Question: You are using the arbitrage pricing model

> You are trying to estimate the beta of a private firm that manufactures home appliances. You have managed to obtain betas for publicly traded firms that also manufacture home appliances. The private firm has a debt equity ratio of 25% and faces a tax rat

> You have been asked to assess whether Walgreen, a drugstore chain, is correctly priced relative to its competitors in the drugstore industry. The following are the price/sales ratios, profit margins, and other relative details of the firms in the drugsto

> Assume now that you have been asked to forecast cash flows that you will have available to repurchase stock and pay dividends during the next five years for Conrail (from Problem 18). In making these forecasts, you can assume the following: • Net income

> Intel has an EBIT of $3.4 billion and faces a marginal tax rate of 36.50%. It currently has $1.5 billion in debt out- standing, and a market value of equity of $51 billion. The beta for the stock is 1.35, and the pretax cost of debt is 6.80%. The Treasur

> A business in the 45% tax bracket is considering borrowing money at 10%. a. What is the after-tax interest rate on the debt? b. What is the after-tax interest rate if only half of the interest expense is allowed as a tax deduction? c. Would your answer c

> You are examining the viability of a capital investment in which your firm is interested. The project will require an initial investment of $500,000 and the projected revenues are $400,000 a year for five years. The projected cost-of-goods-sold is 40% of

> You are helping a manufacturing firm decide whether it should invest in a new plant. The initial investment is expected to be $50 million, and the plant is expected to generate after-tax cash flows of $5 million a year for the next twenty years. There wi

> Chrysler, the automotive manufacturer, had a beta of 1.05 in 1995. It had $13 billion in debt outstanding in that year and 355 million shares trading at $50 per share. The firm had a cash balance of $8 billion at the end of 1995. The marginal tax rate wa

> Now assume that Plastico is considering a project that re- quires an initial investment of $100 million and has the following projected income statement (depreciation for the project is expected to be $5 million a year forever): This project is going to

> Barring the case of multiple IRRs, is it possible for the NPV of a project to be positive while the IRR is less than the discount rate? Explain.

> Longs Drug, a large U.S. drugstore chain operating primarily in northern California, had sales per share of $122 on which it reported earnings per share of $2.45 and paid a dividend per share of $1.12. The dividends at the company is expected to grow 6%

> You are analyzing the dividend policy of Conrail, a major railroad, and you have collected the following information from the past five years The average debt ratio during this period was 40%, and the total noncash working capital at the end of 1990 was

> You are trying to evaluate whether United Airlines (UAL) has any excess debt capacity. In 1995, UAL had 12.2 million shares outstanding at $210 per share and debt outstanding of approximately $3 billion (book as well as market value). The debt had a rati

> MVP, a manufacturing firm with no debt outstanding and a market value of $100 million, is considering borrowing $40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 35%, answer the fol

> You run a financial service firm where you replace your employee’s computers every three years. You have 5,000 employees, and each computer costs $2,500 currently—the old computers can be sold for $500. The new computers are generally depreciated straigh

> You are trying to estimate the NPV of a three-year project, where the discount rate is expected to change over time. a. Estimate the NPV of this project. Would you take this project? b. Estimate the IRR of this project. How would you use the IRR to decid

> Time Warner, the entertainment conglomerate, has a beta of 1.61. Part of the reason for the high beta is the debt left over from the leveraged buyout of Time by Warner in 1989, which amounted to $10 billion in 1995. The market value of equity at Time War

> You are trying to estimate a price per share on an IPO of a company involved in environmental waste disposal. The company has a book value per share of $20 and earned $3.50 per share in the most recent time period. Although it does not pay dividends, the

> Z-Tec, a firm providing Internet services, reported net income of $10 million in the most recent year, while making $25 million in capital expenditures (depreciation was $5 million). The firm had no working capital needs and uses no debt. a. Can the firm

> A commodity bond links interest and principal payments to the price of a commodity. Differentiate a commodity bond from a straight bond and then from equity. How would you factor these differences into your analysis of the debt ratio of a company that ha

> In 1995, an analysis of the capital structure of Reebok provided the following results on the cost of capital and firm value. This analysis was based on the 1995 EBIT of $420 million and a tax rate of 36.90%. a. Why is the optimal debt ratio for Reebok s

> Assume that SmallTech has net income of $1 million and that the earnings will increase in proportion with the additional capital raised. a. Estimate the earning per share that SmallTech will have after the rights issue described in the last problem. b. A

> You are the manager of a grocery store, and you are considering offering baby-sitting services to your customers. You estimate that the licensing and set up costs will amount to $150,000 initially and that you will be spending about $60,000 annually to p

> The following equation is reproduced from the study by Fama and French of returns between 1963 and 1990. where MV is the market value of equity in hundreds of millions of dollar and BV is the book value of equity in hundreds of millions of dollars. The r

> NCH, which markets cleaning chemicals, insecticides, and other products, paid dividends of $2.00 per share on earnings of $4.00 per share. The book value of equity per share was $40.00, and earnings are expected to grow 5% a year in the long term. The st

> Boston Turkey is a publicly traded firm, with the following income statement and balance sheet from its most recent financial year: Boston Turkey expects its revenues to grow 10% next year and its expenses to remain at 40% of revenues. The depreciation a

> You have run a series of regressions of firm value changes at Motorola, the semiconductor company, against changes in a number of macroeconomic variables. The results are summarized here: Change in Firm Value = 0.05 − 3.87(Change in Long − Term Interest

> Kansas City Southern, a railroad company, had debt out- standing of $985 million and 40 million shares trading at $46.25 per share in March 1995. It earned $203 million in EBIT, and faced a marginal tax rate of 36.56%. The firm was interested in estimati

> You are analyzing a project with a thirty-year lifetime, with the following characteristics: • The project will require an initial investment of $20 million and additional investments of $5 million in year 10 and $5 million in year20. • The project will

> You have just run a regression of monthly returns on MAD, a newspaper and magazine publisher, against returns on the S&P 500, and arrived at the following result: The regression has an R 2 of 22%. The current Treasure bill rate is 5.5% and the curren

> A closely held, publicly traded firm faces self-imposed capital rationing constraints of $100 million in this period and $75 million in the next period. It has to choose among the following projects (in millions): Set up the linear programming problem, a

> One of the arguments made for having legislation restricting hostile takeovers is that unscrupulous speculators may take over well-run firms and destroy them for personal gain. Allowing for the possibility that this could happen, do you think that this i

> You are analyzing an investment decision, in which you will have to make an initial investment of $10 million and you will be generating annual cash flows to the firm of$2 million every year, growing at 5% a year, forever. a. Estimate the NPV of this pro

> The following were the P/E ratios of firms in the aerospace/defense industry with additional data on expected growth and risk: a. Estimate the average and median P/E ratios. What, if anything, would these averages tell you? b. An analyst concludes that T

> NoLone, an all-equity manufacturing firm, has net in- come of $100 million currently and expects this number to grow at 10% a year for the next three years. The firm’s working capital increased by $10 million this year and is expected to increase by the

> The following table summarizes the results of regressing changes in firm value against changes in interest rates for six major footwear companies: Change in Firm Value = a + b(Change in Long − Term Interest Rates) a. How would you use t

> Bethlehem Steel, one of the oldest and largest steel companies in the United States, is considering the question of whether it has any excess debt capacity. The firm has $527 million in market value of debt outstanding and $1.76 billion in market value o

> You have been asked for advice on a rights offering by a firm with 10 million shares outstanding trading at $50 per share. The firm needs to raise $100 million in new equity. Assuming that the rights subscription price is $25, answer the following questi

> You work for a firm that has limited access to capital markets. As a consequence, it has only $20 million available for new investments this year. The firm does have a ready supply of good projects, and you have listed all the projects. a. Based on the p

> You have run a regression of monthly returns on Amgen, a large biotechnology firm, against monthly returns on the S&P 500 Index, and come up with the following output: The current one-year Treasury bill rate is 4.8% and the current thirty-year bond r

> Societies attempt to keep private interests in line by legislating against behavior that might create social costs (such as polluting the water). If the legislation is comprehensive enough, does the problem of social costs cease to exist? Why or why not?

> Now assume that the facts in Problem 1 remain unchanged except for the depreciation method, which is switched to an accelerated method with the following depreciation schedule: Depreciable asset = Initial investment − Salvage value a. E

> LimeAde, a large soft drink manufacturing firm, is faced with the decision of how much to pay out as dividends to its stockholders. It expects to have a net income of $1,000 (after depreciation of $500), and it has the following projects: The firmâ

> Railroad companies in the United States tend to have long-term, fixed rate, dollar denominated debt. Explain why.

> Upjohn, another major pharmaceutical company, is also considering whether it should borrow more. It has $664 million in book value of debt outstanding and 173 million shares outstanding at $30.75 per share. The company has a beta of 1.17, and faces a tax

> You are the owner of a small and successful firm with an estimated market value of $50 million. You are considering going public. a. What are the considerations you would have in choosing an investment banker? b. You want to raise $20 million in new fina

> You are the manager of a specialty retailing firm that is considering two strategies for getting into the Malaysian retail market. Under the first strategy, the firm will make an initial investment of $10 million and can expect to capture about 5% of the

> You have to pick between three mutually exclusive projects with the following cash flows to the firm: The cost of capital is 12%. a. Which project would you pick using the NPV rule? b. Which project would you pick using the IRR rule? c. How would you exp

> You have just run a regression of monthly returns of American Airlines (AMR) against the S&P 500 over the past five years. You have misplaced some of the output and are trying to derive it from what you have. a. You know the R2 of the regression is 0.36,

> You run a regression of monthly returns of Mapco, an oil- and gas-producing firm, on the S&P 500 Index and come up with the following output for the period 1991–1995. Intercept of the regression = 0.06% X-coefficient of the regression = 0.46 Standard err

> It has been argued by some that convertible bonds (i.e., bonds that are convertible into stock at the option of the bondholders) provide one form of protection against expropriation by stockholders. On what is this argument based?

> Boise Cascade also had debt outstanding of $1.7 billion and a market value of equity of $1.5 billion; the corporate marginal tax rate was 36%. a. Assuming that the current beta of 0.95 for the stock is a reasonable one, estimate the unlevered beta for th

> Businesses with severe capital rationing constraints should use IRR more than NPV. Do you agree? Explain.

> You have been asked to value Office Help, a private firm providing office support services in the New York area. The firm reported pretax operating income of $10 million in its most recent financial year on revenues of $100 million. In the most recent fi

> InTech, a computer software firm that has never paid dividends before, is considering whether it should start doing so. This firm has a cost of equity of 22% and a cost of debt of 10% (the tax rate is 40%). The firm has $100 million in debt outstanding a

> You are trying to decide whether the debt structure that Bethlehem Steel has currently is appropriate, given its assets. You regress the changes in firm value against changes in interest rates and arrive at the following equation Change in Firm Value = 0

> Pfizer, one of the largest pharmaceutical companies in the United States, is considering what its debt capacity is. In March 1995, Pfizer had an outstanding market value of equity of $24.27 billion, debt of $2.8 billion, and an AAA rating. Its beta was 1

> IPOs are difficult to value because firms going public tend to be small, and little information is available about them. Investment bankers have to underprice IPOs because they bear substantial pricing risk. Do you agree with this statement? How would yo

> You are the supervisor of a town where the roads are in need of repair. You have a limited budget and are considering two options: • You can patch up the roads for $100,000, but you will have to repeat this expenditure every year to keep the roads in rea

> Assume that you are advising a Turkish firm on corporate financial questions and that you do not believe that the Turkish stock market is efficient. Would you recommend stock price maximization as the objective? If not, what would you recommend?

> You have a project that does not require an initial in- vestment but has its expenses spread over the life of the project. Can the IRR be estimated for this project? Why or why not?

> U.S. steel companies have generally been considered mature in terms of growth and often take on high leverage to finance their plant and equipment. Steel companies in some emerging markets often have high growth rates and good growth prospects. Would you

> Unicom is a regulated utility serving Northern Illinois. The following table lists the stock prices and dividends on Unicom from 1989 to 1998. a. Estimate the average annual return you would have made on your investment. b. Estimate the standard deviatio

> You are analyzing a valuation done on a stable firm by a well-known analyst. Based on the expected FCFF next year of $30 million, and an expected growth rate of 5%, the analyst has estimated a value of $750 million. How- ever, he has made the mistake of

> GL Corporation, a retail firm, is making a decision on how much it should pay out to its stockholders. It has $100 million in investible funds. The following information is provided about the firm: • It has 100 million shares outstandin

> When firms increase dividends, stock prices tend to increase. One reason given for this price reaction is that dividends operate as a positive signal. What is the increase in dividends signaling to markets? Will markets always believe the signal? Why or

> You have been asked by JJ Corporation, a California- based firm that manufacturers and services digital satellite TV systems, to evaluate its capital structure. They currently have 70 million shares outstanding trading at $10 per share. In addition, the

> You have collected returns on AnaDone , a large diversified manufacturing firm, and the NYSE index for five years: a. Estimate the intercept (alpha) and slope (beta) of the regression. b. If you bought stock in AnaDone today, how much would you expect to

> It is often argued that managers, when asked to maximize stock price, have to choose between being socially responsible and carrying out their fiduciary duty. Do you agree? Can you provide an example where social responsibility and firm value maximizatio

> Battle Mountain is a mining company that mines gold, silver, and copper in mines in South America, Africa, and Australia. The beta for the stock is estimated to be 0.30. Given the volatility in commodity prices, how would you explain the low beta?

> RJR Nabisco also had $10 billion in bonds outstanding at the time of the dividend increase in Problem 10. How would you expect the bonds to react to the announcement? Why?

> You have been asked to value Alcoa and have come up with the following inputs. • The stock has a beta of 0.90, estimated over the last five years. During this period, the firm had an average debt/equity ratio of 20% and an average cash balance of 15%. •

> JLChem Corporation, a chemical manufacturing firm with changing investment opportunities, is considering a major change in dividend policy. It currently has 50 million shares outstanding and pays an annual dividend of $2 per share. The firm current and p

> There is a conflict of interest between stockholders and managers. In theory, stockholders are expected to exercise control over managers through the annual meeting or the board of directors. In practice, why might these disciplinary mechanisms not work?

> The following table lists the stock prices for Microsoft from 1989 to 1998. The company did not pay any dividends during the period. a. Estimate the average annual return you would have made on your investment. b. Estimate the standard deviation and vari

> After Dan’s EFN analysis for East Coast Yachts (see the Mini Case in Chapter 3), Larissa has decided to expand the company’s operations. She has asked Dan to enlist an underwriter to help sell $50 million in new 20-year bonds to finance new construction.

> Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The company has shown a profit every year for the past 18 y

> You have been at your job with East Coast Yachts for a week now and have decided you need to sign up for the company’s 401(k) plan. Even after your discussion with Sarah Brown, the Bledsoe Financial Services representative, you are stil

> You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded 8 years ago by Joe Swan. Joe found a method to manufacture a cheaper battery with much greater energy density than was previous

> Dawn Browne, an investment broker, has been approached by client Jack Thomas about the risk of his investments. Dawn has recently read several articles concerning the risk factors that can potentially affect asset returns, and she has decided to examine

> You are discussing your 401(k) with Dan Ervin when he mentions that Sarah Brown, a representative from Bledsoe Financial Services, is visiting East Coast Yachts today. You decide that you should meet with Sarah, so Dan sets up an appointment for you late

> You recently graduated from college, and your job search led you to East Coast Yachts. Because you felt the company’s business was seaworthy, you accepted a job offer. The first day on the job, while you are finishing your employment pa

> Larissa has been talking with the company’s directors about the future of East Coast Yachts. To this point, the company has used outside suppliers for various key components of the company’s yachts, including engines.

> a. Tao Co. receives $10,000 cash in advance for 4 months of legal services on October 1, 2015, and records it by debiting Cash and crediting Unearned Revenue both for $10,000. It is now December 31, 2015, and Tao has provided legal services as planned. W

> Determine the missing amount from each of the separate situations a, b, and c below. B Assets Liabilities Equity (a) $ ? (b) (c) $ 20,000 34,000 $ 45,000 ? 100,000 154,000 4 40,000

> a. Barga Company purchases $20,000 of equipment on January 1, 2015. The equipment is expected to last five years and be worth $2,000 at the end of that time. Prepare the entry to record one year’s depreciation expense of $3,600 for the equipment as of De

> a. On July 1, 2015, Lopez Company paid $1,200 for six months of insurance coverage. No adjustments have been made to the Prepaid Insurance account, and it is now December 31, 2015. Prepare the journal entry to reflect expiration of the insurance as of De

> a. Total assets of Charter Company equal $700,000 and its equity is $420,000. What is the amount of its liabilities? b. Total assets of Martin Marine equal $500,000 and its liabilities and equity amounts are equal to each other. What is the amount of its

> Complete the following table with either a yes or no regarding the attributes of a proprietorship, partnership and corporation. Attribute Present Proprietorship Partnership Corporation I. Business taxed.. 2. Business entity.. 3. Logal entity ..

> Selected financial information of Banji Company for the year ended December 31, 2015, follows. Required Prepare the 2015 statement of cash flows for Banji Company. Cash from investing activities $1,600 Net increase in cash 400 Cash from financing act

> Following is selected financial information of Audi Company for the year ended December 31, 2015. Required Prepare the 2015 statement of owner’s equity for Audi Company. A. Audi, Capital, Dec. 31, 2015 $47,000 A. Audi, Withdrawals

> Following is selected financial information for Kojo Company for the year ended December 31, 2015. Required Prepare the 2015 statement of owner’s equity for Kojo Company. K. Kojo, Capital, Dec. 31, 2015. $14,000 K. Kojo, Withdrawa

> Selected financial information for Solar Company for the year ended December 31, 2015, follows. Required Prepare the 2015 income statement for Solar Company. Expenses ..... $40,000 Revenues $68,000 Net income $28,000 .... ... .... ...

> The following is selected financial information for Edison Energy Company for the year ended December 31, 2015: revenues, $55,000; expenses, $40,000; net income, $15,000. Required Prepare the 2015 calendar-year income statement for Edison Energy Company

> The following is selected financial information for Safari Company as of December 31, 2015. Required Prepare the balance sheet for Safari Company as of December 31, 2015. Liabilities $64,000 Equity $50,000 Assets $114,000 ....... .....

> During the year, a company recorded prepayments of expenses in asset accounts, and cash receipts of unearned revenues in liability accounts. At the end of its annual accounting period, the company must make three adjusting entries: (1) accrue salaries e

> The following is selected financial information for Armani Company as of December 31, 2015: liabilities, $44,000; equity, $46,000; assets, $90,000. Required Prepare the balance sheet for Armani Company as of December 31, 2015.

> Refer to Samsung’s 2013 balance sheet in Appendix A near the end of the book. Confirm that its total assets equal its total liabilities plus total equity. Samsung’s 2013 Balance Sheet from Appendix A: / Samsun

> Identify the dollar amounts of Google’s 2013 assets, liabilities, and equity as reported in its statements in Appendix A near the end of the book. Google’s 2013 Statements from Appendix A: // Google Inc. CONS

> Refer to the financial statements of Apple in Appendix A near the end of the book. To what level of significance are dollar amounts rounded? What time period does its income statement cover? Financial Statements from Appendix A: Apple Inc. CONSO