Question: For fiscal year 2015, Wal-Mart Stores,

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

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

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

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

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

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. What is Mydeco’s market capitalization at the end of each year? b. What is Mydeco’s market-to-book ratio at the end of each year?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

> ABC Corporation announced that it will pay a dividend to all shareholders of record as of Monday, April 2, 2012. It takes three business days of a purchase for the new owners of a share of stock to be registered. a. When is the last day an investor can p

> Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent transactio

> At current tax rates, which of the following investors are most likely to hold a stock that has a high dividend yield: a. individual investors, b. pension funds, c. mutual funds, d. corporations

> On Monday, November 15, 2004, TheStreet.com reported: “An experiment in the efficiency of financial markets will play out Monday following the expiration of a $3.08 dividend privilege for holders of Microsoft.” The story went on: “The stock is currently

> You purchased CSH stock for $40 one year ago and it is now selling for $50. The company has announced that it plans a $10 special dividend. You are considering whether to sell the stock now, or wait to receive the dividend and then sell. a. Assuming 2008

> Suppose that all capital gains are taxed at a 25% rate, and that the dividend tax rate is 50%. Arbuckle Corp. is currently trading for $30, and is about to pay a $6 special dividend. a. Absent any other trading frictions or news, what will its share pric

> The dividend tax cut passed in 2003 lowered the effective dividend tax rate for a U.S. investor in the highest tax bracket to a historic low. During which other periods in the last 35 years was the effective dividend tax rate as low?

> What was the effective dividend tax rate for a U.S. investor in the highest tax bracket who planned to hold a stock for one year in 1981? How did the effective dividend tax rate change in 1982 when the Reagan tax cuts took effect?

> Using Table 17.2, for each of the following years, state whether dividends were tax disadvantaged or not for individual investors with a one-year investment horizon: a. 1985 b. 1989 c. 1995 d. 1999 e. 2005 Table 17.2: Year Capital Gains Dividends 1

> What options does a firm have to spend its free cash flow (after it has satisfied all interest obligations)?

> As in Problem 1, Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally

> You have received two job offers. Firm A offers to pay you $85,000 per year for two years. Firm B offers to pay you $90,000 for two years. Both jobs are equivalent. Suppose that firm A’s contract is certain, but that firm B has a 50% chance of going bank

> Suppose Tefco Corp. has a value of $100 million if it continues to operate, but has outstanding debt of $120 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $20 million, and the remaining $80 million will go to credi

> Which type of asset is more likely to be liquidated for close to its full market value in the event of financial distress: a. An office building or a brand name? b. Product inventory or raw materials? c. Patent rights or engineering “know-how”?

> Which type of firm is more likely to experience a loss of customers in the event of financial distress: a. Campbell Soup Company or Intuit, Inc. (a maker of accounting software)? b. Allstate Corporation (an insurance company) or Adidas AG (maker of athle

> We R Toys” (WRT) is considering expanding into new geographic markets. The expansion will have the same business risk as WRT’s existing assets. The expansion will require an initial investment of $50 million and is expected to generate perpetual EBIT of

> During the Internet boom of the late 1990s, the stock prices of many Internet firms soared to extreme heights. As CEO of such a firm, if you believed your stock was significantly overvalued, would using your stock to acquire non-Internet stocks be a wise

> According to the managerial entrenchment theory, managers choose capital structure so as to preserve their control of the firm. On the one hand, debt is costly for managers because they risk losing control in the event of default. On the other hand, if t

> When a firm defaults on its debt, debt holders often receive less than 50% of the amount they are owed. Is the difference between the amount debt holders are owed and the amount they receive a cost of bankruptcy?

> Which of the following industries have low optimal debt levels according to the trade-off theory? Which have high optimal levels of debt? a. Tobacco firms b. Accounting firms c. Mature restaurant chains d. Lumber companies e. Cell phone manufacturers

> For fiscal year 2015, Costco Wholesale Corporation (COST) had a net profit margin of 2.05%, asset turnover of 3.48, and a book equity multiplier of 3.15. a. Use this data to compute Costco’s ROE using the DuPont Identity. b. If Costco’s managers wanted t

> If it is managed efficiently, Remel Inc. will have assets with a market value of $50 million, $100 million, or $150 million next year, with each outcome being equally likely. However, managers may engage in wasteful empire building, which will reduce the

> Although the major benefit of debt financing is easy to observe—the tax shield—many of the indirect costs of debt financing can be quite subtle and difficult to observe. Describe some of these costs.

> Ralston Enterprises has assets that will have a market value in one year as follows: That is, there is a 1% chance the assets will be worth $70 million, a 6% chance the assets will be worth $80 million, and so on. Suppose the CEO is contemplating a dec

> You own your own 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 need to sell two-thirds of the firm. However,

> Consider the setting of Problems 21 and 22, and suppose Petron Corp. must pay a 25% tax rate on the amount of the final payoff that is paid to equity holders. It pays no tax on payments to, or capital raised from, debt holders. a. Which strategy will Pet

> Consider the setting of Problem 21, and suppose Petron Corp. has debt with a face value of $40 million outstanding. For simplicity assume all risk is idiosyncratic, the risk-free interest rate is zero, and there are no taxes. a. What is the expected valu

> Petron Corporation’s management team is meeting to decide on a new corporate strategy. There are four options, each with a different probability of success and total firm value in the event of success, as shown below: Assume that for

> Baruk Industries has no cash and a debt obligation of $36 million that is now due. The market value of Baruk’s assets is $81 million, and the firm has no other liabilities. Assume perfect capital markets. a. Suppose Baruk has 10 million shares outstandin

> Sarvon Systems has a debt-equity ratio of 1.2, an equity beta of 2.0, and a debt beta of 0.30. It currently is evaluating the following projects, none of which would change the firm’s volatility (amounts in $ million): a. Which projec

> Dynron Corporation’s primary business is natural gas transportation using its vast gas pipeline network. Dynron’s assets currently have a market value of $150 million. The firm is exploring the possibility of raising $50 million by selling part of its pi

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Was Mydeco able to improve its ROIC in 2016 relative to what it was in 2012? Table 2.5: Mydeco Corp. 2012–2016 (All data as of fiscal year end; in $ million) Incom

> What are the main advantages and disadvantages of organizing a firm as a corporation?

> On May 14, 2008, General Motors paid a dividend of $0.25 per share. During the same quarter GM lost a staggering $15.5 billion or $27.33 per share. Seven months later the company asked for billions of dollars of government aid and ultimately declared ban

> Real estate purchases are often financed with at least 80% debt. Most corporations, however, have less than 50% debt financing. Provide an explanation for this difference using the trade-off theory.

> Your firm is considering issuing one-year debt, and has come up with the following estimates of the value of the interest tax shield and the probability of distress for different levels of debt: Suppose the firm has a beta of zero, so that the appropri

> Facebook, Inc. has no debt. As Problem 21 in Chapter 15 makes clear, by issuing debt Facebook can generate a very large tax shield potentially worth nearly $2 billion. Given Facebook’s success, one would be hard pressed to argue that Facebook’s managemen

> You work for a large car manufacturer that is currently financially healthy. Your manager feels that the firm should take on more debt because it can thereby reduce the expense of car warranties. To quote your manager, “If we go bankrupt, we don’t have t

> Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of four values next year: $150 million, $135 million, $95 million, or $80 million. These outcomes are all equally likely, and this

> Safeco Inc. has no debt, and maintains a policy of holding $10 million in excess cash reserves, invested in risk-free Treasury securities. If Safeco pays a corporate tax rate of 35%, what is the cost of permanently maintaining this $10 million reserve?

> Bay Transport Systems (BTS) currently has $30 million in debt outstanding. In addition to 6.5% interest, it plans to repay 5% of the remaining balance each year. If BTS has a marginal corporate tax rate of 40%, and if the interest tax shields have the sa

> Ten years have passed since Arnell issued $10 million in perpetual interest only debt with a 6% annual coupon, as in Problem 6. Tax rates have remained the same at 35% but interest rates have dropped, so Arnell’s current cost of debt capital is 4%. a. Wh

> Arnell Industries has just issued $10 million in debt (at par). 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 Arnell pays interest of 6% per year on its debt. What is

> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydeco’s ROE each year from 2012 to 2016. b. Compute Mydeco’s ROA each year from 2012 to 2016. c. Which return is more vol

> Braxton Enterprises currently has debt outstanding of $35 million and an interest rate of 8%. Braxton plans to reduce its debt by repaying $7 million in principal at the end of each year for the next five years. If Braxton’s marginal corporate tax rate i

> PMF, Inc., is equally likely to have EBIT this coming year of $10 million, $15 million, or $20 million. Its corporate tax rate is 35%, and investors pay a 15% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective

> Colt Systems will have EBIT this coming year of $15 million. It will also spend $6 million on total capital expenditures and increases in net working capital, and have $3 million in depreciation expenses. Colt is currently an all-equity firm with a corpo

> With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impi’s corporate tax rate is 35% and it pays 8% interest on its debt, how much additional debt can Impi issue this year and still receive the benefit of the in

> Suppose the tax rate on interest income is 35%, and the average tax rate on capital gains and dividend income is 10%. How high must the marginal corporate tax rate be for debt to offer a tax advantage?

> Garnet Corporation is considering issuing risk-free debt or risk-free preferred stock. The tax rate on interest income is 35%, and the tax rate on dividends or capital gains from preferred stock is 15%. However, the dividends on preferred stock are not d

> Markum Enterprises is considering permanently adding $100 million of debt to its capital structure. Markum’s corporate tax rate is 35%. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? b. If investors pay a tax ra

> Facebook, Inc. had no debt on its balance sheet in 2014, but paid $2 billion in taxes. Suppose Facebook were to issue sufficient debt to reduce its taxes by $250 million per year permanently. Assume Facebook’s marginal corporate tax rate is 35% and its b

> Suppose the corporate tax rate is 40%, and investors pay a tax rate of 15% on income from dividends or capital gains and a tax rate of 33.3% on interest income. Your firm decides to add debt so it will pay an additional $15 million in interest each year.

> Rally, Inc., is an all-equity firm with assets worth $25 billion and 10 billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firm’s corporate tax rate is 35%, and Rally plans to keep its outstanding

> In early-2015, United Airlines (UAL) had a market capitalization of $24.8 billion, debt of $12.8 billion, and cash of $5.5 billion. United also had annual revenues of $38.9 billion. Southwest Airlines (LUV) had a market capitalization of $28.8 billion, d

> Suppose Microsoft has 8.75 billion shares outstanding and pays a marginal corporate tax rate of 35%. If Microsoft announces that it will pay out $50 billion in cash to investors through a combination of a special dividend and a share repurchase, and if i

> Milton Industries expects free cash flow 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, and it expects to maintain this level of debt permanentl

> Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.5% on its debt and has a corporate tax rate of 35%. a. If

> Restex maintains a debt-equity ratio of 0.85, and has an equity cost of capital of 12% and a debt cost of capital of 7%. Restex’s corporate tax rate is 40%, and its market capitalization is $220 million. a. If Restex’s free cash flow is expected to be $1

> Rogot Instruments makes fine violins and cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at rate of 35%. Its cost of equity is 12% and its cost of debt is 7%. a. What is Rogot’s pretax WACC? b. Wh

> Pelamed Pharmaceuticals has EBIT of $325 million in 2006. In addition, Pelamed has interest expenses of $125 million and a corporate tax rate of 40%. a. What is Pelamed’s 2006 net income? b. What is the total of Pelamed’s 2006 net income and interest pay