Redan’s invento...

Q: Hacker Software has 6.2 percent coupon bonds on the market

Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bond...

Q: Antiques R Us is a mature manufacturing firm. The company just

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require an 11 percent retu...

Q: Barrett Pharmaceuticals is considering a drug project that costs $2.

Barrett Pharmaceuticals is considering a drug project that costs $2.5 million today and is expected to generate end-of-year annual cash flows of $227,000, forever. At what discount rate would Barrett...

Q: In Problem 14, what is the break-even quantity for

In Problem 14, what is the break-even quantity for the new credit policy? Problem 14

Q: Plant, Inc., is considering making an offer to purchase Palmer

Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information: Plant also knows that securities anal...

Q: In the previous problem, assume the equity increases by 1,

In the previous problem, assume the equity increases by 1,750 solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 solaris per dollar, what does the balance sheet look...

Q: (Refer to Table 2.3.) Corporation Growth has $

Corporation Growth has $86,000 in taxable income, and Corporation Income has $8,600,000 in taxable income. a. What is the tax bill for each firm? (Refer to Table 2.3.) b. Suppose both firms h...

Q: Consider the following cash flows of two mutually exclusive projects for Tokyo

Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for Tokyo Rubber Company is 10 percent. a. Based on the payback period, which...

Q: Your financial planner offers you two different investment plans. Plan X

Your financial planner offers you two different investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 10-year, $26,000 annual annuity. Both plans will make their first payment one year...

Q: You are evaluating a proposed expansion of an existing subsidiary located in

You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 25 million. The cash flows from the project would be SF 6.9 million per...

Q: Phillips Industries runs a small manufacturing operation. For this fiscal year

Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. Phillips is an ongoing operation, but it expects competitive pressures to er...

Q: Pembroke Co. wants to issue new 20-year bonds for

Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual payments, an...

Q: Pembroke Co. wants to issue new 20-year bonds for

Pembroke Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,063, make semiannual payments, an...

Q: Hagar Industrial Systems Company (HISC) is trying to decide between

Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $85,000 in pretax annual operating...

Q: Suppose we are thinking about replacing an old computer with a new

Suppose we are thinking about replacing an old computer with a new one. The old one cost us $450,000; the new one will cost $580,000. The new machine will be depreciated straight-line to zero over its...

Q: Define each of the following investment rules and discuss any potential shortcomings

Define each of the following investment rules and discuss any potential shortcomings of each. In your definition, state the criterion for accepting or rejecting independent projects under each rule. a...

Q: Consider four different stocks, all of which have a required return

Consider four different stocks, all of which have a required return of 17 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in di...

Q: Southern California Publishing Company is trying to decide whether to revise its

Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost $75,000....

Q: Benson Enterprises is evaluating alternative uses for a three-story manufacturing

Benson Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1,450,000. The company can continue to rent the building to the pr...

Q: The Cornchopper Company is considering the purchase of a new harvester.

The Cornchopper Company is considering the purchase of a new harvester. Cornchopper has hired you to determine the break-even purchase price in terms of present value of the harvester. This break-even...

Q: Most corporations pay quarterly dividends on their common stock rather than annual

Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current divi...

Q: Given the following information for O’Hara Marine Co., calculate the depreciation

Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales = $41,000; costs = $26,400; addition to retained earnings = $4,900; dividends paid = $1,570; interest e...

Q: The following Treasury bond quote appeared in The Wall Street Journal on

The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004: Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?

Q: Your job pays you only once a year for all the work

Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $65,000, and you plan to spend all of it. However, you wan...

Q: The Biological Insect Control Corporation (BICC) has hired you as

The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect...

Q: Lewin Skis, Inc., today expects to earn $8.

Lewin Skis, Inc., today expects to earn $8.50 per share for each of the future operating periods (beginning at Time 1), today if the firm makes no new investments and returns the earnings as dividends...

Q: What is the relationship between the value of an annuity and the

What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $6,800 per year at the current interest rate of 10 percent per ye...

Q: Consider a four-year project with the following information: Initial

Consider a four-year project with the following information: Initial fixed asset investment 5 $480,000; straight-line depreciation to zero over the four-year life; zero salvage value; price 5 $37; var...

Q: After extensive medical and marketing research, Pill, Inc., believes

After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is a medication for headache pain....

Q: J. Smythe, Inc., manufactures fine furniture. The company

J. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,100, including a set of eight chairs. The comp...

Q: Burklin, Inc., has earnings of $18 million and is

Burklin, Inc., has earnings of $18 million and is projected to grow at a constant rate of 5 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out...

Q: You need a 30-year, fixed-rate mortgage to

You need a 30-year, fixed-rate mortgage to buy a new home for $250,000. Your mortgage bank will lend you the money at a 5.3 percent APR for this 360-month loan. However, you can only afford monthly pa...

Q: The present value of the following cash flow stream is $7

The present value of the following cash flow stream is $7,300 when discounted at 8 percent annually. What is the value of the missing cash flow? Year ……………….Cash Flow 1 …………………………..……. $1,500 2 ……………...

Q: As discussed in the text, an annuity due is identical to

As discussed in the text, an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period and not at the end of the period. Show that the rel...

Q: Compute the future value of $1,000 compounded annually for

Compute the future value of $1,000 compounded annually for a. 10 years at 5 percent. b. 10 years at 10 percent. c. 20 years at 5 percent. d. Why is the interest earned in part (c) not twice the amount...

Q: You just won the TVM Lottery. You will receive $1

You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $275,000 per year. Thus, in one year you receive $1.275 million. In two years, you get...

Q: Consider a firm with a contract to sell an asset for $

Consider a firm with a contract to sell an asset for $115,000 three years from now. The asset costs $76,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will...

Q: Titan Inc.’s net income for the most recent year was

Titan Inc.’s net income for the most recent year was $8,320. The tax rate was 34 percent. The firm paid $1,940 in total interest expense and deducted $2,730 in depreciation expense. What was Titan’s c...

Q: Sony International has an investment opportunity to produce a new HDTV.

Sony International has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $165 million. The firm will depreciate the investment to zero using the str...

Q: What is the present value of $5,000 per year

What is the present value of $5,000 per year, at a discount rate of 6 percent, if the first payment is received 6 years from now and the last payment is received 25 years from now?

Q: First City Bank pays 8 percent simple interest on its savings account

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $5,000 deposit in each bank, how muc...

Q: In the chapter, we discussed one calculation of the sustainable growth

In the chapter, we discussed one calculation of the sustainable growth rate as: In practice, probably the most commonly used calculation of the sustainable growth rate is ROE 3 b. This equation is i...

Q: Your company currently produces and sells steel shaft golf clubs. The

Your company currently produces and sells steel shaft golf clubs. The board of directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of th...

Q: You have your choice of two investment accounts. Investment A is

You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,500 payments and has an interest rate of 8.7 percent compounded monthly. Investment B i...

Q: Given an interest rate of 6.1 percent per year,

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Q: Storico Co. just paid a dividend of $3.85

Storico Co. just paid a dividend of $3.85 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until...

Q: What is the value of an investment that pays $30,

What is the value of an investment that pays $30,000 every other year forever, if the first payment occurs one year from today and the discount rate is 13 percent compounded daily? What is the value t...

Q: An investment project has annual cash inflows of $5,000

An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 14 percent. What is the discounted payback period for these cash flows if the initial cost i...

Q: You’re prepared to make monthly payments of $350, beginning at

You’re prepared to make monthly payments of $350, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your a...

Q: Universal Laser, Inc., just paid a dividend of $3

Universal Laser, Inc., just paid a dividend of $3.10 on its stock. The growth rate in dividends is expected to be a constant 6 percent per year, indefinitely. Investors require a 15 percent return on...

Q: This one’s a little harder. Suppose the current share price for

This one’s a little harder. Suppose the current share price for the firm in the previous problem is $78.43 and all the dividend information remains the same. What required return must investors be dem...

Q: California Real Estate, Inc., expects to earn $71 million

California Real Estate, Inc., expects to earn $71 million per year in perpetuity if it does not undertake any new projects. The firm has an opportunity to invest $16 million today and $5 million in on...

Q: You own a lot in Key West, Florida, that is

You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.1 million. Over the past five years, the price of land in the area has increased 12 percent per yea...

Q: Why don’t all firms simply increase their payables periods to shorten their

Why don’t all firms simply increase their payables periods to shorten their cash cycles? Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The...

Q: Travis, Inc., has sales of $387,000,

Travis, Inc., has sales of $387,000, costs of $175,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the com...

Q: One of the less flattering interpretations of the acronym MIRR is “

One of the less flattering interpretations of the acronym MIRR is “meaningless internal rate of return.” Why do you think this term is applied to MIRR?

Q: Your company has been approached to bid on a contract to sell

Your company has been approached to bid on a contract to sell 15,000 voice recognition (VR) computer keyboards a year for four years. Due to technological improvements, beyond that time they will be o...

Q: Krell Industries has a share price of $22.00 today

Krell Industries has a share price of $22.00 today. If Krell is expected to pay a dividend of $0.88 this year and its stock price is expected to grow to $23.54 at the end of the year, what is Krell’s...

Q: Halliford Corporation expects to have earnings this coming year of $3

Halliford Corporation expects to have earnings this coming year of $3 per share. Halliford plans to retain all of its earnings for the next two years. Then, for the subsequent two years, the firm will...

Q: You have just received a windfall from an investment you made in

You have just received a windfall from an investment you made in a friend’s business. She will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at t...

Q: Peripatetic Enterprises, a U.S. import-export trading

Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. Tax law in the Unites States requires U.S. corporations to pay taxes on their foreign earnin...

Q: Suppose the interest on Russian government bonds is 7.5%,

Suppose the interest on Russian government bonds is 7.5%, and the current exchange rate is 28 rubles per dollar. If the forward exchange rate is 28.5 rubles per dollar, and the current U.S. risk-free...

Q: What are some of the differences between the NYSE and NASDAQ?

What are some of the differences between the NYSE and NASDAQ?

Q: You are a shareholder in a C corporation. The corporation earns

You are a shareholder in a C corporation. The corporation earns $2.00 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. Assume the corpor...

Q: What is the financial cycle?

What is the financial cycle?

Q: Dorpac Corporation has a dividend yield of 1.5%. Its

Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends?...

Q: How do financial institutions help with risk-bearing?

How do financial institutions help with risk-bearing?

Q: Think back to the last time you ate at an expensive restaurant

Think back to the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order mor...

Q: What are some of the similarities and differences among mutual funds,

What are some of the similarities and differences among mutual funds, pension funds, and hedge funds?

Q: Quisco Systems has 6.5 billion shares outstanding and a share

Quisco Systems has 6.5 billion shares outstanding and a share price of $18.00. Quisco is considering developing a new networking product in-house at a cost of $500 million. Alternatively, Quisco can a...

Q: Suppose you receive $100 at the end of each year for

Suppose you receive $100 at the end of each year for the next three years. a. If the interest rate is 8%, what is the present value of these cash flows? b. What is the future value in three years of t...

Q: In January 2009, American Airlines (AMR) had a market

In January 2009, American Airlines (AMR) had a market capitalization of $1.7 billion, debt of $11.1 billion, and cash of $4.6 billion. American Airlines had revenues of $23.8 billion. British Airways...

Q: Find online the annual 10-K report for Peet’s Coffee and

Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008 (filed in early 2009). a. Compute Peet’s net profit margin, total asset turnover, and equity multiplier. b. Verify the DuPo...

Q: Repeat the analysis from parts a and b of the previous problem

Repeat the analysis from parts a and b of the previous problem using Starbucks Corporation (SBUX) instead. Based on the DuPont Identity, what explains the difference between the two firms’ ROEs?

Q: Consider a retail firm with a net profit margin of 3.

Consider a retail 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...

Q: Find online the 2008 annual 10-K report for Peet’s Coffee

Find online the 2008 annual 10-K report for Peet’s Coffee and Tea (PEET), filed in early 2009. Answer the following questions from its cash flow statement: a. How much cash did Peet’s generate from op...

Q: See the cash flow statement below for H. J. Heinz

See the cash flow statement below for H. J. Heinz (HNZ) (all values in thousands of dollars) a. What were Heinz’s cumulative earnings over these four quarters? What were its cumulati...

Q: Laurel Enterprises expects earnings next year of $4 per share and

Laurel Enterprises expects earnings next year of $4 per share and has a 40% retention rate, which it plans to keep constant. Its equity cost of capital is 10%, which is also its expected return on new...

Q: Suppose your firm receives a $5 million order on the last

Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 millio...

Q: Nokela Industries purchases a $40 million cyclo-converter. The

Nokela Industries purchases a $40 million cyclo-converter. The cyclo-converter will be depreciated by $10 million per year over four years, starting this year. Suppose Nokela’s tax rate is 40%. a. Wha...

Q: The balance sheet information for Clorox Co. (CLX) in

The balance sheet information for Clorox Co. (CLX) in 2004–2005 is shown here (all values in thousands of dollars) a. What change in the book value of Clorox’s e...

Q: Zoom Enterprises expects that one year from now it will pay a

Zoom Enterprises expects that one year from now it will pay a total dividend of $5 million and repurchase $5 million worth of shares. It plans to spend $10 million on dividends and repurchases every y...

Q: If Local Co., the company in Problem 12, had an

If Local Co., the company in Problem 12, had an increase in selling expenses of $300,000, how would that affect each of its margins? Problem 12 data: Local Co. has sales of $10 million and cost of sal...

Q: If Local Co., the company in Problem 12, had interest

If Local Co., the company in Problem 12, had interest expense of $800,000, how would that affect each of its margins? Problem 12 data Local Co. has sales of $10 million and cost of sales of $6 million...

Q: Ladders, Inc. has a net profit margin of 5%

Ladders, Inc. has a net profit margin of 5% on sales of $50 million. It has book value of equity of $40 million and total liabilities with a book value of $30 million. What is Ladders’ ROE? ROA?

Q: JPJ Corp has sales of $1 million, accounts receivable of

JPJ Corp has sales of $1 million, accounts receivable of $50,000, total assets of $5 million (of which $3 million are fixed assets), inventory of $150,000, and cost of goods sold of $600,000. What is...

Q: If JPJ Corp (the company from the previous question) is

If JPJ Corp (the company from the previous question) is able to increase sales by 10% but keep its total and fixed asset growth to only 5%, what will its new asset turnover ratios be?

Q: Suppose that in 2010, Global launched an aggressive marketing campaign that

Suppose that in 2010, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4.50%. Suppose that they had no other income, inter...

Q: Suppose a firm’s tax rate is 35%. a. What

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 milli...

Q: DFB, Inc., expects earnings this year of $5 per

DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects that have an expected...

Q: You are analyzing the leverage of two firms and you note the

You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity...

Q: For 2010, Wal-Mart and Target had the following information

For 2010, Wal-Mart and Target had the following information (all values are in millions of dollars): a. What is each company’s accounts receivable days? b. What is each companyâ...

Q: You have a loan outstanding. It requires making three annual payments

You have a loan outstanding. It requires making three annual payments of $1000 each at the end of the next three years. Your bank has offered to allow you to skip making the next two payments in lieu...

Q: Consider the following potential events that might have occurred to Global on

Consider the following potential events that might have occurred to Global on December 30, 2010. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Al...

Q: In June 2007, General Electric (GE) had a book

In June 2007, General Electric (GE) had a book value of equity of $117 billion, 10.3 billion shares outstanding, and a market price of $38.00 per share. GE also had cash of $16 billion, and total debt...

Q: In July 2007, Apple had cash of $7.12

In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, and current liabilities of $6.99 billion. It also had inventories of $0.25 billion. a. What was Apple’s current ratio?...

Q: In April 2010, the following information was true about Abercrombie and

In April 2010, the following information was true about Abercrombie and Fitch (ANF) and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars. a. What is t...

Q: Find online the annual 10-K report for Peet’s Coffee and

Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the income statement: a. What were Peet’s revenues for 2008? By what percentage did re...

Q: Local Co. has sales of $10 million and cost of

Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are $500,000 and its research and development is $1 million. It has annual deprecia...

Q: You have $100 and a bank is offering 5% interest

You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?

Q: A friend asks to borrow $55 from you and in return

A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans: a. How much would you have in one year if you deposi...

Q: Cooperton Mining just announced it will cut its dividend from $4

Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a 3% ra...

Q: Suppose the interest rate is 4%. a. Having $

Suppose the interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer,...

Q: You want to endow a scholarship that will pay $10,

You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now. If the school’s endowment discount rate is 7%, what amount must you donate to endow the scholarship?...

Q: Consider the following alternatives: i. $100 received in

Consider the following alternatives: i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 years a. Rank the alternatives from most valuable to least valuable if the inter...

Q: Suppose you invest $1000 in an account paying 8% interest

Suppose you invest $1000 in an account paying 8% interest per year. a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”? b. What is the...

Q: Calculate the future value of $2000 in a. 5

Calculate the future value of $2000 in a. 5 years at an interest rate of 5% per year. b. 10 years at an interest rate of 5% per year. c. 5 years at an interest rate of 10% per year. d. Why is the amou...

Q: What is the present value of $10,000 received

What is the present value of $10,000 received a. 12 years from today when the interest rate is 4% per year? b. 20 years from today when the interest rate is 8% per year? c. 6 years from today when th...

Q: Your brother has offered to give you either $5000 today or

Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?

Q: Your cousin is currently 12 years old. She will be going

Your cousin is currently 12 years old. She will be going to college in 6 years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the account...

Q: Your mom is thinking of retiring. Her retirement plan will pay

Your mom is thinking of retiring. Her retirement plan will pay her either $250,000 immediately on retirement or $350,000 five years after the date of her retirement. Which alternative should she choos...

Q: Your grandfather put some money in an account for you on the

Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in it...

Q: Honda Motor Company is considering offering a $2000 rebate on its

Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over...

Q: Gillette Corporation will pay an annual dividend of $0.65

Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at...

Q: How would your answer to Problem 7 change if you endow it

How would your answer to Problem 7 change if you endow it now, but it makes the first award to a student 10 years from today? Information from Problem 7: You want to endow a scholarship that will pay...

Q: Suppose Big Bank offers an interest rate of 5.5%

Suppose Big Bank offers an interest rate of 5.5% on both savings and loans, and Bank Enn offers an interest rate of 6% on both savings and loans. a. What profit opportunity is available? b. Which bank...

Q: Some companies cross-list their shares, meaning that their stock

Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, Research In Motion, the maker of BlackBerry mobile devices, trades on both the Tor...

Q: Bubba is a shrimp farmer. In an ironic twist, Bubba

Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,000 per ton. a....

Q: Brett has almond orchards, but he is sick of almonds and

Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him. Assume he produces 100...

Q: You figure that the total cost of college will be $100

You figure that the total cost of college will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of 4 years of college costs st...

Q: Assume that Social Security promises you $40,000 per year

Assume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will come 45 years from now). If your discount rate is 7%, compounded annually...

Q: When Alex Rodriguez moved to the Texas Rangers in 2001, he

When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his “$252 million” contract (the total of the payments promised was $252...

Q: You are trying to decide how much to save for retirement.

You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first investment made 1 year from now. You think you can earn 10% per year on your investments...

Q: A rich relative has bequeathed you a growing perpetuity. The first

A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1000. Each year after that, you will receive a payment on the anniversary of the last payme...

Q: You are thinking of building a new machine that will save you

You are thinking of building a new machine that will save you $1000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2% per year forever. What is the...

Q: The British government has a consol bond outstanding paying £100 per

The British government has a consol bond outstanding paying £100 per year forever. Assume the current interest rate is 4% per year. a. What is the value of the bond immediately after a payment is made...

Q: Colgate-Palmolive Company has just paid an annual dividend of $

Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate’s earnings are expect...

Q: When Alfred Nobel died, he left the majority of his estate

When Alfred Nobel died, he left the majority of his estate to fund five prizes, each to be awarded annually in perpetuity starting one year after he died (the sixth one, in economics, was added later)...

Q: You work for a pharmaceutical company that has developed a new drug

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug’s profits will be $2 million in its first year and that this am...

Q: A rich aunt has promised you $5000 one year from today

A rich aunt has promised you $5000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 3% larger than the last payme...

Q: You are thinking about buying a savings bond. The bond costs

You are thinking about buying a savings bond. The bond costs $50 today and will mature in 10 years with a value of $100. What annual interest rate will the bond earn?

Q: You have an investment account that started with $1000 ten years

You have an investment account that started with $1000 ten years ago and which now has grown to $5000. a. What annual rate of return have you earned (you have made no additional contributions to the a...

Q: You have an investment opportunity that requires an initial investment of $

You have an investment opportunity that requires an initial investment of $5000 today and will pay $6000 in one year. What is the rate of return of this opportunity?

Q: You have decided to buy a perpetual bond. The bond makes

You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If the bond initially costs $1000, what is the payment every year?...

Q: You are thinking of purchasing a house. The house costs $

You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The b...

Q: You are thinking about buying a piece of art that costs $

You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment ever...

Q: What is the present value of $1000 paid at the end

What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per year?

Q: You would like to buy the house and take the mortgage described

You would like to buy the house and take the mortgage described in Problem 27. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow...

Q: Your grandmother has been putting $1000 into a savings account on

Your grandmother has been putting $1000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 3%. How much money will be in the...

Q: Assume that your parents wanted to have $160,000 saved

Assume that your parents wanted to have $160,000 saved for college by your eighteenth birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and...

Q: You are saving for retirement. To live comfortably, you decide

You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your twenty-second birthday, and you decide, starting today and continu...

Q: When you purchased your car, you took out a five-

When you purchased your car, you took out a five-year annual-payment loan with an interest rate of 6% per year. The annual payment on the car is $5000. You have just made a payment and have now decide...

Q: You have decided to refinance your mortgage. You plan to borrow

You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2356 and you have made every payment on time. The orig...

Q: You have just sold your house for $1,000,

You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18 1/2...

Q: AFW Industries has 200 million shares outstanding and expects earnings at the

AFW Industries has 200 million shares outstanding and expects earnings at the end of this year of $700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using 20...

Q: You have just purchased a car and taken out a $50

You have just purchased a car and taken out a $50,000 loan. The loan has a five-year term with monthly payments and an APR of 6%. a. How much will you pay in interest, and how much will you pay in pri...

Q: You are thinking about leasing a car. The purchase price of

You are thinking about leasing a car. The purchase price of the car is $30,000. The residual value (the amount you could pay to keep the car at the end of the lease) is $15,000 at the end of 36 months...

Q: You have some extra cash this month and you are considering putting

You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 7%, your loan payments are $600 per month, and you have 36 months left on your loan....

Q: You have an outstanding student loan with required payments of $500

You have an outstanding student loan with required payments of $500 per month for the next four years. The interest rate on the loan is 9% APR (monthly). You are considering making an extra payment of...

Q: Consider again the setting of Problem 19. Now that you realize

Consider again the setting of Problem 19. Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can...

Q: If you decide to take the mortgage in Problem 11, Oppenheimer

If you decide to take the mortgage in Problem 11, Oppenheimer Bank will offer you the following deal: Instead of making the monthly payment you computed in that problem every month, you can make half...

Q: You graduate and get a $10,000 check from your

You graduate and get a $10,000 check from your grandparents. You decide to save it toward a down payment on a house. You invest it earning 10% per year and you think you will need to have $20,000 save...

Q: Your friend tells you he has a very simple trick for taking

Your friend tells you he has a very simple trick for taking one-third off the time it takes to repay your mortgage: Use your Christmas bonus to make an extra payment on January 1 of each year (that is...

Q: The mortgage on your house is five years old. It required

The mortgage on your house is five years old. It required monthly payments of $1402, had an original term of 30 years, and had an interest rate of 10% (APR). In the intervening five years, interest ra...

Q: You have credit card debt of $25,000 that has

You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay a minimum monthly payment only. You are required to pay only the outstanding interest. You have re...

Q: Your firm has taken out a $500,000 loan with

Your firm has taken out a $500,000 loan with 9% APR (compounded monthly) for some commercial property. As is common in commercial real estate, the loan is a 5-year loan based on a 15-year amortization...

Q: Suppose Cisco Systems pays no dividends but spent $5 billion on

Suppose Cisco Systems pays no dividends but spent $5 billion on share repurchases last year. If Cisco’s equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow by 8%...

Q: In 1975, interest rates were 7.85% and the

In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over t...

Q: If the rate of inflation is 5%, what nominal interest rate

If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment?

Q: You have been offered a job with an unusual bonus structure.

You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $70,000 every seven years, starting seven years from now. What is the present valu...

Q: Suppose Oppenheimer Bank is offering a 30-year mortgage with an

Suppose Oppenheimer Bank is offering a 30-year mortgage with an EAR of 6.80%. If you plan to borrow $150,000, what will your monthly payment be?

Q: Assume the inflation rate is 3% APR, compounded annually.

Assume the inflation rate is 3% APR, compounded annually. Would you rather earn a nominal return of 5% APR, compounded semiannually, or a real return of 2% APR, compounded quarterly?

Q: You have just taken out a $20,000 car loan

You have just taken out a $20,000 car loan with a 6% APR, compounded monthly. The loan is for five years. When you make your first payment in one month, how much of the payment will go toward the prin...

Q: You are buying a house and the mortgage company offers to let

You are buying a house and the mortgage company offers to let you pay a “point” (1% of the total amount of the loan) to reduce your APR from 6.5% to 6.25% on your $400,000, 30-year mortgage with month...

Q: Assume the current Treasury yield curve shows that the spot rates for

Assume the current Treasury yield curve shows that the spot rates for 6 months, 1 year, and 1 1/2 years are 1%, 1.1%, and 1.3%, all quoted as semiannually compounded APRs. What is the price of a $1000...

Q: You own 20% of the stock of a company that has

You own 20% of the stock of a company that has ten directors on its board. How much representation can you get on the board if the company has cumulative voting? How much representation can you ensure...

Q: Suppose a ten-year, $1000 bond with an 8

Suppose a ten-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74. a. What is the bond’s yield to maturity (expressed as an APR with semiannual compoundin...

Q: Suppose a five-year, $1000 bond with annual coupons

Suppose a five-year, $1000 bond with annual coupons has a price of $900 and a yield to maturity of 6%. What is the bond’s coupon rate?

Q: You have purchased a 10% coupon bond for $1040.

You have purchased a 10% coupon bond for $1040. What will happen to the bond’s price if market interest rates rise?

Q: You have just turned 22 years old, have just received your

You have just turned 22 years old, have just received your bachelor’s degree, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as f...

Q: Maynard Steel plans to pay a dividend of $3 this year

Maynard Steel plans to pay a dividend of $3 this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%. a. Assuming that Maynard’s dividend payout...

Q: Suppose a seven-year, $1000 bond with an 8

Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%. a. Is this bond currently trading at a discount, at par, or at a premium? E...

Q: What was the price of this bond when it was issued?

What was the price of this bond when it was issued?

Q: You are pleased to see that you have been given a 5

You are pleased to see that you have been given a 5% raise this year. However, you read on the Wall Street Journal Web site that inflation over the past year has been 2%. How much better off are you i...

Q: Assuming the yield to maturity remains constant, what is the price

Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?

Q: Assuming the yield to maturity remains constant, what is the price

Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?

Q: Your company currently has $1000 par, 6% coupon bonds

Your company currently has $1000 par, 6% coupon bonds with ten years to maturity and a price of $1078. If you want to issue new ten-year coupon bonds at par, what coupon rate do you need to set? Assum...

Q: Suppose you purchase a ten-year bond with 6% annual

Suppose you purchase a ten-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to matur...

Q: What is the percentage change in the price of each bond if

What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?

Q: Anzio, Inc., has two classes of shares. Class B

Anzio, Inc., has two classes of shares. Class B has ten times the voting rights as Class A. If you own 10% of the class A shares and 20% of the Class B shares, what percentage of the total voting righ...

Q: Suppose you purchase a 30-year, zero-coupon bond

Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the bond for five years before selling it. a. If the bond’s yield to maturity is 6% when you sell it, what is...

Q: You have found three investment choices for a one-year deposit

You have found three investment choices for a one-year deposit: 10% APR compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice. (Assum...

Q: The following table summarizes the yields to maturity on several one-

The following table summarizes the yields to maturity on several one-year, zero-coupon securities: Security……………………Yield (%) Treasury…………………… …………3.1 AAA corporate…………………………3.2 BBB corporate…………………………...

Q: You have just taken out a five-year loan from a

You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at the...

Q: Andrew Industries is contemplating issuing a 30-year bond with a

Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard & Poor’s....

Q: What is the shape of the yield curve given in the following

What is the shape of the yield curve given in the following term structure? What expectations are investors likely to have about future interest rates?

Q: HMK Enterprises would like to raise $10 million to invest in

HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments). Th...

Q: A BBB-rated corporate bond has a yield to maturity of

A BBB-rated corporate bond has a yield to maturity of 8.2%. A U.S. Treasury security has a yield to maturity of 6.5%. These yields are quoted as APRs with semiannual compounding. Both bonds pay semian...

Q: Consider a ten-year bond with a face value of $

Consider a ten-year bond with a face value of $1000 that has a coupon rate of 5.5%, with semiannual payments. a. What is the coupon payment for this bond? b. Draw the cash flows for the bond on a time...

Q: Assume that a bond will make payments every six months as shown

Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods): a. What is the maturity of the bond (in years)? b. What is the coupon rate (in perc...

Q: Your company wants to raise $10 million by issuing 20-

Your company wants to raise $10 million by issuing 20-year zero-coupon bonds. If the yield to maturity on the bonds will be 6% (annually compounded APR), what total principal amount of bonds must you...

Q: What is the price per $100 face value of a two

What is the price per $100 face value of a two-year, zero-coupon, risk-free bond?

Q: Your bank account pays interest with an EAR of 5%. What

Your bank account pays interest with an EAR of 5%. What is the APR quote for this account based on semiannual compounding? What is the APR with monthly compounding?

Q: What is the price per $100 face value of a four

What is the price per $100 face value of a four-year, zero-coupon, risk-free bond?

Q: Assume Evco, Inc., has a current stock price of $

Assume Evco, Inc., has a current stock price of $50 and will pay a $2 dividend in one year; its equity cost of capital is 15%. What price must you expect Evco stock to sell for immediately after the f...

Q: For each of the following pairs of Treasury securities (each with

For each of the following pairs of Treasury securities (each with $1000 par value), identify which will have the higher price: a. A three-year zero-coupon bond or a five-year zero coupon bond? b. A th...

Q: You currently have a one-year-old loan outstanding on

You currently have a one-year-old loan outstanding on your car. You make monthly payments of $300. You have just made a payment. The loan has four years to go (i.e., it had an original term of five ye...

Q: A local bank is running the following advertisement in the newspaper:

A local bank is running the following advertisement in the newspaper: “For just $1000 we will pay you $100 forever!” The fine print in the ad says that for a $1000 deposit, the bank will pay $100 ever...

Q: The yield to maturity of a $1000 bond with a 7

The yield to maturity of a $1000 bond with a 7% coupon rate, semiannual coupons, and two years to maturity is 7.6% APR, compounded semiannually. What must its price be?

Q: Anle Corporation has a current stock price of $20 and is

Anle Corporation has a current stock price of $20 and is expected to pay a dividend of $1 in one year. Its expected stock price right after paying that dividend is $22. a. What is Anle’s equity cost o...

Q: Achi Corp. has preferred stock with an annual dividend of $

Achi Corp. has preferred stock with an annual dividend of $3. If the required return on Achi’s preferred stock is 8%, what is its price?

Q: NoGrowth Corporation currently pays a dividend of $0.50 per

NoGrowth Corporation currently pays a dividend of $0.50 per quarter, and it will continue to pay this dividend forever. What is the price per share of NoGrowth stock if the firm’s equity cost of capit...

Q: Suppose Acap Corporation will pay a dividend of $2.80

Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of $3 per share next year. You expect Acap’s stock price to be $52 in two years. Assume that Acap...

Q: Suppose the interest rate is 8% APR with monthly compounding.

Suppose the interest rate is 8% APR with monthly compounding. What is the present value of an annuity that pays $100 every six months for five years?

Q: What four financial statements can be found in a firm’s 10-

What four financial statements can be found in a firm’s 10-K filing? What checks are there on the accuracy of these statements?

Q: You are an international shrimp trader. A food producer in the

You are an international shrimp trader. A food producer in the Czech Republic offers to pay you 2 million Czech koruna today in exchange for a year’s supply of frozen shrimp. Your Thai supplier will p...

Q: Suppose your employer offers you a choice between a $5000 bonus

Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company’s stock. Whichever one you choose will be awarded today. The stock is currently trading for $63 per share....

Q: You are a broker for frozen seafood products for Choyce Products.

You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of fro...

Q: You are a U.S. investor who is trying to

You are a U.S. investor who is trying to calculate the present value of a €5 million cash inflow that will occur one year in the future. The spot exchange rate is S = $1.25/€ and the forward rate is F...

Q: You are thinking about investing $5000 in your friend’s landscaping business

You are thinking about investing $5000 in your friend’s landscaping business. Even though you know the investment is risky and you can’t be sure, you expect your investment to be worth $5750 next year...

Q: You plan to deposit $500 in a bank account now and

You plan to deposit $500 in a bank account now and $300 at the end of one year. If the account earns 3% interest per year, what will the balance be in the account right after you make the second depos...

Q: Mia Caruso Enterprises, a U.S. manufacturer of children’s

Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in India and is expecting a 400 million rupee cash inflow in one year. (The currency of India is the rupee). The current...

Q: Etemadi Amalgamated, a U.S. manufacturing firm, is

Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are in Etemadi’s corporate finance department and are responsible for deciding whether t...

Q: Etemadi Amalgamated, the U.S. manufacturing company in Problem

Etemadi Amalgamated, the U.S. manufacturing company in Problem 7, is still considering a new project in Portugal. All information presented in Problem 7 is still accurate, except the spot rate is now...

Q: You have been accepted into college. The college guarantees that your

You have been accepted into college. The college guarantees that your tuition will not increase for the four years you attend college. The first $10,000 tuition payment is due in six months. After tha...

Q: You work for a U.S. firm, and your

You work for a U.S. firm, and your boss has asked you to estimate the cost of capital for countries using the euro. You know that S = $1.20/€ and F1 = $1.157/€. Suppose the dollar WACC for your compan...

Q: Summit Systems will pay a dividend of $1.50 this

Summit Systems will pay a dividend of $1.50 this year. If you expect Summit’s dividend to grow by 6% per year, what is its price per share if the firm’s equity cost of capital is 11%?

Q: Maryland Light, a U.S. manufacturer of light fixtures

Maryland Light, a U.S. manufacturer of light fixtures, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 11%. You are in the corporate treasury department, and you...

Q: The dollar cost of debt for Healy Consulting, a U.

The dollar cost of debt for Healy Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cos...

Q: Manzetti Foods, a U.S. food processing and distribution

Manzetti Foods, a U.S. food processing and distribution company, is considering an investment in Germany. You are in Manzetti’s corporate finance department and are responsible for d...

Q: Tailor Johnson, a U.S. maker of fine menswear

Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 100 million Ethiopian birrs...

Q: Your bank is offering you an account that will pay 20%

Your bank is offering you an account that will pay 20% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length of a. six months. b. one year. c. one month....

Q: Suppose you are considering renting an apartment. You, the renter

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 agency conflicts do you anti...

Q: You are considering two ways of financing a spring break vacation.

You are considering two ways of financing a spring break vacation. You could put it on your credit card, at 15% APR, compounded monthly, or borrow the money from your parents, who want an 8% interest...

Q: Which do you prefer: a bank account that pays 5%

Which do you prefer: a bank account that pays 5% per year (EAR) for three years or a. an account that pays 2.5% every six months for three years? b. an account that pays 7.5% every 18 months for thre...

Q: You are thinking of making an investment in a new plant.

You are thinking of making an investment in a new plant. The plant will generate revenues of $1 million per year for as long as you maintain it. You expect that the maintenance costs will start at $50...

Q: You make monthly payments on your car loan. It has a

You make monthly payments on your car loan. It has a quoted APR of 5% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?

Q: Suppose Capital One is advertising a 60-month, 5.

Suppose Capital One is advertising a 60-month, 5.99% APR motorcycle loan. If you need to borrow $8000 to purchase your dream Harley-Davidson, what will your monthly payment be?

Q: You have an opportunity to invest $50,000 now in

You have an opportunity to invest $50,000 now in return for $60,000 in one year. If your cost of capital is 8%, what is the NPV of this investment?

Q: FastTrack Bikes, Inc., is thinking of developing a new composite

FastTrack Bikes, Inc., is thinking of developing a new composite road bike. Development will take six years and the cost is $200,000 per year. Once in production, the bike is expected to make $300,000...

Q: RiverRocks’ purchase of Raft Adventures (from Problem 18) will cost

RiverRocks’ purchase of Raft Adventures (from Problem 18) will cost $100 million, but will generate cash flows that start at $15 million in one year and then grow at 4% per year forever. What is the N...

Q: CoffeeStop primarily sells coffee. It recently introduced a premium coffee-

CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor. Suppose the firm faces a tax rate of 35% and collects the following information. If it plans to finance 11%...

Q: Your company has two divisions: One division sells software and the

Your company has two divisions: One division sells software and the other division sells computers through a direct sales channel, primarily taking orders over the Internet. You have decided that Dell...

Q: RiverRocks realizes that it will have to raise the financing for the

RiverRocks realizes that it will have to raise the financing for the acquisition of Raft Adventures by issuing new debt and equity. The firm estimates that the direct issuing costs will come to $7 mil...

Q: You are planning to issue debt to finance a new project.

You are planning to issue debt to finance a new project. The project will require $20 million in financing and you estimate its NPV to be $15 million. The issue costs for the debt will be 3% of face v...

Q: MV Corporation has debt with market value of $100 million,

MV Corporation has debt with market value of $100 million, common equity with a book value of $100 million, and preferred stock worth $20 million outstanding. Its common equity trades at $50 per share...

Q: Andyco, Inc., has the following balance sheet and an equity

Andyco, Inc., has the following balance sheet and an equity market-to-book ratio of 1.5. Assuming the market value of debt equals its book value, what weights should it use for its WACC calculation?...

Q: Book Co. has 1 million shares of common equity with a

Book Co. has 1 million shares of common equity with a par (book) value of $1, retained earnings of $30 million, and its shares have a market value of $50 per share. It also has debt with a par value o...

Q: Consider a simple firm that has the following market-value balance

Consider a simple firm that has the following market-value balance sheet: Next year, there are two possible values for its assets, each equally likely: $1200 and $960. Its debt will be due with 5% int...

Q: Avicorp has a $10 million debt issue outstanding, with a

Avicorp has a $10 million debt issue outstanding, with a 6% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently pri...

Q: OpenSeas, Inc., is evaluating the purchase of a new cruise

OpenSeas, Inc., is evaluating the purchase of a new cruise ship. The ship would cost $500 million, but would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be $70...

Q: Laurel, Inc., has debt outstanding with a coupon rate of

Laurel, Inc., has debt outstanding with a coupon rate of 6% and a yield to maturity of 7%. Its tax rate is 35%. What is Laurel’s effective (after-tax) cost of debt?

Q: Dewyco has preferred stock trading at $50 per share. The

Dewyco has preferred stock trading at $50 per share. The next preferred dividend of $4 is due in one year. What is Dewyco’s cost of capital for preferred stock?

Q: Steady Company’s stock has a beta of 0.20. If

Steady Company’s stock has a beta of 0.20. If the risk-free rate is 6% and the market risk premium is 7%, what is an estimate of Steady Company’s cost of equity?

Q: HighGrowth Company has a stock price of $20. The firm

HighGrowth Company has a stock price of $20. The firm will pay a dividend next year of $1, and its dividend is expected to grow at a rate of 4% per year thereafter. What is your estimate of HighGrowth...

Q: Slow ’n Steady, Inc., has a stock price of $

Slow ’n Steady, Inc., has a stock price of $30, will pay a dividend next year of $3, and has expected dividend growth of 1% per year. What is your estimate of Slow ’n Steady’s cost of equity capital?...

Q: If Roundtree from Problem 7 decides to issue an extra 500,

If Roundtree from Problem 7 decides to issue an extra 500,000 shares (for a total of 2.3 million shares), how much total money will it raise? In Problem 7: Roundtree Software is going public using a...

Q: Three years ago, you founded Outdoor Recreation, Inc., a

Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your compa...

Q: Your investment bankers price your IPO at $15 per share for

Your investment bankers price your IPO at $15 per share for 10 million shares. If the price at the end of the first day of trading is $17 per share, a. What was the percentage underpricing? b. How muc...

Q: Margoles Publishing recently completed its IPO. The stock was offered at

Margoles Publishing recently completed its IPO. The stock was offered at a price of $14 per share. On the first day of trading, the stock closed at $19 per share. a. What was the initial return on Mar...

Q: If Margoles Publishing from Problem 11 paid an underwriting spread of 7

If Margoles Publishing from Problem 11 paid an underwriting spread of 7% for its IPO and sold 10 million shares, what was the total cost (exclusive of underpricing) to it of going public?

Q: In the HomeNet example from the chapter, its receivables are 15

In the HomeNet example from the chapter, its receivables are 15% of sales and its payables are 15% of COGS. Forecast the required investment in net working capital for HomeNet assuming that sales and...

Q: Chen Brothers, Inc., sold 4 million shares in its IPO

Chen Brothers, Inc., sold 4 million shares in its IPO, at a price of $18.50 per share. Management negotiated a fee (the underwriting spread) of 7% on this transaction. What was the dollar cost of this...

Q: Your firm is selling 3 million shares in an IPO. You

Your firm is selling 3 million shares in an IPO. You are targeting an offer price of $17.25 per share. Your underwriters have proposed a spread of 7%, but you would like to lower it to 5%. However, yo...

Q: The firm you founded currently has 12 million shares, of which

The firm you founded currently has 12 million shares, of which you own 7 million. You are considering an IPO where you would sell 2 million shares for $20 each. If all of the shares sold are primary s...

Q: The firm you founded currently has 12 million shares, of which

The firm you founded currently has 12 million shares, of which you own 7 million. You are considering an IPO where you would sell 2 million shares for $20 each. If all of the shares sold are from your...

Q: The firm you founded currently has 12 million shares, of which

The firm you founded currently has 12 million shares, of which you own 7 million. You are considering an IPO where you would sell 2 million shares for $20 each. What is the maximum number of secondary...

Q: On January 20, Metropolitan, Inc., sold 8 million shares

On January 20, Metropolitan, Inc., sold 8 million shares of stock in an SEO. The market price of Metropolitan at the time was $42.50 per share. Of the 8 million shares sold, 5 million shares were prim...

Q: Foster Enterprises’ stock is trading for $50 per share and there

Foster Enterprises’ stock is trading for $50 per share and there are currently 10 million shares outstanding. It would like to raise $100 million. If its underwriter charges 5% of gross proceeds, a. H...

Q: MacKenzie Corporation currently has 10 million shares of stock outstanding at a

MacKenzie Corporation currently has 10 million shares of stock outstanding at a price of $40 per share. The company would like to raise money and has announced rights issue. Every existing shareholder...

Q: You have started a company and are in luck—a venture

You have started a company and are in luck—a venture capitalist has offered to invest. You own 100% of the company with 5 million shares. The VC offers $1 million for 800,000 new shares. a. What is th...

Q: Starware Software was founded last year to develop software for gaming applications

Starware Software was founded last year to develop software for gaming applications. The founder initially invested $800,000 and received 8 million shares of stock. Starware now needs to raise a secon...

Q: Elmdale Enterprises is deciding whether to expand its production facilities. Although

Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first tw...

Q: Your start-up company needs capital. Right now, you

Your start-up company needs capital. Right now, you own 100% of the firm with 10 million shares. You have received two offers from venture capitalists. The first offers to invest $3 million for 1 mill...

Q: Three years ago, you founded your own company. You invested

Three years ago, you founded your own company. You invested $100,000 of your own money and received 5 million shares of Series A preferred stock. Your company has since been through three additional r...

Q: Based on the information in Problem 4 (and that each share

Based on the information in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what fractions of the firm do the Series B, C, and D investo...

Q: Assuming that you own only the Series A preferred stock in Problem

Assuming that you own only the Series A preferred stock in Problem 4 (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm d...

Q: Roundtree Software is going public using an auction IPO. The firm

Roundtree Software is going public using an auction IPO. The firm has received the following bids: Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will be the winning auction...

Q: You own a bond with a face value of $10,

You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?

Q: A $1000 face value bond has a conversion ratio of 40

A $1000 face value bond has a conversion ratio of 40. You estimate the transaction costs of conversion to be 3% of the face value of the bond. What price must the stock reach in order for you to conve...

Q: You are the CFO of RealNetworks on July 1, 2008.

You are the CFO of RealNetworks on July 1, 2008. The company’s stock price is $6.74 and its convertible debt (as shown in Table 15.7) is now callable. a. What is the value of the sha...

Q: You are finalizing a bank loan for $200,000 for

You are finalizing a bank loan for $200,000 for your small business and the closing fees payable to the bank are 2% of the loan. After paying the fees, what will be the net amount of funds from the lo...

Q: Your firm is issuing $100 million in straight bonds at par

Your firm is issuing $100 million in straight bonds at par with a coupon rate of 6% and paying total fees of 3%. What is the net amount of funds that the debt issue will provide for your firm?

Q: How many IRRs are there in part (a) of Problem

How many IRRs are there in part (a) of Problem 9? Does the IRR rule give the right answer in this case? Information from Problem 9: Bill Clinton reportedly was paid $10 million to write his book My L...

Q: Your firm successfully issued new debt last year, but the debt

Your firm successfully issued new debt last year, but the debt carries covenants. Specifically, you can only pay dividends out of earnings made after the debt issue and you must maintain a minimum qui...

Q: General Electric has just issued a callable (at par) ten

General Electric has just issued a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It...

Q: Boeing Corporation has just issued a callable (at par) three

Boeing Corporation has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment...

Q: How many IRRs are there in part (b) of Problem

How many IRRs are there in part (b) of Problem 9? Does the IRR rule work in this case? Information from Problem 9: Bill Clinton reportedly was paid $10 million to write his book My Life. The book too...

Q: Professor Wendy Smith has been offered the following deal: A law

Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an upfront payment of $50,000. In return, for the next year the firm would have access to eight hours...

Q: Innovation Company is thinking about marketing a new software product. Upfront

Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5 million. The product is expected to generate profits of $1 million per yea...

Q: You own a coal mining company and are considering opening a new

You own a coal mining company and are considering opening a new mine. The mine itself will cost $120 million to open. If this money is spent immediately, the mine will generate $20 million for the nex...

Q: Your firm is considering a project that will cost $4.

Your firm is considering a project that will cost $4.55 million upfront, generate cash flows of $3.5 million per year for three years, and then have a cleanup and shutdown cost of $6 million in the fo...

Q: You have an opportunity to invest $100,000 now in

You have an opportunity to invest $100,000 now in return for $80,000 in one year and $30,000 in two years. If your cost of capital is 9%, what is the NPV of this investment?

Q: You have just been offered a contract worth $1 million per

You have just been offered a contract worth $1 million per year for five years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12%....

Q: You are getting ready to start a new project that will incur

You are getting ready to start a new project that will incur some cleanup and shutdown costs when it is completed. The project costs $5.4 million upfront and is expected to generate $1.1 million per y...

Q: You are considering investing in a new gold mine in South Africa

You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $250 million. Once this investment is made...

Q: You are considering making a movie. The movie is expected to

You are considering making a movie. The movie is expected to cost $10 million upfront and take a year to make. After that, it is expected to make $5 million in the year it is released and $2 million f...

Q: You are choosing between two projects, but can only take one

You are choosing between two projects, but can only take one. The cash flows for the projects are given in the following table: a. What are the IRRs of the two projects? b. If your discount rate is 5%...

Q: You are deciding between two mutually exclusive investment opportunities. Both require

You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $10 million. Investment A will generate $2 million per year (starting at the end o...

Q: You are considering the following two projects and can only take one

You are considering the following two projects and can only take one. Your cost of capital is 11%. a. What is the NPV of each project at your cost of capital? b. What is the IRR of each project? c. At...

Q: You need a particular piece of equipment for your production process.

You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease you the equipment for $10,000 per year if you sign a guaranteed five-year lease....

Q: Gateway Tours is choosing between two bus models. One is more

Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain, but lasts much longer than the other. Its discount rate is 11%. It plans to continue with one of the t...

Q: Hassle-Free Web is bidding to provide Web-page hosting

Hassle-Free Web is bidding to provide Web-page hosting services for Hotel Lisbon. Hotel Lisbon pays its current provider $10,000 per year for hosting its Web page and handling transactions on it, etc....

Q: Your storage firm has been offered $100,000 in one

Your storage firm has been offered $100,000 in one year to store some goods for one year. Assume your costs are $95,000, payable immediately, and the cost of capital is 8%. Should you take the contrac...

Q: Fabulous Fabricators needs to decide how to allocate space in its production

Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: a. What are the profitability indexes of the projects? b. Wh...

Q: Kartman Corporation is evaluating four real estate investments. Management plans to

Kartman Corporation is evaluating four real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is 15%...

Q: Orchid Biotech Company is evaluating several development projects for experimental drugs.

Orchid Biotech Company is evaluating several development projects for experimental drugs. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the...

Q: Cellular Access, Inc., is a cellular telephone service provider that

Cellular Access, Inc., is a cellular telephone service provider that reported net income of $250 million for the most recent fiscal year. The firm had depreciation expenses of $100 million, capital ex...

Q: Recall the HomeNet example from the chapter. Suppose HomeNet’s lab will

Recall the HomeNet example from the chapter. Suppose HomeNet’s lab will be housed in warehouse space that the company could have otherwise rented out for $200,000 per year during years 1–4. How does t...

Q: One year ago, your company purchased a machine used in manufacturing

One year ago, your company purchased a machine used in manufacturing for $110,000. You have learned that a new machine is available that offers many advantages; you can purchase it for $150,000 today....

Q: Beryl’s Iced Tea currently rents a bottling machine for $50,

Beryl’s Iced Tea currently rents a bottling machine for $50,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase t...

Q: You have just completed a $20,000 feasibility study for

You have just completed a $20,000 feasibility study for a new coffee shop in some retail space you own. You bought the space two years ago for $100,000, but if you sold it today, you would net $115,00...

Q: You purchased a machine for $1 million three years ago and

You purchased a machine for $1 million three years ago and have been applying straight-line depreciation to zero for a seven-year life. Your tax rate is 35%. If you sell the machine right now (after t...

Q: The Jones Company has just completed the third year of a five

The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment it originally purchased for $300,000. a. What is the book value of the equipment? b. I...

Q: You run a construction firm. You have just won a contract

You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10 million today and $5 million in one year. The government...

Q: Just before it is about to sell the equipment from Problem 20

Just before it is about to sell the equipment from Problem 20, Jones receives a new order. It can take the new order if it keeps the old equipment. Is there a cost to taking the order and if so, what...

Q: Home Builder Supply, a retailer in the home improvement industry,

Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store acr...

Q: If Daily Enterprises uses MACRS instead of straight-line depreciation,

If Daily Enterprises uses MACRS instead of straight-line depreciation, which incremental free cash flows from Problem 10 would increase and which would decrease?

Q: Markov Manufacturing recently spent $15 million to purchase some equipment used

Markov Manufacturing recently spent $15 million to purchase some equipment used in the manufacture of disk drives. The firm expects that this equipment will have a useful life of five years, and its m...

Q: You are a manager at Percolated Fiber, which is considering expanding

You are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant’s report o...

Q: Bauer Industries is an automobile manufacturer. Management is currently evaluating a

Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. Bauer plans to use a cost of capital of 12% to...

Q: Billingham Packaging is considering expanding its production capacity by purchasing a new

Billingham Packaging is considering expanding its production capacity by purchasing a new machine, the XC-750. The cost of the XC-750 is $2.75 million. Unfortunately, installing this machine will take...

Q: Why is it that real options must have positive value?

Why is it that real options must have positive value?

Q: What kind of real option does the XC-900 machine provide

What kind of real option does the XC-900 machine provide to Billingham in Problem 27?

Q: If Billingham knows that it can sell the XC-750 to

If Billingham knows that it can sell the XC-750 to another firm for $2 million in two years, what kind of real option would that provide?

Q: You have been offered a unique investment opportunity. If you invest

You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 ten years from now. a. What is the NP...

Q: Daily Enterprises is purchasing a $10 million machine. It will

Daily Enterprises is purchasing a $10 million machine. It will cost $50,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. If Da...

Q: The machine in Problem 1 will generate incremental revenues of $4

The machine in Problem 1 will generate incremental revenues of $4 million per year along with incremental costs of $1.2 million per year. If Daily’s marginal tax rate is 35%, what are the incremental...

Q: You are upgrading to better production equipment for your firm’s only product

You are upgrading to better production equipment for your firm’s only product. The new equipment will allow you to make more of your product in the same amount of time. Thus, you forecast that total s...

Q: Pisa Pizza, a seller of frozen pizza, is considering introducing

Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizz...

Q: Kokomochi is considering the launch of an advertising campaign for its latest

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year f...

Q: Hyperion, Inc., currently sells its latest high-speed color

Hyperion, Inc., currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit,...

Q: You have a depreciation expense of $500,000 and a

You have a depreciation expense of $500,000 and a tax rate of 35%. What is your depreciation tax shield?

Q: You have forecast pro-forma earnings of $1,000

You have forecast pro-forma earnings of $1,000,000. This includes the effect of $200,000 in depreciation. You also forecast a decrease in working capital of $100,000 that year. What is your forecast o...

Q: Your pro-forma income statement shows sales of $1,

Your pro-forma income statement shows sales of $1,000,000, cost of goods sold as $500,000, depreciation expense of $100,000, and taxes of $160,000 due to a tax rate of 40%. What are your pro-forma ear...

Q: You are forecasting incremental free cash flows for Daily Enterprises. Based

You are forecasting incremental free cash flows for Daily Enterprises. Based on the information in Problems 1 and 2, what are the incremental free cash flows associated with the new machine?

Q: Marian Plunket owns her own business and is considering an investment.

Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4000 at the end of each of the next three years. The opportunity requires an initi...

Q: Castle View Games would like to invest in a division to develop

Castle View Games would like to invest in a division to develop software for video games. To evaluate this decision, the firm first attempts to project the working capital needs for this operation. It...

Q: What was your dividend yield from investing in the stock in Problem

What was your dividend yield from investing in the stock in Problem 8? What was your capital gain? In Problem 8:

Q: Your factory has been offered a contract to produce a part for

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three years and your cash flows from the contract would be $5 million per year. Your upfront s...

Q: Given $100,000 to invest, construct a value-

Given $100,000 to invest, construct a value-weighted portfolio of the four stocks listed below.

Q: Consider the following five monthly returns: / *b

Consider the following five monthly returns: *b. Calculate the geometric average monthly return over this period. c. Calculate the monthly variance over this period. d. Calculate the monthly standard...

Q: You hear on the news that the S&P 500 was

You hear on the news that the S&P 500 was down 2% today relative to the risk-free rate (the market’s excess return was -2% ). You are thinking about your portfolio and your investments in Apple and Pr...

Q: You are considering opening a new plant. The plant will cost

You are considering opening a new plant. The plant will cost $100 million upfront and will take one year to build. After that, it is expected to produce profits of $30 million at the end of every year...

Q: Suppose the risk-free return is 4% and the market

Suppose the risk-free return is 4% and the market portfolio has an expected return of 10% and a standard deviation of 16%. Johnson & Johnson Corporation stock has a beta of 0.32. What is its expected...

Q: What is the sign of the risk premium of a negative-

What is the sign of the risk premium of a negative-beta stock? Explain. (Assume the risk premium of the market portfolio is positive.)

Q: EJH has a beta of 1.2, CSH has a

EJH has a beta of 1.2, CSH has a beta of 0.6, and KMS has a beta of 1.0. If you put 25% of your money in EJH, 25% in CSH, and 50% in KMS, what is the beta of your portfolio?

Q: Suppose Intel stock has a beta of 1.6, whereas

Suppose Intel stock has a beta of 1.6, whereas Boeing stock has a beta of 1. If the risk-free interest rate is 4% and the expected return of the market portfolio is 10%, according to the CAPM, a. What...

Q: You are thinking of buying a stock priced at $100 per

You are thinking of buying a stock priced at $100 per share. Assume that the risk free rate is about 4.5% and the market risk premium is 6%. If you think the stock will rise to $117 per share by the e...

Q: You are analyzing a stock that has a beta of 1.

You are analyzing a stock that has a beta of 1.2. The risk-free rate is 5% and you estimate the market risk premium to be 6%. If you expect the stock to have a return of 11% over the next year, should...

Q: The following table contains prices and dividends for a stock. All

The following table contains prices and dividends for a stock. All prices are after the dividend has been paid. If you bought the stock on January 1 and sold it on December 31, what is your realized r...

Q: You buy 100 shares of Tidepool Co. for $40 each

You buy 100 shares of Tidepool Co. for $40 each and 200 shares of Madfish, Inc., for $15 each. What are the weights in your portfolio?

Q: Fremont Enterprises has an expected return of 15% and Laurelhurst News

Fremont Enterprises has an expected return of 15% and Laurelhurst News has an expected return of 20%. If you put 70% of your portfolio in Laurelhurst and 30% in Fremont, what is the expected return of...

Q: Explain the difference between the arithmetic average return you calculated in Problem

Explain the difference between the arithmetic average return you calculated in Problem 10a and the geometric average return you calculated in Problem 10b. Are both numbers useful? If so, explain why....

Q: You are considering how to invest part of your retirement savings.

You are considering how to invest part of your retirement savings. You have decided to put $200,000 into three stocks: 50% of the money in GoldFinger (currently $25/share), 25% of the money in Moosehe...

Q: You have $70,000. You put 20% of

You have $70,000. You put 20% of your money in a stock with an expected return of 12%, $30,000 in a stock with an expected return of 15%, and the rest in a stock with an expected return of 20%. What i...

Q: Bill Clinton reportedly was paid $10 million to write his book

Bill Clinton reportedly was paid $10 million to write his book My Life. The book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given his popul...

Q: Stocks A and B have the following returns (see My Finance

Stocks A and B have the following returns (see My Finance Lab for the data in Excel format): a. What are the expected returns of the two stocks? b. What are the standard deviations of the returns of t...

Q: Using the data in the following table, estimate the average return

Using the data in the following table, estimate the average return and volatility for each stock.

Q: Using your estimates from Problem 8 and the fact that the correlation

Using your estimates from Problem 8 and the fact that the correlation of A and B is 0.48, calculate the volatility (standard deviation) of a portfolio that is 70% invested in stock A and 30% invested...

Q: The following spreadsheet contains monthly returns for Cola Co. and Gas

The following spreadsheet contains monthly returns for Cola Co. and Gas Co. for 2010. Using these data, estimate the average monthly return and volatility for each stock.

Q: Ten annual returns are listed in the following table. /

Ten annual returns are listed in the following table. *b. What is the geometric average return over the ten-year period? c. If you invested $100 at the beginning, how much would you have at the end?...

Q: Mackenzie Company has a price of $36 and will issue a

Mackenzie Company has a price of $36 and will issue a dividend of $2 next year. It has a beta of 1.2, the risk-free rate is 5.5%, and it estimates the market risk premium to be 5%. a. Estimate the equ...

Q: Pfd Company has debt with a yield to maturity of 7%,

Pfd Company has debt with a yield to maturity of 7%, a cost of equity of 13%, and a cost of preferred stock of 9%. The market values of its debt, preferred stock, and equity are $10 million, $3 millio...

Q: Growth Company’s current share price is $20 and it is expected

Growth Company’s current share price is $20 and it is expected to pay a $1 dividend per share next year. After that, the firm’s dividends are expected to grow at a rate of 4% per year. a. What is an e...

Q: The last four years of returns for a stock are as follows

The last four years of returns for a stock are as follows: a. What is the average annual return? b. What is the variance of the stock’s returns? c. What is the standard deviation of...

Q: A retail coffee company is planning to open 100 new coffee outlets

A retail coffee company is planning to open 100 new coffee outlets that are expected to generate, in total, $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the coff...

Q: RiverRocks, Inc., is considering a project with the following projected

RiverRocks, Inc., is considering a project with the following projected free cash flows: The firm believes that, given the risk of this project, the WACC method is the appropriate approach to valuing...

Q: RiverRocks (whose WACC is 12%) is considering an acquisition of

RiverRocks (whose WACC is 12%) is considering an acquisition of Raft Adventures (whose WACC is 15%). What is the appropriate discount rate for RiverRocks to use to evaluate the acquisition? Why?

Q: If returns of S&P 500 stocks are normally distributed,

If returns of S&P 500 stocks are normally distributed, what range of returns would you expect to see 95% of the time? Base your answer on Figures 11.3 and 11.4.

Q: You observe a portfolio for five years and determine that its average

You observe a portfolio for five years and determine that its average return is 12% and the standard deviation of its returns is 20%. Can you be 95% confident that this portfolio will not lose more th...

Q: Using the data in Critical Thinking Question 6, calculate a

Using the data in Critical Thinking Question 6, calculate a. The expected overall payoff of each bank. b. The standard deviation of the overall payoff of each bank.

Q: Using the data in the table below, calculate the return for

Using the data in the table below, calculate the return for investing in this stock from January 1 to December 31. Prices are after the dividend has been paid.

Q: How much of the return in Problem 1 came from dividend yield

How much of the return in Problem 1 came from dividend yield and how much came from capital gain? In Problem 1 You bought a stock one year ago for $50 per share and sold it today for $55 per share. I...

Q: You have just purchased a share of stock for $20.

You have just purchased a share of stock for $20. The company is expected to pay a dividend of $0.50 per share in exactly one year. If you want to earn a 10% return on your investment, what price do y...

Q: The fact that Cola Co. and Gas Co. have a

The fact that Cola Co. and Gas Co. have a correlation of 0.6083, calculate the volatility (standard deviation) of a portfolio that is 55% invested in Cola Co. stock and 45% invested in Gas Co. stock....

Q: Suppose Johnson & Johnson and the Walgreen Company have the expected returns

Suppose Johnson & Johnson and the Walgreen Company have the expected returns and volatilities shown below, with a correlation of 22%. For a portfolio that is equally invested in Johnson & John...

Q: You have a portfolio with a standard deviation of 30% and

You have a portfolio with a standard deviation of 30% and an expected return of 18%. You are considering adding one of the two stocks in the table below. If after adding the stock you will have 20% of...

Q: Your client has $100,000 invested in stock A.

Your client has $100,000 invested in stock A. She would like to build a two-stock portfolio by investing another $100,000 in either stock B or C. She wants a portfolio with an expected return of at le...

Q: Suppose all possible investment opportunities in the world are limited to the

Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. What are the market portfolio weights?

Q: Suppose the corporate tax rate is 40%. Consider a firm that

Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year, and...

Q: Kohwe Corporation plans to issue equity to raise $50 million to

Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently h...

Q: You are long two calls on the same share of stock with

You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short...

Q: Dynamic Energy Systems stock is currently trading for $33 per share

Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10. I...

Q: You happen to be checking the newspaper and notice an arbitrage opportunity

You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $20 per share and the one-year risk-free interest rate is 8%. A one-year put on Int...

Q: Express the position of an equity holder in terms of put options

Express the position of an equity holder in terms of put options.

Q: Below is an option quote on IBM from the CBOE Web site

Below is an option quote on IBM from the CBOE Web site. a. Which option contract had the most trades today? b. Which option contract is being held the most overall? c. Suppose you purchase one option...

Q: You own a call option on Intuit stock with a strike price

You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time. a. If the stock is trading at $55 in three months, what will be the payoff of th...

Q: Assume that you have shorted the call option in Problem 2.

Assume that you have shorted the call option in Problem 2. a. If the stock is trading at $55 in three months, what will you owe? b. If the stock is trading at $35 in three months, what will you owe? c...

Q: You own a put option on Ford stock with a strike price

You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time. a. If the stock is trading at $8 in six months, what will be the payoff of the put? b...

Q: Loki, Inc., and Thor, Inc., have entered into

Loki, Inc., and Thor, Inc., have entered into a stock-swap merger agreement whereby Loki will pay a 40% premium over Thor’s premerger price. If Thor’s premerger price per share was $40 and Loki’s was...

Q: The NFF Corporation has announced plans to acquire LE Corporation. NFF

The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading for $35 per share and LE is trading for $25 per share, implying a premerger value of LE of $4 billion. If the projecte...

Q: Suppose Kohwe borrows the $50 million instead. The firm will

Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe’s corp...

Q: Let’s reconsider part (b) of Problem 1. The actual

Let’s reconsider part (b) of Problem 1. The actual premium that your company will pay for TargetCo when it completes the transaction will not be 20%, because on the announcement the target price will...

Q: ABC has 1 million shares outstanding, each of which has a

ABC has 1 million shares outstanding, each of which has a price of $20. It has made a takeover offer of XYZ Corporation, which has 1 million shares outstanding and a price per share of $2.50. Assume t...

Q: BAD Company’s stock price is $20, and the firm has

BAD Company’s stock price is $20, and the firm has 2 million shares outstanding. You believe you can increase the company’s value if you buy it and replace the management. Assume that BAD has a poison...

Q: You work for a leveraged buyout firm and are evaluating a potential

You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater’s stock price is $20, and it has 2 million shares outstanding. You believe that if you buy...

Q: Your company has earnings per share of $4. It has

Your company has earnings per share of $4. It has 1 million shares outstanding, each of which has a price of $40. You are thinking of buying TargetCo, which has earnings per share of $2, 1 million sha...

Q: If companies in the same industry as TargetCo (from Problem 1

If companies in the same industry as TargetCo (from Problem 1) are trading at multiples of 14 times earnings, what would be one estimate of an appropriate premium for TargetCo? Information from Proble...

Q: You are invested in GreenFrame, Inc. The CEO owns 3

You are invested in GreenFrame, Inc. The CEO owns 3% of GreenFrame and is considering an acquisition. If the acquisition destroys $50 million of GreenFrame’s value, but the present value of the CEO’s...

Q: Sora Industries has 60 million outstanding shares, $120 million in

Sora Industries has 60 million outstanding shares, $120 million in debt, $40 million in cash, and the following projected free cash flow for the next four years (see MyFinanceLab for the data in Excel...

Q: Consider the valuation of Nike given in Example 10.1.

Consider the valuation of Nike given in Example 10.1. a. Suppose you believe Nike’s initial revenue growth rate will be between 7% and 11% (with growth always slowing linearly to 5% by year 2015). Wha...

Q: You notice that Dell Computers has a stock price of $27

You notice that Dell Computers has a stock price of $27.85 and EPS of $1.26. Its competitor Hewlett-Packard has EPS of $2.47. What is one estimate of the value of a share of Hewlett-Packard stock?

Q: Now suppose that with leverage, Kohwe’s expected free cash flows will

Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate...

Q: CSH has EBITDA of $5 million. You feel that an

CSH has EBITDA of $5 million. You feel that an appropriate EV/EBITDA ratio for CSH is 9. CSH has $10 million in debt, $2 million in cash, and 800,000 shares outstanding. What is your estimate of CSH’s...

Q: After researching the competitors of EJH Enterprises, you determine that most

After researching the competitors of EJH Enterprises, you determine that most comparable firms have the following valuation ratios (see MyFinanceLab for the data in Excel format): EJH Enterprises has...

Q: Suppose that in May 2010, Nike had EPS of $3

Suppose that in May 2010, Nike had EPS of $3.51 and a book value of equity of $18.92 per share. a. Using the average P/E multiple in Table 10.1, estimate Nike’s share price. b. What...

Q: Suppose that in May 2010, Nike had sales of $19

Suppose that in May 2010, Nike had sales of $19,176 million, EBITDA of $2,809 million, excess cash of $3,500 million, $437 million of debt, and 485.7 million shares outstanding. a. Using the average e...

Q: Suppose Rocky Shoes and Boots has earnings per share of $2

Suppose Rocky Shoes and Boots has earnings per share of $2.30 and EBITDA of $30.7 million. The firm also has 5.4 million shares outstanding and debt of $125 million (net of cash). You believe Deckers...

Q: Summit Systems has an equity cost of capital of 11%, will

Summit Systems has an equity cost of capital of 11%, will pay a dividend of $1.50 in one year and its dividends had been expected to grow by 6% per year. You read in the paper that Summit has revised...

Q: Assume that Cola Company has a share price of $43.

Assume that Cola Company has a share price of $43. The firm will pay a dividend of $1.24 in one year, and you expect Cola Co. to raise this dividend by approximately 7% per year in perpetuity. a. If C...

Q: Roybus, Inc., a manufacturer of flash memory, just reported

Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decre...

Q: Apnex, Inc., is a biotechnology firm that is about to

Apnex, Inc., is a biotechnology firm that is about to announce the results of its clinical trials of a potential new cancer drug. If the trials were successful, Apnex stock will be worth $70 per share...

Q: You have a $100,000 portfolio made up of 15

You have a $100,000 portfolio made up of 15 stocks. You trade each stock five times this year and each time you trade, you pay about $30 in commissions and spread. You have no special knowledge, so yo...

Q: Hawar International is a shipping firm with a current share price of

Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $20 million a...

Q: Assume the annual return for the lowest turnover portfolio is 18%

Assume the annual return for the lowest turnover portfolio is 18% and the annual return for the highest turnover portfolio is 12%. If you invest $100,000 and have the highest turnover, how much lower...

Q: This year, FCF, Inc., has earnings before interest and

This year, FCF, Inc., has earnings before interest and taxes of $10 million, depreciation expenses of $1 million, capital expenditures of $1.5 million, and has increased its net working capital by $50...

Q: Victoria Enterprises expects earnings before interest and taxes (EBIT) next

Victoria Enterprises expects earnings before interest and taxes (EBIT) next year of $1 million. Its depreciation and capital expenditures will both be $300,000, and it expects its capital expenditures...

Q: The present value of JECK Co.’s expected free cash flows

The present value of JECK Co.’s expected free cash flows is $100 million. If JECK has $30 million in debt, $6 million in cash, and 2 million shares outstanding, what is its share price?

Q: Portage Bay Enterprises has $1 million in excess cash, no

Portage Bay Enterprises has $1 million in excess cash, no debt and is expected to have free cash flow of $10 million next year. Its FCF is then expected to grow at a rate of 3% per year forever. If Po...

Q: Heavy Metal Corporation is expected to generate the following free cash flows

Heavy Metal Corporation is expected to generate the following free cash flows over the next five years: After then, the free cash flows are expected to grow at the industry average of 4% per year. Usi...

Q: Covan, Inc., is expected to have the following free cash

Covan, Inc., is expected to have the following free cash flows: a. Covan has 8 million shares outstanding, $3 million in excess cash, and it has no debt. If its cost of capital is 12%, what should its...

Q: Consider a project with free cash flows in one year of $

Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project’s cost...

Q: You are an entrepreneur starting a biotechnology firm. If your research

You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund y...

Q: Acort Industries owns assets that will have an 80% probability of

Acort Industries owns assets that will have an 80% probability of having a market value of $50 million in one year. There is a 20% chance that the assets will be worth only $20 million. The current ri...

Q: Marpor Industries has no debt and expects to generate free cash flows

Marpor Industries has no debt and expects to generate free cash flows of $16 million each year. Marpor believes that if it permanently increases its level of debt to $40 million, the risk of financial...

Q: Suppose there are no taxes. Firm ABC has no debt,

Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $5000 on which it pays interest of 10% each year. Both companies have identical projects that generate free cash flows of $80...

Q: Hardmon Enterprises is currently an all-equity firm with an expected

Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage. a. Suppose...

Q: Suppose Microsoft has no debt and a WACC of 9.2

Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would its cost of equity be if it took on the average amount of debt for its ind...

Q: Pelamed Pharmaceuticals had EBIT of $325 million in 2010. In

Pelamed Pharmaceuticals had EBIT of $325 million in 2010. In addition, Pelamed had interest expenses of $125 million and a corporate tax rate of 40%. a. What was Pelamed’s 2010 net income? b. What was...

Q: Grommit Engineering expects to have net income next year of $20

Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 35%. a. If Grommit increases leverage so that...

Q: Assume that Microsoft has a total market value of $300 billion

Assume that Microsoft has a total market value of $300 billion and a marginal tax rate of 35%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13% of its cur...

Q: The HNH Corporation will pay a constant dividend of $2 per

The HNH Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital f...

Q: Consider a firm whose only asset is a plot of vacant land

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year. Alternativel...

Q: Zymase is a biotechnology start-up firm. Researchers at Zymase

Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after taxes) and their likelihood for each strategy are shown below....

Q: You own a firm, and you want to raise $30

You own a firm, and you want to raise $30 million to fund an expansion. Currently, you own 100% of the firm’s equity, and the firm has no debt. To raise the $30 million solely through equity, you will...

Q: Empire Industries forecasts net income this coming year as shown below (

Empire Industries forecasts net income this coming year as shown below (in thousands of dollars): Approximately $200,000 of Empire’s earnings will be needed to make new, positive-NP...

Q: Your firm currently has $100 million in debt outstanding with a

Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corpo...

Q: Info Systems Technology (IST) manufactures microprocessor chips for use in

Info Systems Technology (IST) manufactures microprocessor chips for use in appliances and other applications. IST has no debt and 100 million shares outstanding. The correct price for these shares is...

Q: You purchased CSH stock for $40 and it is now selling

You purchased CSH stock for $40 and it is now selling for $50. The company has announced that it plans a $10 special dividend. a. Assuming 2010 tax rates, if you sell the stock or wait and receive the...

Q: Assume perfect capital markets. Kay Industries currently has $100 million

Assume perfect capital markets. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, and it pays out the interest payments on these securities as a dividend....

Q: Redo Problem 11, but assume that Kay must pay a corporate

Redo Problem 11, but assume that Kay must pay a corporate tax rate of 35%, and that investors pay no taxes. Data from Problem 11: Assume perfect capital markets. Kay Industries currently has $100 mil...

Q: Redo Problem 11, but assume that investors pay a 15%

Redo Problem 11, but assume that investors pay a 15% tax on dividends but no capital gains taxes, and that Kay does not pay corporate taxes. Data from Problem 11: Assume perfect capital markets. Kay...

Q: AMC Corporation currently has an enterprise value of $400 million and

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 repurchas...

Q: AMC Corporation currently has an enterprise value of $400 million and

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 repurchas...

Q: AMC Corporation currently has an enterprise value of $400 million and

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 repurchas...

Q: AMC Corporation currently has an enterprise value of $400 million and

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 repurchas...

Q: AMC Corporation currently has an enterprise value of $400 million and

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 repurchas...

Q: Arnell Industries has $10 million in permanent debt outstanding. The

Arnell Industries has $10 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future. a. Suppose A...

Q: FCF Co. has 20,000 shares outstanding and a total

FCF Co. has 20,000 shares outstanding and a total market value of $1 million, $300 thousand of which is debt and the other $700 thousand is equity. It is planning a 10% stock dividend. a. What is the...

Q: Suppose the stock of Host Hotels & Resorts is currently trading for

Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share. a. If Host issues a 20% stock dividend, what would its new share price be? b. If Host does a 3:2 stock split, what wo...

Q: If Berkshire Hathaway’s A shares are trading at $120,000

If Berkshire Hathaway’s A shares are trading at $120,000, what split ratio would it need to bring its stock price down to $50?

Q: After the market close on May 11, 2001, Adaptec,

After the market close on May 11, 2001, Adaptec, Inc., distributed a dividend of shares of the stock of its software division, Roxio, Inc. Each Adaptec shareholder received 0.1646 share of Roxio stock...

Q: ABC Corporation announced that it would pay a dividend to all shareholders

ABC Corporation announced that it would pay a dividend to all shareholders of record as of Monday, April 5, 2010. It takes three business days after a purchase for the new owners of a share of stock t...

Q: RFC Corp. has announced a $1 dividend. If RFC’s

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

Q: ECB Co. has 1 million shares outstanding selling at $20

ECB Co. has 1 million shares outstanding selling at $20 per share. It plans to repurchase 100,000 shares at the market price. What will its market capitalization be after the repurchase? What will its...

Q: KMS corporation has assets of $500 million, $50 million

KMS corporation has assets of $500 million, $50 million of which are cash. It has debt of $200 million. If KMS repurchases $20 million of its stock: a. What changes will occur on its balance sheet? b...

Q: Suppose that KMS in Problem 4 decides to initiate a dividend instead

Suppose that KMS in Problem 4 decides to initiate a dividend instead, but it wants the present value of the payout to be the same $20 million. If its cost of equity capital is 10%, to what amount per...

Q: EJH Company has a market capitalization of $1 billion and 20

EJH Company has a market capitalization of $1 billion and 20 million shares outstanding. It plans to distribute $100 million through an open market repurchase. Assuming perfect capital markets: a. Wha...

Q: Rogot Instruments makes fine violins, violas, and cellos. It

Rogot Instruments makes fine violins, violas, and cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at a rate of 35%. Its cost of equity is 12%...

Q: Natsam Corporation has $250 million of excess cash. The firm

Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cas...

Q: Suppose the board of Natsam Corporation decided to do the share repurchase

Suppose the board of Natsam Corporation decided to do the share repurchase in Problem 7(b), but you as an investor would have preferred to receive a dividend payment. How can you leave yourself in the...

Q: Use the following income statement and balance sheet for Global Corp.:

Use the following income statement and balance sheet for Global Corp.: Assume that Global pays out 50% of its net income. Use the percent of sales method to forecast stockholders’ eq...

Q: Use the following income statement and balance sheet for Global Corp.:

Use the following income statement and balance sheet for Global Corp.: What is the amount of net new financing needed for Global?

Q: Use the following income statement and balance sheet for Global Corp.:

Use the following income statement and balance sheet for Global Corp.: If Global decides that it will limit its net new financing to no more than $9 million, how will this affect its payout policy?

Q: Assume that KMS’s market share will increase by 0.25%

Assume that KMS’s market share will increase by 0.25% per year rather than the 1% used in the chapter (see Table 18.5) and that its prices remain as in the chapter. What production capacity will KMS r...

Q: Under the assumption that KMS’s market share will increase by 0.

Under the assumption that KMS’s market share will increase by 0.25% per year, you determine that the plant will require an expansion in 2012. The expansion will cost $20 million. Assuming that the fin...

Q: Under the assumption that KMS’s market share will increase by 0.

Under the assumption that KMS’s market share will increase by 0.25% per year, you project the following depreciation: Using this information, project net income through 2015 (that is...

Q: Assuming that KMS’s market share will increase by 0.25%

Assuming that KMS’s market share will increase by 0.25% per year (implying that the investment, financing, and depreciation will be adjusted as described in Problems 13 and 14), and...

Q: Using the information in the table below, calculate this company’s:

Using the information in the table below, calculate this company’s: a. Internal growth rate. b. Sustainable growth rate. c. Sustainable growth rate if it pays out 40% of its net inco...

Q: Rumolt Motors has 30 million shares outstanding with a price of $

Rumolt Motors has 30 million shares outstanding with a price of $15 per share. In addition, Rumolt has issued bonds with a total current market value of $150 million. Suppose Rumolt’s equity cost of c...

Q: Did KMS’s expansion plan call for it to grow slower or faster

Did KMS’s expansion plan call for it to grow slower or faster than its sustainable growth rate?

Q: Your firm has an ROE of 12%, a payout ratio of

Your firm has an ROE of 12%, a payout ratio of 25%, $600,000 of stockholders’ equity, and $400,000 of debt. If you grow at your sustainable growth rate this year, how much additional debt will you nee...

Q: IZAX, Co. had the following items on its balance sheet

IZAX, Co. had the following items on its balance sheet at the beginning of the year: Its net income this year is $20,000 and it pays dividends of $5,000. If its assets grew at its internal growth rate...

Q: Forecast KMS’s free cash flows (reproduce Table 18.13),

Forecast KMS’s free cash flows (reproduce Table 18.13), assuming KMS’s market share will increase by 0.25% per year; investment, financing, and depreciation will be adjusted accordingly; and working c...

Q: Calculate the continuation value of KMS using your reproduction of Table 18

Calculate the continuation value of KMS using your reproduction of Table 18.8 from Problem 14, and assuming an EBITDA multiple of 8.5. In Problem 14

Q: Assuming a cost of capital of 10%, compute the value of

Assuming a cost of capital of 10%, compute the value of KMS under the 0.25% growth scenario.

Q: Your company has sales of $100,000 this year and

Your company has sales of $100,000 this year and cost of goods sold of $72,000. You forecast sales to increase to $110,000 next year. Using the percent of sales method, forecast next year’s cost of go...

Q: For the next fiscal year, you forecast net income of $

For the next fiscal year, you forecast net income of $50,000 and ending assets of $500,000. Your firm’s payout ratio is 10%. Your beginning stockholders’ equity is $300,000 and your beginning total li...

Q: Assume your beginning debt in Problem 2 is $100,000

Assume your beginning debt in Problem 2 is $100,000. What amount of equity and what amount of debt would you need to issue to cover the net new financing in order to keep your debt-equity ratio consta...

Q: Use the following income statement and balance sheet for Jim’s Espresso:

Use the following income statement and balance sheet for Jim’s Espresso: Jim’s expects sales to grow by 10% next year. Using the percent of sales method, forecast:...

Q: Your supplier offers terms of 1/10, net 45.

Your supplier offers terms of 1/10, net 45. What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 45?

Q: The Fast Reader Company supplies bulletin board services to numerous hotel chains

The Fast Reader Company supplies bulletin board services to numerous hotel chains nationwide. The owner of the firm is investigating the desirability of employing a billing firm to do her billing and...

Q: The Saban Corporation is trying to decide whether to switch to a

The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system would d...

Q: Milton Industries expects free cash flows of $5 million each year

Milton Industries expects free cash flows of $5 million each year. Milton’s corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million, a...

Q: The Manana Corporation had sales of $60 million this year.

The Manana Corporation had sales of $60 million this year. Its accounts receivable balance averaged $2 million. How long, on average, does it take the firm to collect on its sales?

Q: The Mighty Power Tool Company has the following accounts on its books

The Mighty Power Tool Company has the following accounts on its books: The firm extends credit on terms of 1/15, net 30. Develop an aging schedule using 15-day increments through 60 days, and then ind...

Q: Simple Simon’s Bakery purchases supplies on terms of 1/10,

Simple Simon’s Bakery purchases supplies on terms of 1/10, net 25. If Simple Simon’s chooses to take the discount offered, it must obtain a bank loan to meet its short-term financing needs. A local ba...

Q: Your firm purchases goods from its supplier on terms of 3/

Your firm purchases goods from its supplier on terms of 3/15, net 40. a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40? b. What...

Q: Use the financial statements supplied below and on the next page for

Use the financial statements supplied below and on the next page for International Motor Corporation (IMC) to answer the following questions: a. Calculate the cash conversion cycle for IMC for both 20...

Q: Your company had $10 million in sales last year. Its

Your company had $10 million in sales last year. Its cost of goods sold was $7 million and its average inventory balance was $1,200,000. What was its average days of inventory?

Q: Summit Builders has a market debt-equity ratio of 0.

Summit Builders has a market debt-equity ratio of 0.65 and a corporate tax rate of 40%, and it pays 7% interest on its debt. By what amount does the interest tax shield from its debt lower Summit’s WA...

Q: Happy Valley Homecare Suppliers, Inc. (HVHS), had $

Happy Valley Homecare Suppliers, Inc. (HVHS), had $20 million in sales in 2010. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000. a. Calculate the average numbe...

Q: Use the following income statement and balance sheet for Jim’s Espresso:

Use the following income statement and balance sheet for Jim’s Espresso: Assume that Jim’s pays out 90% of its net income. Use the percent of sales method to foreca...

Q: Sailboats Etc. is a retail company specializing in sailboats and other

Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment. The following table contains financial forecasts as well as current (month 0) working capital levels....

Q: FastChips Semiconductors has inventory days of 75, accounts receivable days of

FastChips Semiconductors has inventory days of 75, accounts receivable days of 30, and accounts payable days of 90. What is its cash conversion cycle?

Q: Emerald City Umbrellas sells umbrellas and rain gear in Seattle, so

Emerald City Umbrellas sells umbrellas and rain gear in Seattle, so its sales are fairly level across the year. However, it is branching out to other markets where it expects demand to be much more va...

Q: Use the following income statement and balance sheet for Jim’s Espresso:

Use the following income statement and balance sheet for Jim’s Espresso: What is the amount of net new financing needed for Jim’s?

Q: What are the permanent working capital needs of your company? What

What are the permanent working capital needs of your company? What are the temporary needs?

Q: If you chose to use only long-term financing, what

If you chose to use only long-term financing, what total amount of borrowing would you need to have on a permanent basis? Forecast your excess cash levels under this scenario.

Q: If you hold only $100 in cash at any time,

If you hold only $100 in cash at any time, what is your maximum short-term borrowing and when?

Q: If you choose to enter the year with $400 total in

If you choose to enter the year with $400 total in cash, what is your maximum short-term borrowing?

Q: Assume that you have shorted the put option in Problem 4.

Assume that you have shorted the put option in Problem 4. a. If the stock is trading at $8 in three months, what will you owe? b. If the stock is trading at $23 in three months, what will you owe? c....

Q: You are long both a call and a put on the same

You are long both a call and a put on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $45. Plot the value of this combin...

Q: The Treadwater Bank wants to raise $1 million using three-

The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for Treadwater?

Q: Use the following income statement and balance sheet for Jim’s Espresso:

Use the following income statement and balance sheet for Jim’s Espresso: If Jim’s adjusts its payout policy to 70% of net income, how will the net new financing cha...

Q: Use the following income statement and balance sheet for Global Corp.:

Use the following income statement and balance sheet for Global Corp.: Global expects sales to grow by 8% next year. Using the percent of sales method, forecast: a. Costs except depreciation b. Deprec...

Q: Westerly Industries has the following financial information. What is its cash

Westerly Industries has the following financial information. What is its cash conversion cycle?

Q: Aberdeen Outboard Motors is contemplating building a new plant. The company

Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $2 million in net working capital today. The plant will las...

Q: Your firm currently has net working capital of $100,000

Your firm currently has net working capital of $100,000 that it expects to grow at a rate of 4% per year forever. You are considering some suggestions that could slow that growth to 3% per year. If yo...

Q: Assume the credit terms offered to your firm by your suppliers are

Assume the credit terms offered to your firm by your suppliers are 3/5, net 30. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 30.

Q: NatNah, a builder of acoustic accessories, has no debt and

NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. NatNah decides to increase its leverage to maintain a market debt-to-value ratio of 0.5. Suppose its debt c...

Q: If you want to limit your maximum short-term borrowing to

If you want to limit your maximum short-term borrowing to $500, how much excess cash must you carry?

Q: The Hand-to-Mouth Company needs a $10,

The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide which of three alternatives to use: Alternative A: Forgo the discount on its trade credit agreement that off...

Q: Consider two loans with one-year maturities and identical face values

Consider two loans with one-year maturities and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement. Which loan wou...

Q: Magna Corporation has an issue of commercial paper with a face value

Magna Corporation has an issue of commercial paper with a face value of $1,000,000 and a maturity of six months. Magna received net proceeds of $973,710 when it sold the paper. What is the effective a...

Q: Which of the following one-year, $1000 bank loans

Which of the following one-year, $1000 bank loans offers the lowest effective annual rate? a. A loan with an APR of 6%, compounded monthly b. A loan with an APR of 6%, compounded annually, with a com...

Q: The Needy Corporation borrowed $10,000 from Bank Ease.

The Needy Corporation borrowed $10,000 from Bank Ease. According to the terms of the loan, Needy must pay the bank $400 in interest every three months for the three-year life of the loan, with the pri...

Q: Assume that the prime rate is 8% APR, compounded quarterly

Assume that the prime rate is 8% APR, compounded quarterly. How much dollar savings in interest did Treadwater (Problem 12) and Magna (Problem 11) achieve by accessing the commercial paper market? Da...

Q: The Signet Corporation has issued four-month commercial paper with a

The Signet Corporation has issued four-month commercial paper with a $6 million face value. The firm netted $5,870,850 on the sale. What effective annual rate is Signet paying for these funds?

Q: The Ohio Valley Steel Corporation has borrowed $5 million for one

The Ohio Valley Steel Corporation has borrowed $5 million for one month at a stated annual rate of 9%, using inventory stored in a field warehouse as collateral. The warehouser charges a $5000 fee, pa...

Q: Kurz Manufacturing is currently an all-equity firm with 20 million

Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz...

Q: The Rasputin Brewery is considering using a public warehouse loan as part

The Rasputin Brewery is considering using a public warehouse loan as part of its short-term financing. The firm will require a loan of $500,000. Interest on the loan will be 10% (APR, annual compoundi...

Q: Construct a short-term financial plan for Springfield Snowboards based on

Construct a short-term financial plan for Springfield Snowboards based on its expansion opportunity described in the “Positive Cash Flow Shocks” part of Section 20....

Q: The term globalization has become very widely used in recent years.

The term globalization has become very widely used in recent years. How would you define it?

Q: How do the motivations of individuals, both inside and outside the

How do the motivations of individuals, both inside and outside the organization or business, define the limits of financial globalization?

Q: Name the four main types of transactions from which transaction exposure arises

Name the four main types of transactions from which transaction exposure arises.

Q: Why would anyone write an option, knowing that the gain from

Why would anyone write an option, knowing that the gain from receiving the option premium is fixed, but the loss, if the underlying price goes in the wrong direction, can be extremely large?

Q: Infrastructure weakness was one of the causes of the emerging market crisis

Infrastructure weakness was one of the causes of the emerging market crisis in Thailand in 1997. Define infrastructure weakness, and explain how it could affect a country’s exchange rate.

Q: Define the Fisher effect. To what extent do empirical tests confirm

Define the Fisher effect. To what extent do empirical tests confirm that the Fisher effect exists in practice?

Q: Define the international Fisher effect. To what extent do empirical tests

Define the international Fisher effect. To what extent do empirical tests confirm that the international Fisher effect exists in practice?

Q: Define interest rate parity. What is the relationship between interest rate

Define interest rate parity. What is the relationship between interest rate parity and forward rates?

Q: Describe four arguments in favor of a firm pursuing an active currency

Describe four arguments in favor of a firm pursuing an active currency risk management program.

Q: Define the terms covered interest arbitrage and uncovered interest arbitrage. What

Define the terms covered interest arbitrage and uncovered interest arbitrage. What is the difference between these two transactions?

Q: Some forecasters believe that foreign exchange markets for the major floating currencies

Some forecasters believe that foreign exchange markets for the major floating currencies are “efficient” and forward exchange rates are unbiased predictors of future spot exchange rates. What is meant...

Q: Define the following terms: a. The law of one

Define the following terms: a. The law of one price. b. Absolute purchasing power parity. c. Relative purchasing power parity.

Q: Explain how a nominal effective exchange rate index is constructed.

Explain how a nominal effective exchange rate index is constructed.

Q: What are the main advantages that Trident gains by developing a multinational

What are the main advantages that Trident gains by developing a multinational presence?

Q: A newspaper shows the following prices for the previous day’s trading in

A newspaper shows the following prices for the previous day’s trading in the U.S. dollar-euro currency futures: What do the above terms indicate?

Q: Give an example of a transaction exposure that arises from borrowing in

Give an example of a transaction exposure that arises from borrowing in a foreign currency.

Q: What is the basic difference between a put on British pounds sterling

What is the basic difference between a put on British pounds sterling and a call on sterling?

Q: You read that exchange-traded American call options on pounds sterling

You read that exchange-traded American call options on pounds sterling having a strike price of 1.460 and a maturity of next March are now quoted at 3.67. What does this mean if you are a potential bu...

Q: What happens to the premium you paid for the above option in

What happens to the premium you paid for the above option in the event you decide to let the option expire unexercised? What happens to this amount in the event you decide to exercise the option?

Q: You have the same information as in question 4 above, except

You have the same information as in question 4 above, except that the pricing is for a European option. What is different? Information from Question 4: A newspaper shows the following prices for the...

Q: Explain why infrastructure strengths have helped to offset the large BOP deficits

Explain why infrastructure strengths have helped to offset the large BOP deficits on current account in the United States.

Q: The emerging market crises of 199–2002 were worsened because of

The emerging market crises of 199–2002 were worsened because of rampant speculation. Do speculators cause such a crisis, or do they simply respond to market signals of weakness? How can a government m...

Q: Swings in foreign direct investment flows into and out of emerging markets

Swings in foreign direct investment flows into and out of emerging markets contribute to exchange rate volatility. Describe one concrete historical example of this phenomenon during the last 10 years....

Q: What were the main causes of Thailand’s crisis of 1997? What

What were the main causes of Thailand’s crisis of 1997? What lessons were learned and what steps were eventually taken to normalize Thailand’s economy?

Q: What were the main causes of Russia’s crisis of 1998? What

What were the main causes of Russia’s crisis of 1998? What lessons were learned and what steps were taken to normalize Russia’s economy?

Q: What were the main causes of Argentina’s crisis of 2001–2002

What were the main causes of Argentina’s crisis of 2001–2002? What lessons were learned and what steps were taken to normalize Argentina’s economy?

Q: How would a high degree of leverage (debt/assets)

How would a high degree of leverage (debt/assets) be viewed by the shareholder wealth maximization model compared to the stakeholder wealth maximization model?

Q: Explain why foreign currency cash balances do not cause transaction exposure.

Explain why foreign currency cash balances do not cause transaction exposure.

Q: The value of an option is stated to be the sum of

The value of an option is stated to be the sum of its intrinsic value and its time value. Explain what is meant by these terms.

Q: Ultimately a treasurer must choose among alternative strategies to manage transaction exposure

Ultimately a treasurer must choose among alternative strategies to manage transaction exposure. Explain the two main decision criteria that must be used.

Q: Many MNEs have established transaction exposure risk management policies that mandate proportional

Many MNEs have established transaction exposure risk management policies that mandate proportional hedging. Explain and give an example of how proportional hedging can be implemented.

Q: Define the following terms: a. Foreign exchange exposure.

Define the following terms: a. Foreign exchange exposure. b. The three types of foreign exchange exposure.

Q: Define the following terms: a. Hedging. b

Define the following terms: a. Hedging. b. Currency risk.

Q: Describe six arguments against a firm pursuing an active currency risk management

Describe six arguments against a firm pursuing an active currency risk management program.

Q: Define and give an example of each of the following quotes:

Define and give an example of each of the following quotes: a. Bid quote. b. Ask quote.

Q: What are the major differences between short-term and long-

What are the major differences between short-term and long-term forecasts for a fixed exchange rate versus a floating exchange rate?

Q: Conglomerates are firms that have diversified into unrelated fields. How would

Conglomerates are firms that have diversified into unrelated fields. How would a policy of conglomeration be viewed by the shareholder wealth maximization model compared to the stakeholder wealth maxi...

Q: How is risk defined in the shareholder wealth maximization model compared to

How is risk defined in the shareholder wealth maximization model compared to the stakeholder wealth maximization model?

Q: How would stock options granted to a firm’s management and employees be

How would stock options granted to a firm’s management and employees be viewed by the shareholder wealth maximization model compared to the stakeholder wealth maximization model?

Q: From the point of view of a borrowing corporation, what are

From the point of view of a borrowing corporation, what are credit and repricing risks? Explain steps a company might take to minimize both.

Q: What alternative actions can shareholders take if they are dissatisfied with their

What alternative actions can shareholders take if they are dissatisfied with their company?

Q: In many countries it is common for a firm to have two

In many countries it is common for a firm to have two or more classes of common stock with differential voting rights. In the United States the norm is for a firm to have one class of common stock wit...

Q: Define the following terms: a. Corporate governance b

Define the following terms: a. Corporate governance b. The market for corporate control c. Agency theory d. Stakeholder capitalism

Q: In recent years emerging market MNEs have improved their corporate governance policies

In recent years emerging market MNEs have improved their corporate governance policies and become more shareholder-friendly. What do you think is driving this phenomenon?

Q: What have been the main causes of recent corporate governance failures in

What have been the main causes of recent corporate governance failures in the United States and Europe?

Q: Which assets play the most critical role in linking the major institutions

Which assets play the most critical role in linking the major institutions which make up the global financial marketplace?

Q: What are the key differences in the goals and motivations of family

What are the key differences in the goals and motivations of family ownership of a business as opposed to those of a widely held publicly traded business?

Q: What is meant by the term “overshooting”? What causes it

What is meant by the term “overshooting”? What causes it and how is it corrected?

Q: Do markets appear to be willing to pay for good governance?

Do markets appear to be willing to pay for good governance?

Q: What are the primary principles behind corporate governance reform today? Are

What are the primary principles behind corporate governance reform today? Are these culturally specific in your opinion?

Q: How can a business firm that has borrowed on a floating-

How can a business firm that has borrowed on a floating-rate basis use a forward rate agreement to reduce interest rate risk?

Q: What should be the primary operational goal of an MNE?

What should be the primary operational goal of an MNE?

Q: “Knowledge assets” are a firm’s intangible assets, the sources

“Knowledge assets” are a firm’s intangible assets, the sources and uses of its intellectual talent—its competitive advantage. What are some of the most important “knowledge assets” that create shareho...

Q: In Germany and Scandinavia, among others, labor unions have representation

In Germany and Scandinavia, among others, labor unions have representation on boards of directors or supervisory boards. How might such union representation be viewed under the shareholder wealth maxi...

Q: In an interlocking directorate members of the board of directors of one

In an interlocking directorate members of the board of directors of one firm also sit on the board of directors of other firms. How would interlocking directorates be viewed by the shareholder wealth...

Q: A leveraged buyout is a financial strategy in which a group of

A leveraged buyout is a financial strategy in which a group of investors gain voting control of a firm and then liquidate its assets in order to repay the loans used to purchase the firm’s shares. How...

Q: How does ownership alter the goals and governance of a business?

How does ownership alter the goals and governance of a business?

Q: Why is this separation so critical to the understanding of how businesses

Why is this separation so critical to the understanding of how businesses are structured and led?

Q: Explain the assumptions and objectives of the shareholder wealth maximization model.

Explain the assumptions and objectives of the shareholder wealth maximization model.

Q: What is meant by the term “fundamental equilibrium path” for

What is meant by the term “fundamental equilibrium path” for a currency value? What is “noise”?

Q: Explain the assumptions and objectives of the stakeholder wealth maximization model.

Explain the assumptions and objectives of the stakeholder wealth maximization model.

Q: Why would one company with interest payments due in pounds sterling want

Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars?

Q: Fixed exchange rate regimes are sometimes implemented through a currency board (

Fixed exchange rate regimes are sometimes implemented through a currency board (Hong Kong) or through dollarization (Ecuador). What is the difference between the two approaches?

Q: High capital mobility is forcing emerging market nations to choose between free

High capital mobility is forcing emerging market nations to choose between free-floating regimes and currency board or dollarization regimes. What are the main outcomes of each of these regimes from t...

Q: How did the Argentine currency board function from 1991 to January 2002

How did the Argentine currency board function from 1991 to January 2002, and why did it collapse?

Q: On January 4, 1999, 11 member states of the European

On January 4, 1999, 11 member states of the European Union initiated the European Monetary Union (EMU) and established a single currency, the euro, which replaced the individual currencies of particip...

Q: The United Kingdom, Denmark, and Sweden have chosen not to

The United Kingdom, Denmark, and Sweden have chosen not to adopt the euro, but rather to maintain their individual currencies. What are the motivations of each of these three countries, which are also...

Q: The IMF was established by the Bretton Woods Agreement (1944).

The IMF was established by the Bretton Woods Agreement (1944). What were its original objectives?

Q: What are Special Drawing Rights?

What are Special Drawing Rights?

Q: What are the attributes of the ideal currency?

What are the attributes of the ideal currency?

Q: Why did the fixed exchange rate regime of 1945–1973 eventually

Why did the fixed exchange rate regime of 1945–1973 eventually fail?

Q: Explain how the asset market approach can be used to forecast future

Explain how the asset market approach can be used to forecast future spot exchange rates. How does the asset market approach differ from the BOP approach to forecasting?

Q: What are the main phases that Trident passed through as it evolved

What are the main phases that Trident passed through as it evolved into a truly global firm? What are the advantages and disadvantages of each?

Q: Define and explain the theory of comparative advantage.

Define and explain the theory of comparative advantage.

Q: Under the gold standard all national governments promised to follow the “

Under the gold standard all national governments promised to follow the “rules of the game.” This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply?

Q: What are the advantages and disadvantages of fixed exchange rates?

What are the advantages and disadvantages of fixed exchange rates?

Q: Explain what is meant by the term impossible trinity, and why

Explain what is meant by the term impossible trinity, and why it is true.

Q: What are the main component accounts of the current account? Give

What are the main component accounts of the current account? Give one debit and one credit example for each component account for the United States.

Q: What is the difference between a direct foreign investment and a portfolio

What is the difference between a direct foreign investment and a portfolio foreign investment? Give an example of each. Which type of investment is a multinational industrial company more likely to ma...

Q: What are the main components of the financial accounts? Give one

What are the main components of the financial accounts? Give one debit and one credit example for each component account for the United States.

Q: Classify the following as a transaction reported in a sub-component

Classify the following as a transaction reported in a sub-component of the current account, or the capital and financial accounts of the two countries involved: a. A U.S. food chain imports wine from...

Q: What are the main summary statements of the balance of payments accounts

What are the main summary statements of the balance of payments accounts, and what do they measure?

Q: Where in the balance of payments accounts do the flows of “

Where in the balance of payments accounts do the flows of “laundered” money by drug dealers and international terrorist organizations appear?

Q: How does organized exchange trading in swaps remove any risk that the

How does organized exchange trading in swaps remove any risk that the counterparty in a swap agreement will not complete the agreement?

Q: Explain how technical analysis can be used to forecast future spot exchange

Explain how technical analysis can be used to forecast future spot exchange rates. How does technical analysis differ from the BOP and asset market approaches to forecasting?

Q: Identify the correct BOP account for each of the following transactions.

Identify the correct BOP account for each of the following transactions. a. A German-based pension fund buys U.S. government 30-year bonds for its investment portfolio. b. Scandinavian Airlines Syste...

Q: The key to understanding most theories is what they say and what

The key to understanding most theories is what they say and what they don’t. What are four or five key limitations to the theory of comparative advantage?

Q: Business managers and investors need BOP data to anticipate changes in host

Business managers and investors need BOP data to anticipate changes in host country economic policies that might be driven by BOP events. From the perspective of business managers and investors, list...

Q: What are the two main types of economic activity measured by a

What are the two main types of economic activity measured by a country’s BOP?

Q: Why does the BOP always “balance”?

Why does the BOP always “balance”?

Q: Why were LIBOR rates so much higher than Treasury yields in 2007

Why were LIBOR rates so much higher than Treasury yields in 2007 and 2008? What is needed to return LIBOR rates to the lower, more stable levels of the past?

Q: What were the three key elements of the package used by the

What were the three key elements of the package used by the U.S. government to resolve the 2008–2009 credit crisis?

Q: Why are the sovereign debtors of the eurozone considered to have a

Why are the sovereign debtors of the eurozone considered to have a problem that is different from these of any other heavily indebted country, like the United States?

Q: What is the European Financial Stability Facility (EFSF), and what

What is the European Financial Stability Facility (EFSF), and what role might it play in the resolution of the eurozone debt crisis?

Q: Explain the difference between foreign currency options and futures and when either

Explain the difference between foreign currency options and futures and when either might be most appropriately used.

Q: Why has the case of Portugal been termed a “case of

Why has the case of Portugal been termed a “case of contagion” rather than a sovereign debt crisis?

Q: Numerous exchange rate forecasting services exist. Trident’s CFO Maria Gonzalez is

Numerous exchange rate forecasting services exist. Trident’s CFO Maria Gonzalez is considering whether to subscribe to one of these services at a cost of $20,000 per year. The price includes online ac...

Q: What are the three primary methods that might be used individually or

What are the three primary methods that might be used individually or in combination to resolve the debt crisis?

Q: What were the three major forces behind the credit crisis of 2007

What were the three major forces behind the credit crisis of 2007–2008?

Q: After reading this chapter’s description of Trident’s globalization process, how would

After reading this chapter’s description of Trident’s globalization process, how would you explain the distinctions between international, multinational, and global companies?

Q: What is a structured investment vehicle (SIV)?

What is a structured investment vehicle (SIV)?

Q: What is a credit default swap (CDS)?

What is a credit default swap (CDS)?

Q: Why do you believe it is important for many of the world’s

Why do you believe it is important for many of the world’s largest commercial and investment banks to be considered on-the-run in the interbank market?

Q: What are the three major functions of the foreign exchange market?

What are the three major functions of the foreign exchange market?

Q: At what point in the globalization process did Trident become a multinational

At what point in the globalization process did Trident become a multinational enterprise (MNE)?

Q: What formula is used to convert a nominal effective exchange rate index

What formula is used to convert a nominal effective exchange rate index into a real effective exchange rate index?

Q: Exhibit 7.3 compares the real effective exchange rates for Japan

Exhibit 7.3 compares the real effective exchange rates for Japan, the United States, and the Euro area. If the comparative real effective exchange rate was the main determinant, does Japan or the Unit...

Q: Incomplete exchange rate pass-through is one reason that a country’s

Incomplete exchange rate pass-through is one reason that a country’s real effective exchange rate can deviate for lengthy periods from its purchasing power equilibrium level of 100. What is meant by t...

Q: For each of the foreign exchange market participants, identify their motive

For each of the foreign exchange market participants, identify their motive for buying or selling foreign exchange.

Q: Explain the meaning and probable significance for international business of the following

Explain the meaning and probable significance for international business of the following contract specifications: • Specific-sized contract • Standard method of stating exchange rates • Standard matu...

Q: Define each of the following types of foreign exchange transactions:

Define each of the following types of foreign exchange transactions: a. Spot. b. Outright forward. c. Forward-forward swap.

Q: With reference to foreign exchange turnover in 2010: a.

With reference to foreign exchange turnover in 2010: a. Rank the relative size of spot, forwards, and swaps as of 2010. b. Rank the five most important geographic locations for foreign exchange turno...

Q: Explain the meaning of “cross-rate consistency” as used

Explain the meaning of “cross-rate consistency” as used by MNEs. How do MNEs use a check of cross-rate consistency in practice?

Q: With reference to interbank quotations, what is the difference between American

With reference to interbank quotations, what is the difference between American terms and European terms?

Q: Define and give an example of the following: a.

Define and give an example of the following: a. Direct quote between the U.S. dollar and the Mexican peso, where the United States is designated as the home country. b. Indirect quote between the Japa...

Q: Define the following terms: • Foreign exchange market •

Define the following terms: • Foreign exchange market • Foreign exchange transaction •Foreign exchange

Q: What does the word translation mean? Why is translation exposure sometimes

What does the word translation mean? Why is translation exposure sometimes called accounting exposure?

Q: Explain how back-to-back loans can hedge foreign exchange

Explain how back-to-back loans can hedge foreign exchange operating exposure.

Q: What is real option analysis? How is it a better method

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Q: What is a foreign tax credit? Why do countries give credit

What is a foreign tax credit? Why do countries give credit for taxes paid on foreign-source income?

Q: a. What is a value-added tax? b

a. What is a value-added tax? b. Although the value-added tax has been proposed numerous times, the Unites States has never adopted it. Why do you think the United States is so negative on it, when t...

Q: What is a transfer price, and can a government regulate it

What is a transfer price, and can a government regulate it? What difficulties and motives does a parent multinational firm face in setting transfer prices?

Q: Subsidiary Alpha in Country Able faces a 40% income tax rate

Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. Presently each subsidiary imports from the other an amount of goods and...

Q: Section 482 of the U.S. Internal Revenue Code specifies

Section 482 of the U.S. Internal Revenue Code specifies use of a “correct” transfer price, and the burden of proof that the transfer price is “correct” lies with the company. What guidelines exist for...

Q: What are the major differences in translating assets between the current rate

What are the major differences in translating assets between the current rate method and the temporal method?

Q: Answer the following questions: a. What is meant by

Answer the following questions: a. What is meant by the term “tax haven”? b. What are the desired characteristics for a country if it expects to be used as a tax haven? c. What are the advantages lea...

Q: How do tax treaties affect the operations and structure of MNEs?

How do tax treaties affect the operations and structure of MNEs?

Q: Why do the U.S. tax authorities tax passive income

Why do the U.S. tax authorities tax passive income generated offshore differently from active income?

Q: What is meant by the term “tax morality”?

What is meant by the term “tax morality”?

Q: Capital budgeting for a foreign project uses the same theoretical framework as

Capital budgeting for a foreign project uses the same theoretical framework as does domestic capital budgeting. What are the basic steps in domestic capital budgeting?

Q: a. Define the term “tax neutrality.” b.

a. Define the term “tax neutrality.” b. What is the difference between domestic neutrality and foreign neutrality? c. What are a country’s objectives when determining tax policy on foreign-source inc...

Q: Nations typically structure their tax systems along one of two basic approaches

Nations typically structure their tax systems along one of two basic approaches: the worldwide approach or the territorial approach. Explain these two approaches and how they differ from each other.

Q: Define in words (without graphics) how the optimal domestic portfolio

Define in words (without graphics) how the optimal domestic portfolio is constructed.

Q: If the primary benefit of portfolio diversification is risk reduction, is

If the primary benefit of portfolio diversification is risk reduction, is the investor always better off choosing the portfolio with the lowest expected risk?

Q: When asked why they do not internationally diversify their portfolios, answer

When asked why they do not internationally diversify their portfolios, answer that “the risks are not worth the expected returns.” Using the theory of international diversification, how would you eval...

Q: The benefits of portfolio construction, domestically or internationally, arise from

The benefits of portfolio construction, domestically or internationally, arise from the lack of correlation among assets and markets. The increasing globalization of business is expected to change the...

Q: The key to managing operating exposure at the strategic level is for

The key to managing operating exposure at the strategic level is for management to recognize a disequilibrium in parity conditions when it occurs, and to be prepositioned to react most appropriately....

Q: Conceptually, how do the Sharpe and Treynor performance measures define risk

Conceptually, how do the Sharpe and Treynor performance measures define risk differently? Which do you believe is a more useful measure in an internationally diversified portfolio?

Q: As the newest member of the asset allocation team in your firm

As the newest member of the asset allocation team in your firm, you constantly find yourself being quizzed by your fellow group members. The topic is international diversification. One analyst asks yo...

Q: Firms with operations and assets across the globe, true MNEs,

Firms with operations and assets across the globe, true MNEs, are in many ways as international in composition as the most internationally diversified portfolio of unrelated securities. Why do investo...

Q: Explain how currency swaps can hedge foreign exchange operating exposure. What

Explain how currency swaps can hedge foreign exchange operating exposure. What are the accounting advantages of currency swaps?

Q: When you are constructing your portfolio, you know you want to

When you are constructing your portfolio, you know you want to include Cementos de Mexico (Mexico), but you cannot decide whether you wish to hold it in the form of ADRs traded on the NYSE, or directl...

Q: How does the diversification of a portfolio change its expected returns and

How does the diversification of a portfolio change its expected returns and expected risks? Is this in principle any different for internationally diversified portfolios?

Q: What types of risk are present in a diversified portfolio? Which

What types of risk are present in a diversified portfolio? Which type of risk remains after the portfolio has been diversified?

Q: How, according to portfolio theory, is the risk of the

How, according to portfolio theory, is the risk of the portfolio measured exactly?

Q: The currency risk associated with international diversification is a serious concern for

The currency risk associated with international diversification is a serious concern for portfolio managers. Is it possible for currency risk ever to benefit the portfolio’s return?

Q: The decision about where to invest abroad is influenced by behavioral factors

The decision about where to invest abroad is influenced by behavioral factors. a. Explain the behavioral approach to FDI. b. Explain the international network theory explanation of FDI.

Q: What are the advantages and disadvantages of limiting a firm’s activities to

What are the advantages and disadvantages of limiting a firm’s activities to exporting compared to producing abroad?

Q: What is hyperinflation, and what are the consequences for translating foreign

What is hyperinflation, and what are the consequences for translating foreign financial statements?

Q: What are the advantages and disadvantages of licensing and management contracts compared

What are the advantages and disadvantages of licensing and management contracts compared to producing abroad?

Q: What are the advantages and disadvantages of forming a joint venture to

What are the advantages and disadvantages of forming a joint venture to serve a foreign market compared to serving that market with a wholly owned production subsidiary?

Q: Capital budgeting for a foreign project is considerably more complex than the

Capital budgeting for a foreign project is considerably more complex than the domestic case. What are the factors that add complexity?

Q: What are the advantages and disadvantages of serving a foreign market through

What are the advantages and disadvantages of serving a foreign market through a greenfield foreign direct investment compared to an acquisition of a local firm in the target market?

Q: The term “cross-border strategic alliance” conveys different meanings

The term “cross-border strategic alliance” conveys different meanings to different observers. What are the meanings?

Q: Answer the following questions: a. What is meant

Answer the following questions: a. What is meant by the term “governance risk”? b. What is the most important type of governance risk?

Q: An investment agreement spells out specific rights and responsibilities of both the

An investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. What are the main financial policies that should be included in an investment...

Q: Answer the following questions: a. What is OPIC?

Answer the following questions: a. What is OPIC? b. What types of political risks can OPIC insure against?

Q: The following operating strategies, among others, are expected to reduce

The following operating strategies, among others, are expected to reduce damage from political risk. Explain each, and how it reduces damage. a. Local sourcing. b. Facility location. c. Control of tec...

Q: Define the following terms: a. Transfer risk.

Define the following terms: a. Transfer risk. b. Blocked funds.

Q: Identify and explain the main types of cultural and institutional risks,

Identify and explain the main types of cultural and institutional risks, except protectionism.

Q: What is the primary difference between losses from transaction exposure, operating

What is the primary difference between losses from transaction exposure, operating exposure, and translation exposure?

Q: Respond to the following: a. Define protectionism and identify

Respond to the following: a. Define protectionism and identify the industries that are typically protected. b. Explain the “infant industry” argument for protectionism.

Q: a. Why should a foreign project be evaluated from both a

a. Why should a foreign project be evaluated from both a project and a parent viewpoint? b. Which viewpoint, project or parent, gives results closer to the traditional meaning of net present value in...

Q: a. What are the traditional methods for countries to implement protectionism

a. What are the traditional methods for countries to implement protectionism? b. What are some typical non-tariff barriers to trade? c. How can MNEs overcome host country protectionism?

Q: The United States has a law prohibiting U.S. firms

The United States has a law prohibiting U.S. firms from bribing foreign officials and business persons, even in countries where bribery is a normal practice. Some U.S. firms claim this places the Unit...

Q: As a firm evolves from purely domestic into a true multinational enterprise

As a firm evolves from purely domestic into a true multinational enterprise, it must consider (1) its competitive advantages, (2) its production location, (3) the type of control it wants to have over...

Q: What is the essence of the theory of comparative advantage?

What is the essence of the theory of comparative advantage?

Q: MNEs strive to take advantage of market imperfections in national markets for

MNEs strive to take advantage of market imperfections in national markets for products, factors of production, and financial assets. Large international firms are better able to exploit such imperfect...

Q: In deciding whether to invest abroad, management must first determine whether

In deciding whether to invest abroad, management must first determine whether the firm has a sustainable competitive advantage that enables it to compete effectively in the home market. What are the n...

Q: Explain briefly how economies of scale and scope can be developed in

Explain briefly how economies of scale and scope can be developed in production, marketing, finance, research and development, transportation, and purchasing.

Q: A strongly competitive home market can sharpen a firm’s competitive advantage relative

A strongly competitive home market can sharpen a firm’s competitive advantage relative to firms located in less competitive markets. Explain what is meant by the “competitive advantage of nations.”

Q: The OLI Paradigm is an attempt to create an overall framework to

The OLI Paradigm is an attempt to create an overall framework to explain why MNEs choose FDI, rather than serve foreign markets through alternative modes. Explain what is meant by the O, the L, and th...

Q: In the context of unbundling cash flows from subsidiary to parent,

In the context of unbundling cash flows from subsidiary to parent, why might a host government be more lenient in its treatment of fees than its treatment of dividends? What difference does it make to...

Q: The operating cycle of a firm, domestic or multinational, consists

The operating cycle of a firm, domestic or multinational, consists of the following four time periods. For each of these periods, explain whether a cash outflow or a cash inflow is associated with the...

Q: Exhibit 19.1 shows the accounts payable period to be longer

Exhibit 19.1 shows the accounts payable period to be longer than the inventory period. Could this be otherwise, and what would be the cash implications?

Q: As a financial manager, would you prefer that the accounts payable

As a financial manager, would you prefer that the accounts payable period end before, at the same time, or after the beginning of the accounts receivable period? Explain.

Q: Assuming the flow illustrated in Exhibit 19.1, where does

Assuming the flow illustrated in Exhibit 19.1, where does transaction exposure begin and end if inputs are purchased with one currency at t1, and proceeds from the sale are received at t5? Is there mo...

Q: Financial strategies are directly related to the OLI Paradigm. a

Financial strategies are directly related to the OLI Paradigm. a. Explain how proactive financial strategies are related to OLI. b. Explain how reactive financial strategies are related to OLI.

Q: Is any operating exposure created during the course of a firm’s operating

Is any operating exposure created during the course of a firm’s operating cycle?

Q: Is any accounting exposure created during the course of a firm’s operating

Is any accounting exposure created during the course of a firm’s operating cycle?

Q: Assume a firm purchases inventory with one foreign currency and sells it

Assume a firm purchases inventory with one foreign currency and sells it for another foreign currency, neither currency being the home currency of the parent or subsidiary where the manufacturing proc...

Q: Merck is an MNE that has undertaken contractual hedging of its operating

Merck is an MNE that has undertaken contractual hedging of its operating exposure. a. How do they accomplish this task? b. What assumptions do they make in order to justify contractual hedging of the...

Q: Roberts and Sons, Inc., of Great Britain has just purchased

Roberts and Sons, Inc., of Great Britain has just purchased inventory items costing kroner 1,000,000 from a Swedish supplier. The supplier has quoted terms 3/15, net 45. Under what conditions might Ro...

Q: Japanese industry is often praised for its “just-in-

Japanese industry is often praised for its “just-in-time” inventory practice between industrial buyers and industrial sellers. In the context of the “Day’s Receivables” turnover in Exhibit 19.5, what...

Q: Why might the time lag for intramultinational firm accounts receivable and payable

Why might the time lag for intramultinational firm accounts receivable and payable (that is, all received or paid to a parent or sister subsidiary) differ substantially from the time lags reported for...

Q: Merlin Corporation of the United States imports raw material from Indonesia on

Merlin Corporation of the United States imports raw material from Indonesia on terms of 2/10, net 30. Merlin expects a 36% devaluation of the Indonesian rupiah at any moment. Should Merlin take the di...

Q: What are the advantages of a free trade zone? Are there

What are the advantages of a free trade zone? Are there any disadvantages?

Q: Explain the difference between the “transaction motive” and the “

Explain the difference between the “transaction motive” and the “precautionary motive” for holding cash.

Q: Capital projects provide both operating cash flows and financial cash flows.

Capital projects provide both operating cash flows and financial cash flows. Why are operating cash flows preferred for domestic capital budgeting, but financial cash flows given major consideration i...

Q: The operating cash cycle of a multinational firm goes from cash collection

The operating cash cycle of a multinational firm goes from cash collection from customers, cash holding for anticipated transaction needs (the transaction motive for holding cash), possible cash repos...

Q: Electro-Beam Company generates and disburses cash in the currencies of

Electro-Beam Company generates and disburses cash in the currencies of four countries, Singapore, Malaysia, Thailand, and Vietnam. What would be the characteristics you might consider if charged with...

Q: During the era of the French franc, France imposed a rule

During the era of the French franc, France imposed a rule on its banks and subsidiaries of international companies operating in France that precluded those subsidiaries from netting cash flow obligati...

Q: What is the difference between a foreign branch and a foreign subsidiary

What is the difference between a foreign branch and a foreign subsidiary of a home-country bank?

Q: Answer the following: a. How can an MNE

Answer the following: a. How can an MNE diversify operations? b. How can an MNE diversify financing?

Q: Each of the following factors is sometimes a constraint on the free

Each of the following factors is sometimes a constraint on the free movement of funds internationally. Why would a government impose such a constraint? How might the management of a multinational argu...

Q: What does this term mean? Why would unbundling be needed for

What does this term mean? Why would unbundling be needed for international cash flows from foreign subsidiaries, but not for domestic cash flows between related domestic subsidiaries and their parent?...

Q: In the context of unbundling cash flows from subsidiary to parent,

In the context of unbundling cash flows from subsidiary to parent, explain how each of the following creates a conduit. What are the tax consequences of each? a. Imports of components from the parent....

Q: Subsidiary Alpha in Country Able faces a 40% income tax rate

Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. At present each subsidiary imports from the other an amount of goods an...

Q: What are the differences between a “license fee” and a

What are the differences between a “license fee” and a “royalty fee”? Do you think license and royalty fees should be covered by the tax rules that regulate transfer pricing? Why?

Q: Should the anticipated internal rate of return (IRR) for a

Should the anticipated internal rate of return (IRR) for a proposed foreign project be compared to (1) alternative home country proposals, (2) returns earned by local companies in the same industry...

Q: What is the difference between a “management fee”, a “

What is the difference between a “management fee”, a “technical assistance fee”, and a “license fee for patent usage”? Should they be treated differently for income tax purposes?

Q: What methods might the U.S. Internal Revenue Service use

What methods might the U.S. Internal Revenue Service use to determine whether allocations of distributed overhead are being fairly allocated to foreign subsidiaries?

Q: Explain the difference between a letter of credit (L/C

Explain the difference between a letter of credit (L/C) and a draft. How are they linked?

Q: What is the major difference between “currency risk” and “

What is the major difference between “currency risk” and “risk of noncompletion”? How are these risks handled in a typical international trade transaction?

Q: Identify each party to a letter of credit (L/C

Identify each party to a letter of credit (L/C), and indicate its responsibility.

Q: Define the following terms: a. Operating exposure

Define the following terms: a. Operating exposure b. Economic exposure c. Competitive exposure

Q: Why would an exporter insist on a confirmed letter of credit?

Why would an exporter insist on a confirmed letter of credit?

Q: List the steps involved in the export of computer hard disk drives

List the steps involved in the export of computer hard disk drives from Penang, Malaysia, to San Jose, California, using an unconfirmed letter of credit authorizing payment on sight.

Q: List the steps involved in the export of lumber from Portland,

List the steps involved in the export of lumber from Portland, Oregon, to Yokohama, Japan, using a confirmed letter of credit, payment to be made in 120 days.

Q: Inca Breweries of Lima, Peru, has received an order for

Inca Breweries of Lima, Peru, has received an order for 10,000 cartons of beer from Alicante Importers of Alicante, Spain. The beer will be exported to Spain under the terms of a letter of credit issu...

Q: In the context of evaluating foreign investment proposals, how should a

In the context of evaluating foreign investment proposals, how should a multinational firm evaluate cash flows in the host foreign country that are blocked from being repatriated to the firm’s home co...

Q: Swishing Shoe Company of Durham, North Carolina, has received an

Swishing Shoe Company of Durham, North Carolina, has received an order for 50,000 cartons of athletic shoes from Southampton Footware, Ltd., of Great Britain, payment to be in British pounds sterling....

Q: Assume that Great Britain charges a duty of 10% on shoes

Assume that Great Britain charges a duty of 10% on shoes imported into the United Kingdom. Swishing Shoe Company, in question 11, discovers that it can manufacture shoes in Ireland and import them int...

Q: Various governments have established agencies to insure against nonpayment for exports and

Various governments have established agencies to insure against nonpayment for exports and/or to provide export credit. This shifts credit risk away from private banks and to the citizen taxpayers of...

Q: Why might different documentation be used for an export to a nonaffiliated

Why might different documentation be used for an export to a nonaffiliated foreign buyer who is a new customer, as compared with an export to a nonaffiliated foreign buyer to whom the exporter has bee...

Q: For what reason might an exporter use standard international trade documentation (

For what reason might an exporter use standard international trade documentation (letter of credit, draft, order bill of lading) on an intrafirm export to its parent or sister subsidiary?

Q: What reasons can you give for the observation that intrafirm trade is

What reasons can you give for the observation that intrafirm trade is now greater than trade between nonaffiliated exporters and importers?

Q: Answer the following: a. Why do unexpected exchange

Answer the following: a. Why do unexpected exchange rate changes contribute to operating exposure, but expected exchange rate changes do not? b. Explain the time horizons used to analyze unexpected ch...

Q: Novo believed that the Danish capital market was segmented from world capital

Novo believed that the Danish capital market was segmented from world capital markets. Explain the six characteristics of the Danish equity market that were responsible for its segmentation.

Q: a. What was Novo’s strategy to internationalize its cost of capital

a. What was Novo’s strategy to internationalize its cost of capital? b. What is the evidence that Novo’s strategy succeeded?

Q: It has been suggested that firms located in illiquid and segmented emerging

It has been suggested that firms located in illiquid and segmented emerging markets could follow Novo’s proactive strategy to internationalize their own cost of capital. What are the preconditions tha...

Q: Theoretically MNEs should be in a better position than their domestic counterparts

Theoretically MNEs should be in a better position than their domestic counterparts to support higher debt ratios, because their cash flows are diversified internationally. However, recent empirical st...

Q: The “Riddle” The riddle is an attempt to explain under

The “Riddle” The riddle is an attempt to explain under what conditions an MNE would have a higher or lower debt ratio and beta than its domestic counterpart. Explain and diagram these conditions.

Q: Global integration has given many firms access to new and cheaper sources

Global integration has given many firms access to new and cheaper sources of funds beyond those available in their home markets. What are the dimensions of a strategy to capture this lower cost and gr...

Q: What are the differences in the cash flows used in a project

What are the differences in the cash flows used in a project point of view analysis and a parent point of view analysis?

Q: Define the following terms: a. Systematic risk.

Define the following terms: a. Systematic risk. b. Beta (in the Capital Asset Pricing Model).

Q: Answer the following; a. What is an equity

Answer the following; a. What is an equity risk premium? b. What is the difference between calculating an equity risk premium using arithmetic returns compared to using geometric returns? c. In Exhi...

Q: What is the central problem involved in consolidating the financial statements of

What is the central problem involved in consolidating the financial statements of a foreign subsidiary?

Q: Apart from improving liquidity and escaping from a segmented home market,

Apart from improving liquidity and escaping from a segmented home market, why might emerging market MNEs further lower their cost of capital by listing and selling equity abroad?

Q: Define what is meant by a “Euroequity public share issue.”

Define what is meant by a “Euroequity public share issue.”

Q: Answer the following questions: a. What is SEC Rule

Answer the following questions: a. What is SEC Rule 144A? b. Why might a foreign firm choose to sell its equity in the United States under SEC Rule 144A?

Q: a. What is a private equity fund? b.

a. What is a private equity fund? b. How do they differ from traditional venture capital firms? c. How do private equity funds raise their own capital, and how does this action give them a competitive...

Q: What, in simple wording, is the objective sought by finding

What, in simple wording, is the objective sought by finding an optimal capital structure?

Q: Answer the following questions: a. What is the “

Answer the following questions: a. What is the “cost of debt” and how is it determined? b. What is the “cost of equity” and how is it determined?

Q: As debt in a firm’s capital structure is increased from no debt

As debt in a firm’s capital structure is increased from no debt to a significant proportion of debt (say, 60%), what tends to happen to the cost of debt, to the cost of equity, and to the overall weig...

Q: How does the availability of capital influence the theory of optimal capital

How does the availability of capital influence the theory of optimal capital structure for a multinational enterprise?

Q: How is foreign exchange risk sensitivity factored into the capital budgeting analysis

How is foreign exchange risk sensitivity factored into the capital budgeting analysis of a foreign project?

Q: Define “marginal weighted average cost of capital”.

Define “marginal weighted average cost of capital”.

Q: If a multinational firm is able to diversify its sources of cash

If a multinational firm is able to diversify its sources of cash inflow so as to receive those flows from several countries and in several currencies, do you think that tends to increase or decrease i...

Q: Both domestic and international portfolio managers are asset allocators. a

Both domestic and international portfolio managers are asset allocators. a. What is their portfolio management objective? b. What is the main advantage that international portfolio managers have comp...

Q: Many firms in many countries every year borrow at nominal costs which

Many firms in many countries every year borrow at nominal costs which prove to be very different after the fact. For example, not too long ago Deutsche Bank borrowed funds at a nominal cost of 9.59% p...

Q: What is the difference between a self-sustaining foreign subsidiary and

What is the difference between a self-sustaining foreign subsidiary and an integrated foreign subsidiary?

Q: Should foreign subsidiaries of multinational firms conform to the capital structure norms

Should foreign subsidiaries of multinational firms conform to the capital structure norms of the host country, or to the norms of their parent’s country? Discuss.

Q: What is the difference between “internal” financing and “external

What is the difference between “internal” financing and “external” financing for a subsidiary? List three types of internal financing and three types of external financing available to a foreign subsi...

Q: Bank borrowing has long been the manner by which corporations and governments

Bank borrowing has long been the manner by which corporations and governments borrowed funds for short periods. What then, is the advantage over bank borrowing for each of the following? a. Syndicated...

Q: What is the difference between a eurobond and a foreign bond,

What is the difference between a eurobond and a foreign bond, and why do two types of international bonds exist?

Q: Exhibit 14.1 illustrates alternative paths to globalizing the cost and

Exhibit 14.1 illustrates alternative paths to globalizing the cost and availability of capital. Identify the specific steps in Exhibit 14.1 that were taken by Novo Industry (Chapter 13) in chronologic...

Q: Define the following terms: a. ADRs. b

Define the following terms: a. ADRs. b. GRSs. c. Sponsored depositary receipts. d. Unsponsored depositary receipts.

Q: How is expropriation risk factored into the capital budgeting analysis of a

How is expropriation risk factored into the capital budgeting analysis of a foreign project?

Q: Distinguish between the three levels of commitment for ADRs traded in the

Distinguish between the three levels of commitment for ADRs traded in the United States.

Q: Portfolio asset allocation can be accomplished along many dimensions, depending on

Portfolio asset allocation can be accomplished along many dimensions, depending on the investment objective of the portfolio manager. Identify the various dimensions.

Q: Give five reasons why a firm might cross-list and sell

Give five reasons why a firm might cross-list and sell its shares on a very liquid stock exchange.

Q: What are the main reasons causing U.S. firms to

What are the main reasons causing U.S. firms to cross-list abroad?

Q: What are the main barriers to cross-listing abroad?

What are the main barriers to cross-listing abroad?

Q: What is a functional currency? What is a non-functional

What is a functional currency? What is a non-functional currency?

Q: What are five alternative instruments that can be used to source equity

What are five alternative instruments that can be used to source equity in global markets?

Q: Answer the following questions: a. Define what is meant

Answer the following questions: a. Define what is meant by a “directed public share issue”. b. Why did Novo choose to make a $61 million directed public share issue in the United States in 1981?

Q: a. What is meant by the term “tax deferral”?

a. What is meant by the term “tax deferral”? b. Why do countries allow tax deferral on foreign-source income?

Q: a. What is a bilateral tax treaty? b.

a. What is a bilateral tax treaty? b. What is the purpose of a bilateral tax treaty? c. What policies do most tax treaties cover?

Q: Taxes are classified on the basis of whether they are applied directly

Taxes are classified on the basis of whether they are applied directly to income, called direct taxes, or to some other measurable performance characteristic of the firm, called indirect taxes. Identi...

Q: A foreign subsidiary does not have an independent cost of capital.

A foreign subsidiary does not have an independent cost of capital. However, in order to estimate the discount rate for a comparable host country firm, the analyst should try to calculate a hypothetica...

Q: Answer the following questions: a. Define what is meant

Answer the following questions: a. Define what is meant by the term market liquidity. b. What are the main disadvantages for a firm to be located in an illiquid market? c. If a firm is limited to ra...

Q: In the context of preparing consolidated financial statements, are the words

In the context of preparing consolidated financial statements, are the words translate and convert synonyms?

Q: a. Define market segmentation. b. What are the

a. Define market segmentation. b. What are the six main causes of market segmentation? c. What are the main disadvantages for a firm to be located in a segmented market?

Q: Why did Novo believe that its cost of capital was too high

Why did Novo believe that its cost of capital was too high compared to its competitors? Why did Novo’s relatively high cost of capital create a competitive disadvantage?

Q: A stock currently sells for $32.00. A 6

A stock currently sells for $32.00. A 6-month call option with a strike of $30.00 has a premium of $4.29, and a 6-month put with the same strike has a premium of $2.64. Assume a 4% continuously compou...

Q: Assuming a $10m investment in one stock, compute the 95

Assuming a $10m investment in one stock, compute the 95% and 99% VaR for stocks A and B over 1-day, 10-day, and 20-day horizons.

Q: What is a collateralized debt obligation (CDO)?

What is a collateralized debt obligation (CDO)?

Q: The newspaper reports that a given June Eurodollar future settled at 93

The newspaper reports that a given June Eurodollar future settled at 93.55. What was the annual yield? How many dollars does this represent?

Q: A stock currently sells for $32.00. A 6

A stock currently sells for $32.00. A 6-month call option with a strike of $35.00 has a premium of $2.27. Assuming a 4% continuously compounded risk-free rate and a 6% continuous dividend yield, what...

Q: Suppose you observe the following effective annual zero-coupon bond yields

Suppose you observe the following effective annual zero-coupon bond yields: 0.030 (1-year), 0.035 (2-year), 0.040 (3-year), 0.045 (4-year), 0.050 (5-year). For each maturity year compute the zero-coup...

Q: Suppose the stock price is $35 and the continuously compounded interest

Suppose the stock price is $35 and the continuously compounded interest rate is 5%. a. What is the 6-month forward price, assuming dividends are zero? b. If the 6-month forward price is $35.50, what i...

Q: Using the information in Table 8.9, what is the

Using the information in Table 8.9, what is the swap price of a 4-quarter oil swap with the first settlement occurring in the third quarter?

Q: Using the zero-coupon bond prices and oil forward prices in

Using the zero-coupon bond prices and oil forward prices in Table 8.9, what is the price of an 8-period swap for which two barrels of oil are delivered in even-numbered quarters and one barrel of oil...

Q: Using the assumptions in Tables 8.5 and 8.6

Using the assumptions in Tables 8.5 and 8.6, verify that equation (8.13) equals 6%. Equation (8.13)

Q: Suppose that 1- and 2-year oil forward prices are

Suppose that 1- and 2-year oil forward prices are $22/barrel and $23/barrel. The 1-and 2-year interest rates are 6% and 6.5%. Show that the new 2-year swap price is $22.483.

Q: Verify that the 1-year yield volatility of the 4-

Verify that the 1-year yield volatility of the 4-year zero-coupon bond price generated by the tree in Figure 25.5 is 0.14.

Q: This problem builds on the previous problem using the same parameters,

This problem builds on the previous problem using the same parameters, only valuing a call option instead of a bond. Using Monte Carlo, simulate the Vasicek process for 3 years. For each simulation tr...

Q: What is the price of a 3-year interest rate cap

What is the price of a 3-year interest rate cap with an 11.5% (effective annual) cap rate? For the first three problems, use the following information:

Q: A stock currently sells for $32.00. A 6

A stock currently sells for $32.00. A 6-month call option with a strike of $30.00 has a premium of $4.29, and a 6-month put with the same strike has a premium of $2.64. Assume a 4% continuously compou...

Q: Suppose the exchange rate is 0.95 $/=C, the

Suppose the exchange rate is 0.95 $/=C, the euro-denominated continuously compounded interest rate is 4%, the dollar-denominated continuously compounded interest rate is 6%, and the price of a 1-year...

Q: Let S = $100, K = $105, r

Let S = $100, K = $105, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n =1. a. What are the premium, ∆, and B for a European call? b. What are the premium, ∆, and B for a European put?

Q: Assuming a $10m investment in one stock, compute the 95

Assuming a $10m investment in one stock, compute the 95% and 99% VaR for stocks A and B over 1-day, 10-day, and 20-day horizons.

Q: Using the same assumptions as in Example 26.3, compute

Using the same assumptions as in Example 26.3, compute VaR with and without the mean, assuming correlations of −1, −0.5, 0, 0.5, and 1. Is risk eliminated with a correlation of −1? If not, why not?

Q: Consider the expression in equation (26.6). What is

Consider the expression in equation (26.6). What is the exact probability that, over a 1-day horizon, stock A will have a loss?

Q: Suppose you observe the following 1-year implied forward rates:

Suppose you observe the following 1-year implied forward rates: 0.050000 (1- year), 0.034061 (2-year), 0.036012 (3-year), 0.024092 (4-year), 0.001470 (5-year). For each maturity year compute the zero-...

Q: Suppose you observe the following continuously compounded zero-coupon bond yields

Suppose you observe the following continuously compounded zero-coupon bond yields: 0.06766 (1-year), 0.05827 (2-year), 0.04879 (3-year), 0.04402 (4-year), 0.03922 (5-year). For each maturity year comp...

Q: If all national markets have market risk, is all market risk

If all national markets have market risk, is all market risk the same?

Q: Explain how the concept of macroeconomic uncertainty expands the scope of analyzing

Explain how the concept of macroeconomic uncertainty expands the scope of analyzing operating exposure.

Q: The objective of both operating and transaction exposure management is to anticipate

The objective of both operating and transaction exposure management is to anticipate and influence the effect of unexpected changes in exchange rates on a firm’s future cash flows. What strategic alte...

Q: Operating and transaction exposures can be partially managed by adopting operating or

Operating and transaction exposures can be partially managed by adopting operating or financing policies that offset anticipated foreign exchange exposures. What are four of the most commonly employed...

Q: Answer the following: a. Explain how matching currency

Answer the following: a. Explain how matching currency cash flows can offset operating exposure. b. Give an example of matching currency cash flows.

Q: An alternative arrangement for managing operating exposure between firms with a continuing

An alternative arrangement for managing operating exposure between firms with a continuing buyer-supplier relationship is risk sharing. Explain how risk sharing works.

Q: What are the major differences in translating liabilities between the current rate

What are the major differences in translating liabilities between the current rate method and the temporal method?

Q: Name the four main contractual instruments used to hedge transaction exposure.

Name the four main contractual instruments used to hedge transaction exposure.

Q: What is a mortgage-backed security (MBS)?

What is a mortgage-backed security (MBS)?

Q: Check The Wall Street Journal to find the United States locations for

Check The Wall Street Journal to find the United States locations for trading foreign exchange futures contracts.

Q: The newspaper reports that a given June Eurodollar future settled at 93

The newspaper reports that a given June Eurodollar future settled at 93.55. What was the annual yield? How many dollars does this represent?

Q: How should an MNE factor host country inflation into its evaluation of

How should an MNE factor host country inflation into its evaluation of an investment proposal?

Q: Smith Company and Jones Company enter into an interest rate swap,

Smith Company and Jones Company enter into an interest rate swap, with Smith paying fixed interest to Jones, and Jones paying floating interest to Smith. Smith now goes bankrupt, and so defaults on it...

Q: Convert the following indirect quotes to direct quotes, and direct quotes

Convert the following indirect quotes to direct quotes, and direct quotes to indirect quotes: a. Euro: €1.22/$ (indirect quote) b. Russia: Rubl 30/$ (indirect quote c. Canada: $0.72/C$ (direct quote)...

Q: The IMF classifies all exchange rate regimes into eight specific categories that

The IMF classifies all exchange rate regimes into eight specific categories that are summarized in this chapter. Under which exchange rate regime would you classify each of the following countries?

Q: The U.S. dollar has maintained or increased its value

The U.S. dollar has maintained or increased its value over the past 20 years, despite running a gradually increasing current account deficit. Why has this phenomenon occurred?

Q: Brazil has experienced periodic depreciation of its currency over the past 20

Brazil has experienced periodic depreciation of its currency over the past 20 years, despite occasionally running a current account surplus. Why has this phenomenon occurred?

Q: Technically, what is a sovereign default?

Technically, what is a sovereign default?

Q: It has been claimed that failures in corporate governance have hampered the

It has been claimed that failures in corporate governance have hampered the growth and profitability of some prominent firms located in emerging markets. What are some typical causes of these failures...

Q: The measurement of all international economic transactions between the residents of a

The measurement of all international economic transactions between the residents of a country and foreign residents is called the balance of payments (BOP). What institution provides the primary sourc...

Q: If a country follows a fixed exchange rate regime, what macroeconomic

If a country follows a fixed exchange rate regime, what macroeconomic variables could cause the fixed exchange rate to be devalued?

Q: Why have eurocurrencies and LIBOR remained the centerpiece of the global financial

Why have eurocurrencies and LIBOR remained the centerpiece of the global financial marketplace for so long?

Q: What is the effect of market liquidity and segmentation on a firm

What is the effect of market liquidity and segmentation on a firm capital.

Q: What is a collateralized debt obligation (CDO)?

What is a collateralized debt obligation (CDO)?

Q: If the BOP were viewed as an accounting statement, would it

If the BOP were viewed as an accounting statement, would it be a balance sheet of the country’s wealth, an income statement of the country’s earnings, or a funds flow statement of money into and out o...

Q: Why does LIBOR receive so much attention in the global financial markets

Why does LIBOR receive so much attention in the global financial markets?

Q: What is the difference between a “real” asset and a

What is the difference between a “real” asset and a “financial” asset?

Q: What are the benefits of achieving a lower cost and greater availability

What are the benefits of achieving a lower cost and greater availability of capital?

Q: In January 2002 the government of Argentina broke away from its currency

In January 2002 the government of Argentina broke away from its currency board system that had tied the peso to the U.S. dollar, and devalued the peso from APs1.0000/$ to APs1.4000/$. This caused some...

Q: Explain the strategies used by an MNE to counter blocked funds.

Explain the strategies used by an MNE to counter blocked funds. What can a multinational firm do to transfer funds out of countries having exchange or remittance restrictions? At least six popular str...

Q: Why would anyone, individual or corporation, want to deposit U

Why would anyone, individual or corporation, want to deposit U.S. dollars in a bank outside of the United States, when the natural location for such deposits would be a bank within the United States?...

Q: What, if anything, is a “euro-euro?”

What, if anything, is a “euro-euro?”

Q: What are the main types of political risks that are global in

What are the main types of political risks that are global in origin?

Q: Diagram the life span of an exposure arising from selling a product

Diagram the life span of an exposure arising from selling a product on open account. On the diagram define and show quotation, backlog, and billing exposures.

Q: Given that eGain Communications was up by almost 412 percent for 2011

Given that eGain Communications was up by almost 412 percent for 2011, why didn’t all investors hold eGain Communications?

Q: Define financial distress using the stock-based and flow-based

Define financial distress using the stock-based and flow-based approaches.

Q: Companies pay rating agencies such as Moody’s and S&P to

Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so...

Q: True or false: The unsystematic risk of a share of stock

True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock...

Q: Why is it not necessarily bad for the operating cash flow to

Why is it not necessarily bad for the operating cash flow to be negative for a particular period?

Q: How can the return on a portfolio be expressed in terms of

How can the return on a portfolio be expressed in terms of a factor model?

Q: Critically evaluate the following statements: Playing the stock market is like

Critically evaluate the following statements: Playing the stock market is like gambling. Such speculative investing has no social value other than the pleasure people get from this form of gambling.

Q: Why is the use of debt financing referred to as financial “

Why is the use of debt financing referred to as financial “leverage”?

Q: A put option and a call option with an exercise price of

A put option and a call option with an exercise price of $85 and three months to expiration sell for $2.40 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuous...

Q: Your company currently uses traditional capital budgeting techniques, including net present

Your company currently uses traditional capital budgeting techniques, including net present value. After hearing about the use of real option analysis, your boss decides that your company should use r...