Questions from Corporate Finance

Q: Shadow Corp. has no debt but can borrow at 6.

Shadow Corp. has no debt but can borrow at 6.5 percent. The firm’s WACC is currently 9.8 percent, and the tax rate is 35 percent. a. What is the company’s cost of equity? b. If the company converts to...

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: a. If the company requires a 10 percent return on its investments, should it accept this project? Wh...

Q: Take a look back at Figure 8.4(given below

Take a look back at Figure 8.4(given below). Notice the wide range of coupon rates. Why are they so different?

Q: It is sometimes stated that “the net present value approach assumes

It is sometimes stated that “the net present value approach assumes reinvestment of the intermediate cash flows at the required return.” Is this claim correct? To answer, suppose you calculate the NPV...

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: 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: It is said that the equity holders of a levered firm can

It is said that the equity holders 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: 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: $13, $8, $6.50, and $2.40. Afterwards, the company pledges to maintain a constant 4.5 percent growth rate in divid...

Q: Suppose your company needs $35 million to build a new assembly

Suppose your company needs $35 million to build a new assembly line. Your target debt–equity ratio is .75. The flotation cost for new equity is 6 percent, but the flotation cost for debt is only 2 per...

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...