All Related Questions of Corporate Finance

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 $530,000 per year. You believe the technology used in the machine has a 10-year life; in other w...

Q: Suppose a stock had an initial price of $64 per share

Suppose a stock had an initial price of $64 per share, paid a dividend of $1.20 per share during the year, and had an ending share price of $73. Compute the percentage total return.

Q: With regard to bid and ask prices on a Treasury bond,

With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?

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: 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: 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: Kiedis, Corp., has interest-bearing debt with a market

Kiedis, Corp., has interest-bearing debt with a market value of $65 million. The company also has 2 million shares that sell for $25 per share. What is the debt–equity ratio for this company based on...

Q: In Problem 4, use MM Proposition I to find the price

In Problem 4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? Problem 4: Franklin Corporation is comparing two differen...

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

Edwards Construction currently has debt outstanding with a market value of $75,000 and a cost of 9 percent. The company has EBIT of $6,750 that is expected to continue in perpetuity. Assume there are...

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: The balance sheet for Levy Corp. is shown here in market

The balance sheet for Levy Corp. is shown here in market value terms. There are 14,000 shares of stock outstanding. The company has declared a dividend of $1.60 per share. The stock goes ex dividend...

Q: Vital Silence, Inc., has a project with the following cash

Vital Silence, Inc., has a project with the following cash flows: The company evaluates all projects by applying the IRR rule. If the appropriate interest rate is 9 percent, should the company accep...

Q: If a portfolio has a positive investment in every asset, can

If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?

Q: We have seen that over long periods stock investments have tended to

We have seen that over long periods stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding their...

Q: What are the portfolio weights for a portfolio that has 165 shares

What are the portfolio weights for a portfolio that has 165 shares of Stock A that sell for $43 per share and 120 shares of Stock B that sell for $74 per share?

Q: What are the differences between a k-factor model and the

What are the differences between a k-factor model and the market model?

Q: A stock market analyst is able to identify mispriced stocks by comparing

A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the m...

Q: Some corporations, like one British company that offers its large shareholders

Some corporations, like one British company that offers its large shareholders free crematorium use, pay dividends in kind (i.e., offer their services to shareholders at below-market cost). Should mut...

Q: Zipcar, the car sharing company, went public in April 2011

Zipcar, the car sharing company, went public in April 2011. Assisted by the investment bank Goldman Sachs, Zipcar sold 9.68 million shares at $18 each, thereby raising a total of $174.24 million. By t...

Q: You notice that shares of stock in the Patel Corporation are going

You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you can...

Q: Your company owns a vacant lot in a suburban area. What

Your company owns a vacant lot in a suburban area. What is the advantage of waiting to develop the lot?

Q: Look at Table 10.1 and Figure 10.7(

Look at Table 10.1 and Figure 10.7(Given Below) in the text. When were T-bill rates at their highest over the period from 1926 through 2014? Why do you think they were so high during this period? What...

Q: Suppose a company has a preferred stock issue and a common stock

Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the commo...

Q: In March 2014, BMW announced plans to spend $1 billion

In March 2014, BMW announced plans to spend $1 billion to expand production at its South Carolina plant. The plant produced the second-generation BMW X3 as well as the company’s X5 and X6 models. The...

Q: The Dybvig Corporation’s common stock has a beta of 1.17

The Dybvig Corporation’s common stock has a beta of 1.17. If the risk-free rate is 3.8 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital?

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

Scarlett Corp. uses no debt. The weighted average cost of capital is 8.4 percent. If the current market value of the equity is $43 million and there are no taxes, what is EBIT?

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 3.7 percent. What rate would you expect to see on a Treasury bill?

Q: Lee Ann, Inc., has declared a $7.50

Lee Ann, Inc., has declared a $7.50 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld when the dividend...

Q: A stock has a beta of 1.15, the expected

A stock has a beta of 1.15, the expected return on the market is 10.6 percent, and the risk-free rate is 4.5 percent. What must the expected return on this stock be?

Q: An investment offers a total return of 13 percent over the coming

An investment offers a total return of 13 percent over the coming year. Alan Wingspan thinks the total real return on this investment will be only 8 percent. What does Alan believe the inflation rate...

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 11.6 percent. If the inflation rate last year was 5.3 percent, what was your real return?

Q: Bruce & Co. expects its EBIT to be $145,

Bruce & Co. expects its EBIT to be $145,000 every year forever. The company can borrow at 8 percent. The company currently has no debt, and its cost of equity is 14 percent. If the tax rate is 35 perc...

Q: A stock has an expected return of 13.4 percent,

A stock has an expected return of 13.4 percent, its beta is 1.20, and the risk-free rate is 4.4 percent. What must the expected return on the market be?

Q: A stock has an expected return of 11.2 percent,

A stock has an expected return of 11.2 percent, a beta of 1.15, and the expected return on the market is 10.4 percent. What must the risk-free rate be?

Q: A call option has an exercise price of $80 and matures

A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the ca...

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: Using information from the previous chapter about capital market history, determine

Using information from the previous chapter about capital market history, determine the return on a portfolio that is equally invested in large-company stocks and long-term government bonds. What is t...

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: A researcher has determined that a two-factor model is appropriate

A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 3.6...

Q: You own a portfolio that is 20 percent invested in Stock X

You own a portfolio that is 20 percent invested in Stock X, 45 percent in Stock Y, and 35 percent in Stock Z. The expected returns on these three stocks are 11 percent, 17 percent, and 14 percent, res...

Q: Shiller Corporation will pay a $2.75 per share dividend

Shiller Corporation will pay a $2.75 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 11 percent on your inves...

Q: Mullineaux Corporation has a target capital structure of 70 percent common stock

Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 11.5 percent, and the cost of debt is 5.9 percent. The relevant tax rate is...

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 2014? a. In nominal terms? b. In real terms?

Q: Siblings, Inc., is expected to maintain a constant 5.

Siblings, Inc., is expected to maintain a constant 5.7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.6 percent, what is the required return on the compan...

Q: A stock is currently selling for $47 per share. A

A stock is currently selling for $47 per share. A call option with an exercise price of $50 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, comp...

Q: Miller Manufacturing has a target debt–equity ratio of .55

Miller Manufacturing has a target debt–equity ratio of .55. Its cost of equity is 12.5 percent, and its cost of debt is 7 percent. If the tax rate is 35 percent, what is the company’s WACC?

Q: A put option that expires in six months with an exercise price

A put option that expires in six months with an exercise price of $75 sells for $4.89. The stock is currently priced at $72, and the risk-free rate is 3.6 percent per year, compounded continuously. Wh...

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 13 years and will then cease paying dividends forever. If the required return on this stock...

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 $6.18 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuous...

Q: Yan Yan Corp. has a $2,000 par value

Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the dollar...

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 $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuousl...

Q: Union Local School District has bonds outstanding with a coupon rate of

Union Local School District has bonds outstanding with a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. The yield to maturity on these bonds is 3.9 percent, and the bonds have...

Q: Dan Ervin was recently hired by East Coast Yachts to assist the

Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the company’s financial performance. Dan graduated...

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: 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: Ethics Firms sometimes use the threat of a bankruptcy filing to force

Ethics 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 shiel...

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: 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 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: 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 syn...

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, 5 days past due. If annual credit sales are $8.95 million, what is the company’s balance sheet amount in acco...

Q: Suppose the current exchange rate for the Polish zloty is Z 3

Suppose the current exchange rate for the Polish zloty is Z 3.29. The expected exchange rate in three years is Z 3.41. What is the difference in the annual inflation rates for the United States and Po...

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: Holmes, Inc., has offered $295 million cash for all

Holmes, Inc., has offered $295 million cash for all of the common stock in Watson Corporation. Based on recent market information, Watson is worth $278 million as an independent operation. If the merg...

Q: If a company moves to a JIT inventory management system, what

If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity (ROE)? (Hint: Remember t...

Q: Last month, BlueSky Airline announced that it would stretch out its

Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The i...

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: Ethics Several firms have entered bankruptcy, or threatened to enter bankruptcy

Ethics 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...

Q: In the previous problem, are the shareholders of Firm T better

In the previous problem, 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 bet...

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: 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: No More Pencils, Inc., disburses checks every two weeks that

No More Pencils, Inc., disburses checks every two weeks that average $61,700 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an intere...

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 2016: Credit sales are collected as follows: 65 percent in the month of the sale. 20 percent in the month after the sal...

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 today is January 8, 2015, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2015 for an upcoming pro...

Q: You place an order for 400 units of inventory at a unit

You place an order for 400 units of inventory at a unit price of $115. 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: Suppose a company in which you own stock has attracted two takeover

Suppose a company in which you own stock has attracted two takeover offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment affect your answer...

Q: If a company’s inventory carrying costs are $5 million per year

If a company’s inventory carrying costs are $5 million per year and its fixed order costs are $8 million per year, do you think the firm keeps too much inventory on hand or too little? Why?

Q: We discussed five international capital market relationships: Relative PPP, IRP

We discussed five international capital market relationships: Relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think...

Q: It is sometimes argued that excess cash held by a firm can

It is sometimes argued that excess cash held by a firm can aggravate agency problems (discussed in Chapter 1) and, more generally, reduce incentives for shareholder wealth maximization. How would you...

Q: Last month, BlueSky Airline announced that it would stretch out its

Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The i...

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: 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: 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: Leeloo, Inc., is considering a change in its cash-

Leeloo, 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 the company should proceed or not. D...

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 6.97 and Kr 7.06, respectively. The annual risk-free rate in the United States is 3 percent, and the annual risk-free rate in...

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: 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 $2.9 million in collections a day and requires a $350,000 compensating balance. No More Books is contemplating canc...

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 2016: The company predicts that 5 percent of its credit sales will never be collected, 35 perce...

Q: Consider the following premerger information about Firm A and Firm B:

Consider the following premerger information about Firm A and Firm B: Assume that Firm A acquires Firm B via an exchange of stock at a price of $13 for each share of B’s stock. Bot...

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: Last month, BlueSky Airline announced that it would stretch out its

Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The i...

Q: If you are an exporter who must make payments in foreign currency

If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is th...

Q: One option a firm usually has with any excess cash is to

One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?

Q: Suppose a firm enters a fixed for floating interest rate swap with

Suppose a firm enters a fixed for floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.

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: Last month, BlueSky Airline announced that it would stretch out its

Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The i...

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

In a typical month, the Warren Corporation receives 140 checks totaling $113,500. These are delayed four days on average. What is the average daily float?

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: Fhloston Manufacturing uses 1,860 switch assemblies per week and then

Fhloston Manufacturing uses 1,860 switch assemblies per week and then reorders another 1,860. If the relevant carrying cost per switch assembly is $6.25, and the fixed order cost is $730, is the compa...

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 1.95 percent annually. What do you estimate the inflation rate to be in: a. Australia...

Q: Time Bird’s Eye Treehouses, Inc., a Kentucky company, has

Time Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbo...

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: Show that the NPV of a merger can be expressed as the

Show that the NPV of a merger can be expressed as the value of the synergistic benefits, DV, less the merger premium.

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: Another option usually available is to reduce the firm’s outstanding debt.

Another option usually available is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?

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: 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: 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 2015 cocoa futures contract on January 8, 2015, at the last price of the day. What will your profit or loss be if...

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: The Trektronics store begins each week with 675 phasers in stock.

The Trektronics store begins each week with 675 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $73 per year and the fixed order cost is $340, what...

Q: Suppose the spot and three-month forward rates for the yen

Suppose the spot and three-month forward rates for the yen are ¥115.13 and ¥114.35, respectively. a. Is the yen expected to get stronger or weaker? b. What would you estimate is the difference between...

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: 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 $185 million. In addition to this basic trend, the se...

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 6.4 percent paid semiannually, and the market interest rate is 4.9 percent?

Q: An unfortunately common practice goes like this (Warning: Don’t try

An unfortunately common practice goes like this (Warning: Don’t try this at home): Suppose you are out of money in your checking account; however, your local grocery store will, as a convenience to yo...

Q: Last month, BlueSky Airline announced that it would stretch out its

Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to “control costs and optimize cash flow.” The i...

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: 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: Define financial distress using the stock-based and flow-based

Define financial distress using the stock-based and flow-based approaches.

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: Harrods PLC has a market value of £360 million and 30 

Harrods PLC has a market value of £360 million and 30 million shares outstanding. Selfridge Department Store has a market value of £144 million and 18 million shares outstanding. Harrods is contemplat...

Q: Suppose the spot exchange rate for the Hungarian forint is HUF 251

Suppose the spot exchange rate for the Hungarian forint is HUF 251. 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: 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 t...

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 (S 0) multiplied by 1, plus the appropriate interest rate betwe...

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: 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: 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: 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 bo...

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: Is it possible for a firm to have too much cash?

Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?

Q: If financial markets are perfectly competitive and the Eurodollar rate is above

If financial markets are perfectly competitive and the Eurodollar rate is above that offered in the U.S. loan market, you would immediately want to borrow money in the United States and invest it in E...

Q: In May 2004, Sysco Corporation, the distributor of food and

In May 2004, Sysco Corporation, the distributor of food and food-related products (not to be confused with Cisco Systems), announced it had signed an interest rate swap. The interest rate swap effecti...

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: 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: 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: 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 ana...

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: 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: a. What is the...

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: 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 700 bicycles. The average cost to the shop of a bicycle is $650....

Q: What are some of the characteristics of a firm with a long

What are some of the characteristics of a firm with a long operating cycle?

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: 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 43,000 solaris, debt in the amount of 14,000 solaris, and equity of 29,000 sol...

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: Kevin Nomura is a Japanese student who is planning a one-

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: 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: In Problem 14, what is the break-even quantity for

In Problem 14, what is the break-even quantity for the new credit policy?

Q: From our discussion of the Fisher effect in Chapter 8, we

From our discussion of the Fisher effect in Chapter 8, 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 +...

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 3,150 units and all other values remain 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.

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: Warf Computers, Inc., was founded 15 years ago by Nick

Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small initial investment to start the company was made by Nick and his friends. Over the years, this same group...

Q: Solar Engines manufactures solar engines for tractor-trailers. Given the

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: 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: Ben Bates graduated from college six years ago with a finance undergraduate

Ben Bates graduated from college six years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degr...

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: 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: The Paden Corporation has annual sales of $29.5 million

The Paden Corporation has annual sales of $29.5 million. The average collection period is 27 days. What is the average investment in accounts receivable as shown on the balance sheet?

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 £100? Why? c. What is...

Q: Each business day, on average, a company writes checks totaling

Each business day, on average, a company writes checks totaling $14,400 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its...

Q: Blizzard Corp. has a book value of equity of $14

Blizzard Corp. has a book value of equity of $14,750. Long-term debt is $8,300. Net working capital, other than cash, is $1,950. Fixed assets are $20,730 and current liabilities are $1,930. How much c...

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: 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 2015 silver futures contracts on January 8, 2015, at the last price of the day. What will your profit or loss be if...

Q: What are some benefits of financial distress?

What are some benefits of financial distress?

Q: In what form is trade credit most commonly offered? What is

In what form is trade credit most commonly offered? What is the credit instrument in this case?

Q: Seth Bullock, the owner of Bullock Gold Mining, is evaluating

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. H...

Q: Suppose the rate of inflation in Mexico will run about 3 percent

Suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso...

Q: What options are available to a firm if it believes it has

What options are available to a firm if it believes it has too much cash? How about too little?

Q: What are some of the characteristics of a firm with a long

What are some of the characteristics of a firm with a long cash cycle?

Q: After extensive research and development, Goodweek Tires, Inc., has

After extensive research and development, Goodweek Tires, Inc., has recently developed a new tire, the SuperTread, and must decide whether to make the investment necessary to produce and market it. Th...

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: 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: 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: 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 companyâ...

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: Purple Feet Wine, Inc., receives an average of $13

Purple Feet Wine, Inc., receives an average of $13,800 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: Bethesda Mining is a midsized coal mining company with 20 mines located

Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio, Pennsylvania, West Virginia, and Kentucky. The company operates deep mines as well as strip mines. Most of the coal min...

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: Assume that the following balance sheets are stated at book value.

Assume that the following balance sheets are stated at book value. Suppose that Jurion Co. purchases James, Inc. Then suppose the fair market value of James’s fixed assets is $23,000...

Q: Kyoto Joe, Inc., sells earnings forecasts for Japanese securities.

Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 1/15, net 30. Based on experience, 70 percent of all customers will take the discount. a. What is the average co...

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 $65 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise p...

Q: What costs are associated with carrying receivables? What costs are associated

What costs are associated with carrying receivables? What costs are associated with not granting credit? What do we call the sum of the costs for different levels of receivables?

Q: Are stockholders and creditors likely to agree on how much cash a

Are stockholders and creditors likely to agree on how much cash a firm should keep on hand?

Q: What is prepackaged bankruptcy? What is the main benefit of prepackaged

What is prepackaged bankruptcy? What is the main benefit of prepackaged bankruptcy?

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: What are the five Cs of credit? Explain why each is

What are the five Cs of credit? Explain why each is important.

Q: No matter how you look at it, Dow Chemical had busy

No matter how you look at it, Dow Chemical had busy years in 2014 and 2015. In 2014, Dow announced that it was planning to sell its subsidiaries Angus Chemical Company, Sodium Borohydride, and AgroFre...

Q: Bunyan Lumber, LLC, harvests timber and delivers logs to timber

Bunyan Lumber, LLC, harvests timber and delivers logs to timber mills for sale. The company was founded 70 years ago by Pete Bunyan. The current CEO is Paula Bunyan, the granddaughter of the founder....

Q: Tidwell, Inc., has weekly credit sales of $31,

Tidwell, Inc., has weekly credit sales of $31,400, and the average collection period is 29 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable figu...

Q: Suppose the spot exchange rate for the Canadian dollar is Can $

Suppose the spot exchange rate for the Canadian dollar is Can $1.13 and the six-month forward rate is Can$1.16. a. Which is worth more, a U.S. dollar or a Canadian dollar? b. Assuming absolute PPP hol...

Q: Delay Your neighbor goes to the post office once a month and

Delay Your neighbor goes to the post office once a month and picks up two checks, one for $9,700 and one for $2,600. The larger check takes four days to clear after it is deposited; the smaller one ta...

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: 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....

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 $1,210 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at $1...

Q: Why doesn’t financial distress always cause firms to die?

Why doesn’t financial distress always cause firms to die?

Q: Are exchange rate changes necessarily good or bad for a particular company

Are exchange rate changes necessarily good or bad for a particular company?

Q: What is the difference between cash management and liquidity management?

What is the difference between cash management and liquidity management?

Q: Grohl Manufacturing, Inc., has recently installed a just-in

Grohl Manufacturing, Inc., has recently installed a just-in-time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating cycle...

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: 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: 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: 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: Suppose the Japanese yen exchange rate is ¥126 5 $1

Suppose the Japanese yen exchange rate is ¥126 5 $1, and the British pound exchange rate is £1 5 $1.53. a. What is the cross-rate in terms of yen per pound? b. Suppose the cross-rate is ¥195.8 5 £1. I...

Q: Your firm has an average receipt size of $119. A

Your firm has an average receipt size of $119. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,650 checks per...

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 $335. The company has a 45-day collection per...

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 aftertax annual cash flow by $1.3 million indefinitel...

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 $1.36 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline...

Q: What is the difference between liquidation and reorganization?

What is the difference between liquidation and reorganization?

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: At one point, Duracell International confirmed that it was planning to

At one point, Duracell International confirmed that it was planning to open battery manufacturing plants in China and India. Manufacturing in these countries allows Duracell to avoid import duties of...

Q: Why is a preferred stock with a dividend tied to short-

Why is a preferred stock with a dividend tied to short-term interest rates an attractive short-term investment for corporations with excess cash?

Q: Are poison pills good or bad for stockholders? How do you

Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?

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: What are the costs of shortages? Describe them.

What are the costs of shortages? Describe them.

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: 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: Consider the following financial statement information for the Rivers Corporation:

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

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: 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...

Q: Turnover Chen, Inc., has an average collection period of 34

Turnover Chen, Inc., has an average collection period of 34 days. Its average daily investment in receivables is $61,300. What are annual credit sales? What is the receivables turnover?

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: A mail-order firm processes 5,450 checks per month

A mail-order firm processes 5,450 checks per month. Of these, 70 percent are for $55 and 30 percent are for $80. The $55 checks are delayed two days on average; the $80 checks are delayed three days o...

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 6.1 percent paid annually if the bond sells at par?

Q: Which would a firm prefer: A net collection float or a

Which would a firm prefer: A net collection float or a net disbursement float? Why?

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

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

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

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

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 syste...

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 supplie...

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: Essence of Skunk Fragrances, Ltd., sells 5,450 units

Essence of Skunk Fragrances, Ltd., sells 5,450 units of its perfume collection each year at a price per unit of $480. All sales are on credit with terms of 1/10, net 40. The discount is taken by 35 pe...

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 .17 percent per month. The interest rate in Great Britain is .61 percent...

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 8.6 percent paid annually if the bond sells at par?

Q: Suppose a firm has a book balance of $2 million.

Suppose a firm has a book balance of $2 million. At the automatic teller machine (ATM), the cash manager finds out that the bank balance is $2.5 million. What is the situation here? If this is an ongo...

Q: What does it mean to say that a proposed merger will take

What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both operate a...

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: Larissa has been talking with the company’s directors about the future of

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 c...

Q: You recently graduated from college, and your job search led you

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...

Q: You are discussing your 401(k) with Dan Ervin when

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...

Q: Dawn Browne, an investment broker, has been approached by client

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...

Q: You have recently been hired by Swan Motors, Inc. (

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 batt...

Q: You have been at your job with East Coast Yachts for a

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 B...

Q: Stephenson Real Estate Company was founded 25 years ago by the current

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 c...

Q: After Dan’s EFN analysis for East Coast Yachts (see the Mini

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 mil...

Q: The following table lists the stock prices for Microsoft from 1989 to

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 i...

Q: There is a conflict of interest between stockholders and managers. In

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 pract...

Q: JLChem Corporation, a chemical manufacturing firm with changing investment opportunities,

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 a...

Q: You have been asked to value Alcoa and have come up with

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/equi...

Q: RJR Nabisco also had $10 billion in bonds outstanding at the

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?

Q: Battle Mountain is a mining company that mines gold, silver,

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 commod...

Q: It is often argued that managers, when asked to maximize stock

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...

Q: You have collected returns on AnaDone , a large diversified manufacturing firm

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 bough...

Q: You have been asked by JJ Corporation, a California- based

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 o...

Q: When firms increase dividends, stock prices tend to increase. One

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 ma...

Q: GL Corporation, a retail firm, is making a decision on

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: &a...

Q: You are analyzing a valuation done on a stable firm by a

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 o...

Q: Unicom is a regulated utility serving Northern Illinois. The following table

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...

Q: U.S. steel companies have generally been considered mature in

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...

Q: You have a project that does not require an initial in-

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?

Q: Assume that you are advising a Turkish firm on corporate financial questions

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...

Q: You are the supervisor of a town where the roads are in

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 repea...

Q: IPOs are difficult to value because firms going public tend to be

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 pricin...

Q: Pfizer, one of the largest pharmaceutical companies in the United States

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, d...

Q: You are trying to decide whether the debt structure that Bethlehem Steel

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 arr...

Q: InTech, a computer software firm that has never paid dividends before

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...

Q: You have been asked to value Office Help, a private firm

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 y...

Q: Businesses with severe capital rationing constraints should use IRR more than NPV

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

Q: Boise Cascade also had debt outstanding of $1.7 billion

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 i...

Q: It has been argued by some that convertible bonds (i.

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. O...

Q: You run a regression of monthly returns of Mapco, an oil

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 = 0.0...

Q: You are using the arbitrage pricing model to estimate the expected return

You are using the arbitrage pricing model to estimate the expected return on Bethlehem Steel and have derived the following estimates for the factor betas and risk premia: a. Which risk factor is Beth...

Q: You have just run a regression of monthly returns of American Airlines

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 y...

Q: You have to pick between three mutually exclusive projects with the following

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 w...

Q: You are the manager of a specialty retailing firm that is considering

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...

Q: You are the owner of a small and successful firm with an

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 investmen...

Q: Upjohn, another major pharmaceutical company, is also considering whether it

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...

Q: Railroad companies in the United States tend to have long-term

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

Q: LimeAde, a large soft drink manufacturing firm, is faced with

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 $50...

Q: Now assume that the facts in Problem 1 remain unchanged except for

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 = Ini...

Q: Societies attempt to keep private interests in line by legislating against behavior

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 p...

Q: You have run a regression of monthly returns on Amgen, a

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 Treasur...

Q: You work for a firm that has limited access to capital markets

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, a...

Q: You have been asked for advice on a rights offering by a

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...

Q: Bethlehem Steel, one of the oldest and largest steel companies in

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 o...

Q: The following table summarizes the results of regressing changes in firm value

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 â&#...

Q: NoLone, an all-equity manufacturing firm, has net in

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...

Q: The following were the P/E ratios of firms in the

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 t...

Q: You are analyzing an investment decision, in which you will have

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...

Q: One of the arguments made for having legislation restricting hostile takeovers is

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 possib...

Q: A closely held, publicly traded firm faces self-imposed capital

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 (...

Q: You have just run a regression of monthly returns on MAD,

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%....

Q: You are analyzing a project with a thirty-year lifetime,

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...

Q: Kansas City Southern, a railroad company, had debt out-

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 t...

Q: You have run a series of regressions of firm value changes at

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 Fi...

Q: Boston Turkey is a publicly traded firm, with the following income

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 exp...

Q: NCH, which markets cleaning chemicals, insecticides, and other products

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 a...

Q: The following equation is reproduced from the study by Fama and French

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 val...

Q: You are the manager of a grocery store, and you are

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...

Q: Assume that SmallTech has net income of $1 million and that

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 afte...

Q: In 1995, an analysis of the capital structure of Reebok provided

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...

Q: A commodity bond links interest and principal payments to the price of

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 int...

Q: Z-Tec, a firm providing Internet services, reported net

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 w...

Q: You are trying to estimate a price per share on an IPO

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 recen...

Q: Time Warner, the entertainment conglomerate, has a beta of 1

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 b...

Q: You are trying to estimate the NPV of a three-year

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 I...

Q: You run a financial service firm where you replace your employee’s computers

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 $50...

Q: MVP, a manufacturing firm with no debt outstanding and a market

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...

Q: You are trying to evaluate whether United Airlines (UAL) has

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 billi...

Q: You are analyzing the dividend policy of Conrail, a major railroad

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...

Q: Longs Drug, a large U.S. drugstore chain operating

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...

Q: Barring the case of multiple IRRs, is it possible for the

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.

Q: Now assume that Plastico is considering a project that re- quires

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...

Q: Chrysler, the automotive manufacturer, had a beta of 1.

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 $...

Q: You are helping a manufacturing firm decide whether it should invest in

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...

Q: You are examining the viability of a capital investment in which your

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...

Q: A business in the 45% tax bracket is considering borrowing money

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...

Q: Intel has an EBIT of $3.4 billion and faces

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...

Q: Assume now that you have been asked to forecast cash flows that

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...

Q: You have been asked to assess whether Walgreen, a drugstore chain

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,...

Q: You are trying to estimate the beta of a private firm that

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 f...

Q: Your company is considering producing a new product. You have a

Your company is considering producing a new product. You have a production facility that is currently used to only 50% of capacity, and you plan to use some of the excess capacity for the new product....

Q: WestingHome is a manufacturing company that has accumulated a net operating loss

WestingHome is a manufacturing company that has accumulated a net operating loss of $2 billion over time. It is considering borrowing $5 billion to acquire another company. a. Based on the corporate t...

Q: MiniSink is a manufacturing company that has $100 million in debt

MiniSink is a manufacturing company that has $100 million in debt outstanding and 9 million shares trading at $100 per share. The current beta is 1.10, and the interest rate on the debt is 8%. In the...

Q: NYNEX, the phone utility for the New York City area,

NYNEX, the phone utility for the New York City area, has approached you for advice on its capital structure. In 1995, NYNEX had debt outstanding of $12.14 billion and equity outstanding of $20.55 bill...

Q: Cracker Barrel, which operates restaurants and gift stores, is reexamining

Cracker Barrel, which operates restaurants and gift stores, is reexamining its policy of paying minimal dividends. In 1995, Cracker Barrel reported net income of $66 million; it had capital expenditur...

Q: Time Warner is considering a sale of its publishing division. The

Time Warner is considering a sale of its publishing division. The division had earnings EBITDA of $550 million in the most recent year (depreciation was $150 million), growing at an estimated 5% a yea...

Q: You have been asked to analyze a project where the analyst has

You have been asked to analyze a project where the analyst has estimated the return on capital to be 37% over the ten-year lifetime of the project. The cost of capital is only 12%, but you have concer...

Q: As the result of stockholder pressure, RJR Nabisco is considering spinning

As the result of stockholder pressure, RJR Nabisco is considering spinning off its food division. You have been asked to estimate the beta for the division and decide to do so by obtaining the beta of...

Q: You are an analyst for a sporting goods corporation that is considering

You are an analyst for a sporting goods corporation that is considering a new project that will take advantage of excess capacity in an existing plant. The plant has a capacity to produce 50,000 tenni...

Q: Answer true or false to the following questions relating to the free

Answer true or false to the following questions relating to the free cash flow hypothesis (as developed by Jensen). a. Companies with high operating earnings have high free cash flows. b. Companies wi...

Q: 21. A small, private firm has approached you for advice

21. A small, private firm has approached you for advice on its capital structure decision. It is in the specialty retailing business, and it had an EBIT last year of $500,000. • The book value of equi...

Q: Assume that Cracker Barrel, from Problem 20, wants to continue

Assume that Cracker Barrel, from Problem 20, wants to continue with its policy of not paying dividends. You are the CEO of Cracker Barrel and have been confronted by dissident stockholders, demanding...

Q: Accounting rates of return are based on accounting income and book value

Accounting rates of return are based on accounting income and book value of investment, whereas internal rates of return are based on cash flows and take into account the time value of money. Under wh...

Q: You are comparing the dividend policies of three dividend-paying utilities

You are comparing the dividend policies of three dividend-paying utilities. You have collected the following information on the ex-dividend behavior of these firms. If you were a tax-exempt investor,...

Q: Southwestern Bell, a phone company, is considering expanding its operations

Southwestern Bell, a phone company, is considering expanding its operations into the media business. The beta for the company at the end of 1995 was 0.90, and the debt-to-equity ratio was 1. The media...

Q: XCV, Inc., which manufactures automobile parts for assembly, is

XCV, Inc., which manufactures automobile parts for assembly, is considering the costs and the benefits of leverage. The CFO notes that the return on equity of the firm, which is only 12.75% now based...

Q: Manpower, which provides nongovernment employment services in the United States,

Manpower, which provides nongovernment employment services in the United States, reported net income of $128 million in 1995. It had capital expenditures of $50 million and depreciation of $24 million...

Q: The chief financial officer of Adobe Systems, a software manufacturing firm

The chief financial officer of Adobe Systems, a software manufacturing firm, has approached you for some advice regarding the beta of his company. He subscribes to a service that estimates Adobe Syste...

Q: Assess the likelihood that the following firms will be taken over,

Assess the likelihood that the following firms will be taken over, based on your understanding of the free cash flow hypothesis. You can assume that earnings and free cash flows are highly correlated....

Q: Nadir, an unlevered firm, has expected earnings before interest and

Nadir, an unlevered firm, has expected earnings before interest and taxes of $2 million per year. Nadir’s tax rate is 40%, and the market value is V = E = $12 million. The stock has...

Q: How would your answers to the previous problem change if Manpower is

How would your answers to the previous problem change if Manpower is in plans to pay off its outstanding debt of $100 million next year and become a debt-free company?

Q: You are analyzing Tiffany’s, an upscale retailer, and find that

You are analyzing Tiffany’s, an upscale retailer, and find that the regression estimate of the firm’s beta is 0.75; the standard error for the beta estimate is 0.50. You also note that the average unl...

Q: You are an institutional investor and have collected the following information on

You are an institutional investor and have collected the following information on five maritime firms to assess their dividend policies The average risk-free rate during the period was 7%, and the ave...

Q: A firm that has no debt has a market value of $

A firm that has no debt has a market value of $100 million and a cost of equity of 11%. In the Miller–Modigliani world. a. what happens to the value of the firm as the leverage is changed (assume no t...

Q: Between 1988 and 2013, we saw an increase in the percentage

Between 1988 and 2013, we saw an increase in the percentage of cash returned to stockholders in the form of dividends. Why?

Q: You are analyzing the dividend policy of Black and Decker, a

You are analyzing the dividend policy of Black and Decker, a manufacturer of tools and appliances. The following table summarizes the dividend payout ratios, yields, and expected growth rates of other...

Q: Assume that personal investors pay a 40% tax rate on interest

Assume that personal investors pay a 40% tax rate on interest income and only a 20% tax rate on equity income. If the corporate tax rate is 30%, estimate whether debt has a tax benefit, relative to eq...

Q: Handy and Harman, a leading fabricator of precious metal alloys,

Handy and Harman, a leading fabricator of precious metal alloys, pays out only 23% of its earnings as dividends. The average dividend payout ratio for metal fabricating firms is 45%. The average growt...

Q: XYZ Pharma is a pharmaceutical company that traditionally has not used debt

XYZ Pharma is a pharmaceutical company that traditionally has not used debt to finance its projects. Over the past 10 years, it has also reported high returns on its projects and growth and made subst...

Q: Unitrode, which makes analog/linear integrated circuits for power management

Unitrode, which makes analog/linear integrated circuits for power management, is a firm that has not used debt in the financing of its projects. The managers of the firm contend that they do not borro...

Q: Consolidated Power is a regulated electric utility that has equity with a

Consolidated Power is a regulated electric utility that has equity with a market value of $1.5 billion and debt outstanding of $3 billion. A consultant notes that this is a high debt ratio relative to...

Q: In December 1995, Boise Cascade’s stock had a beta of 0

In December 1995, Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8%, and the Treasury bond rate was 6.4%. The firm had debt out- standing of $1.7 billion and a mark...

Q: Stockholders can transfer wealth from bondholders through a variety of actions.

Stockholders can transfer wealth from bondholders through a variety of actions. How would the following actions by stockholders transfer wealth from bondholders? a. An increase in dividends b. A lever...

Q: The following table summarizes the annual returns you would have made on

The following table summarizes the annual returns you would have made on two companies—Scientific Atlanta, a satellite and data equipment manufacturer, and AT&T, the telecomm gia...

Q: Biogen, a biotechnology firm, had a beta of 1.

Biogen, a biotechnology firm, had a beta of 1.70 in 1995. It had no debt outstanding at the end of that year. a. Estimate the cost of equity for Biogen, if the Treasury bond rate is 6.4%. b. What effe...

Q: Consider again the project described in Problem 1 (assume that the

Consider again the project described in Problem 1 (assume that the depreciation reverts to a straight line). Assume that 40% of the initial investment for the project will be financed with debt, with...

Q: You own a rental building in the city and are interested in

You own a rental building in the city and are interested in replacing the heating system. You are faced with the following alternatives: a. A solar heating system, which will cost $12,000 to install a...

Q: You are analyzing a new security that has been promoted as equity

You are analyzing a new security that has been promoted as equity, with the following features: • The dividend on the security is fixed in dollar terms for the life of the security, which is 20 years....

Q: Plastico is considering a major change in its capital structure. It

Plastico is considering a major change in its capital structure. It has three options: • Option 1: Issue $1 billion in new stock and repurchase half of its outstanding debt. This will make it an AAA-r...

Q: IOU has $5 billion in debt outstanding (carrying an interest

IOU has $5 billion in debt outstanding (carrying an interest rate of 9%) and 10 million shares trading at $50 per share. Based on its current EBIT of $200 million, its optimal debt ratio is only 30%....

Q: Stock prices are much too volatile for financial markets to be efficient

Stock prices are much too volatile for financial markets to be efficient. Comment.

Q: You are in a world where there are only two assets,

You are in a world where there are only two assets, gold and stocks. You are interested in investing your money in one, the other, or both assets. Consequently, you collect the following data on the r...

Q: You have been given the following information on a project:

You have been given the following information on a project: • It has a five-year lifetime • The initial investment in the project will be $25 million, and the investment will be depreciated straight l...

Q: Genting Berhad is a Malaysian conglomerate with holdings in plantations and tourist

Genting Berhad is a Malaysian conglomerate with holdings in plantations and tourist resorts. The beta estimated for the firm, relative to the Malaysian stock exchange, is 1.15, and the long-term local...

Q: Answer true or false to the following statements: a.

Answer true or false to the following statements: a. The return on equity for a project will always be higher than the return on capital on the same project. b. If the return on capital is less than t...

Q: Plastico is interested in how it compares with its competitors in the

Plastico is interested in how it compares with its competitors in the same industry. a. Taking each of these variables, explain at an intuitive level whether you would expect Plastico to have more or...

Q: DGF Corporation has come to you for some advice on how best

DGF Corporation has come to you for some advice on how best to increase their leverage over time. In the most recent year, DGF had an EBITDA of $300 million, owed $1 billion in both book value and mar...

Q: Cell Phone is a cellular firm that reported net income of $

Cell Phone is a cellular firm that reported net income of $50 million in the most recent financial year. The firm had $1 billion in debt, on which it reported interest expenses of $100 million in the...

Q: Lube Oil, in Question 3, paid a dividend of $

Lube Oil, in Question 3, paid a dividend of $20 million and bought back $25 million in stock. Estimate how much the cash balance of the firm changed during the year.

Q: You are analyzing a convertible preferred stock with the following characteristics for

You are analyzing a convertible preferred stock with the following characteristics for the security: • There are 50,000 preferred shares outstanding, with a face value of $100 and a 6% preferred divid...

Q: Maximizing stock prices does not make sense because investors focus on short

Maximizing stock prices does not make sense because investors focus on short-term results and not on the long-term consequences. Comment.

Q: You have just done a regression of monthly stock re- turns

You have just done a regression of monthly stock re- turns of HeavyTech, a manufacturer of heavy machinery, on monthly market returns over the past five years and come up with the following regression...

Q: You have been asked to calculate the debt ratio for a firm

You have been asked to calculate the debt ratio for a firm that has the following components to its financing mix: • The firm has 1 million shares outstanding, trading at $50 per share. • The firm has...

Q: A small manufacturing firm, which has limited access to capital,

A small manufacturing firm, which has limited access to capital, has a capital rationing constraint of $150 million and is faced with the following investment projects(numbers in millions): a. Which o...

Q: As CEO of a major corporation, you have to make a

As CEO of a major corporation, you have to make a decision on how much you can afford to borrow. You currently have 10 million shares outstanding, and the market price per share is $50. You also curre...

Q: STL has asked you for advice on putting together the details of

STL has asked you for advice on putting together the details of the new debt issues it is planning to make. What information would you need to obtain to provide this advice?

Q: Netsoft is a company that manufactures networking software. In the current

Netsoft is a company that manufactures networking software. In the current year, the firm reported operating earnings before interest and taxes of $200 million (operating earnings does not include int...

Q: Under what conditions will the return on equity on a project be

Under what conditions will the return on equity on a project be equal to the IRR, estimated from cash flows to equity investors, on the same project?

Q: UJ Gas is a utility that has followed a policy of increasing

UJ Gas is a utility that has followed a policy of increasing dividends every quarter by 5% over dividends in the prior year. The company announces that it will increase quarterly dividends from $1.00...

Q: How would your answers to the last two questions change if you

How would your answers to the last two questions change if you were told that Lube Oil started the year with $120 million in debt and ended the year with $135 million?

Q: There are some corporate strategists who have suggested that firms focus on

There are some corporate strategists who have suggested that firms focus on maximizing market share rather than market prices. When might this strategy work, and when might it fail?

Q: You are interested in creating a portfolio of two stocks—Coca

You are interested in creating a portfolio of two stocks—Coca Cola and Texas Utilities. Over the last decade, an investment in Coca Cola stock would have earned an average annual return of 25%, with a...

Q: Assume that you have half of your money invested in Times Mirror

Assume that you have half of your money invested in Times Mirror, the media company, and the other half invested in Unilever, the consumer product giant. The expected returns and standard deviations o...

Q: You are provided with the projected income statements for a project:

You are provided with the projected income statements for a project: • The tax rate is 40%. • The project required an initial investment of $15,000and an additional...

Q: An income bondholder receives interest payments only if the firm makes income

An income bondholder receives interest payments only if the firm makes income. If the firm does not make interest payments in a year, the interest is cumulated and paid in the first year the firm make...

Q: You have been hired as a capital budgeting analyst by a sporting

You have been hired as a capital budgeting analyst by a sporting goods firm that manufactures athletic shoes and has captured 10% of the overall shoe market (the total market is worth $100 million a y...

Q: You have been asked to estimate the debt ratio for a firm

You have been asked to estimate the debt ratio for a firm with the following financing details: • The firm has two classes of shares outstanding: 50,000 shares of class A stock, with 2 voting rights p...

Q: You have been hired as a management consultant by AD Corporation to

You have been hired as a management consultant by AD Corporation to evaluate whether it has an appropriate amount of debt (the company is worried about a leveraged buyout). You have collected the foll...

Q: Assume now that you have uncovered the following facts about the types

Assume now that you have uncovered the following facts about the types of projects STL takes: • The projects are primarily infrastructure projects, requiring large initial investments and long gestati...

Q: Now assume that Lube Oil has a return on equity of 5

Now assume that Lube Oil has a return on equity of 5% and a cost of equity of 10%. As a stockholder in Lube Oil, would you want the firm to change its dividend policy? Why or why not?

Q: Gemco Jewelers earned $5 million in after-tax operating income

Gemco Jewelers earned $5 million in after-tax operating income in the most recent year. The firm also had capital expenditures of $4 million and depreciation of $2 million during the year, and the non...

Q: Geotech Inc., which has had a history of high growth and

Geotech Inc., which has had a history of high growth and pays no dividends, announces that it will start paying dividends next quarter. How would you expect its stock price to react to the announcemen...

Q: Antitakeover amendments can be in the best interests of stockholders. Under

Antitakeover amendments can be in the best interests of stockholders. Under what conditions is this likely to be true?

Q: You are considering the possibility of replacing an existing machine that has

You are considering the possibility of replacing an existing machine that has a book value of $500,000, a remaining depreciable life of five years, and a salvage value of $300,000. The replacement mac...

Q: UB is examining its capital structure with the intent of arriving at

UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your research indicates th...

Q: Plastico, a manufacturer of consumer plastic products, is evaluating its

Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions): In addition, you are provided the following in...

Q: You are attempting to structure a debt issue for Eaton Corporation,

You are attempting to structure a debt issue for Eaton Corporation, a manufacturer of automotive components. You have collected the following information on the market values of debt and equity for th...

Q: JC Automobiles is a small auto parts manufacturing firm that has paid

JC Automobiles is a small auto parts manufacturing firm that has paid $1.00 in annual dividends each year for the past five years. It announces that dividends will increase to $1.25 next year. What wo...

Q: Now assume that Gemco Jewelers has $10 million in cash and

Now assume that Gemco Jewelers has $10 million in cash and non-operating assets and that the firm has $15 million in outstanding debt. a. Estimate the value of equity in the firm. b. If the firm has 5...

Q: Companies outside the United States often have two classes of stock outstanding

Companies outside the United States often have two classes of stock outstanding. One class of shares is voting and is held by the incumbent managers of the firm. The other class is nonvoting and repre...

Q: Consider the project described in Problem 6. Assume that the firm

Consider the project described in Problem 6. Assume that the firm plans to finance 40% of its net capital expenditure and working capital needs with debt. a. Estimate the cash flow to equity for each...

Q: You are analyzing the beta for Hewlett Packard and have broken down

You are analyzing the beta for Hewlett Packard and have broken down the company into four broad business groups, with market values and betas for each group. a. Estimate the beta for Hewlett Packard a...

Q: You are provided with the following cash flows on a project:

You are provided with the following cash flows on a project: Plot the net present value (NPV) profile for this project. What is the IRR? If this firm had a cost of capital of 10% and a cost of equity...

Q: You are helping a bookstore decide whether it should open a coffee

You are helping a bookstore decide whether it should open a coffee shop on the premises. The details of the investment are as follows: • The coffee shop will cost $50,000 to open; it will have a five-...

Q: Office Helpers is a private firm that manufactures and sells office supplies

Office Helpers is a private firm that manufactures and sells office supplies. The firm has limited capital and is estimated to have a value of $80 million with the capital constraints. A venture capit...

Q: GenCorp, an automotive parts manufacturer, currently has $25 million

GenCorp, an automotive parts manufacturer, currently has $25 million in outstanding debt and has 10 million shares outstanding. The book value per share is $10, and the market price per share is $25....

Q: BMD is a firm with no debt on its books currently anda

BMD is a firm with no debt on its books currently anda market value of equity of $2 billion. On the basis of its EBITDA of $200 million, it can afford to have a debt ratio of 50%, at which level the f...

Q: Repeat the analysis in Problem 7 for a private firm that has

Repeat the analysis in Problem 7 for a private firm that has provided you with the following estimates of operating income for the 10 years, for which you have the macroeconomic data:

Q: Union Pacific Railroad reported net income of $770 million after interest

Union Pacific Railroad reported net income of $770 million after interest expenses of $320 million in a recent financial year. (The corporate tax rate was 36%.) It reported depreciation of $960 millio...

Q: Tech Products, from Question 7, pays a dividend of $

Tech Products, from Question 7, pays a dividend of $40 million. Assuming that the firm started the period with no cash, how did it raise the funding for the dividend payment?

Q: Would your answer be different for the previous problem if JC Automobiles

Would your answer be different for the previous problem if JC Automobiles were a large firm followed by thirty-five analysts? Why or why not?

Q: In recent years, top managers have been given large packages of

In recent years, top managers have been given large packages of options, giving them the right to buy stock in the firm at a fixed price. Will these compensation schemes make managers more responsive...

Q: Assume that the average variance of return for an individual security is

Assume that the average variance of return for an individual security is 50% and that the average covariance is 10%. What is the expected variance of a portfolio of 5, 10, 20, 50, and 100 securities....

Q: The following table summarizes the percentage changes in operating income, percentage

The following table summarizes the percentage changes in operating income, percentage changes in revenue, and betas for four pharmaceutical firms. a. Calculate the degree of operating leverage for eac...

Q: You have estimated the following cash flows on a project:

You have estimated the following cash flows on a project: Plot the NPV profile for this project. What is the IRR? If the cost of equity is 16%, would you accept this project?

Q: The lining of a plating tank must be replaced every three years

The lining of a plating tank must be replaced every three years at the cost of approximately $2,000. A new lining material has been developed that is more resistant to the corrosive effects of the pla...

Q: Assume now that Office Helpers decides to go public and would like

Assume now that Office Helpers decides to go public and would like to offer its shares at a target price of $10 per share. If the IPO is likely to be underpriced by 20%, how many shares should the fir...

Q: Vernon Enterprises has current after-tax operating income of $100

Vernon Enterprises has current after-tax operating income of $100 million and a cost of capital of 10%. The firm earns a return on capital equal to its cost of capital. a. Assume that the firm is in s...

Q: You have been called in as a consultant for Herbert’s a sporting

You have been called in as a consultant for Herbert’s a sporting goods retail firm, which is examining its debt policy. The firm currently has a balance sheet as follows: The firm&ac...

Q: Assuming that you do the analysis in Problem 8 with both firm

Assuming that you do the analysis in Problem 8 with both firm value and operating income, what are the reasons for the differences you might find in the results, using each? When would you use one ove...

Q: WeeMart, a retailer of children’s clothes, announces a cut in

WeeMart, a retailer of children’s clothes, announces a cut in dividends following a year in which both revenues and earnings dropped significantly. How would you expect its stock price to react? Expla...

Q: Lockheed, one of the largest defense contractors in the United States

Lockheed, one of the largest defense contractors in the United States, reported EBITDA of $1,290 million in a recent financial year, prior to interest expenses of $215 million and depreciation charges...

Q: New Age Telecomm is a young, high-growth telecommunications firm

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Q: Estimate the MIRR for the project described in Problem 8. Does

Estimate the MIRR for the project described in Problem 8. Does it change your decision on accepting this project?

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Q: Terck, a leading pharmaceutical company, currently has a balance sheet

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Q: Pfizer, a major pharmaceutical company, has a debt ratio of

Pfizer, a major pharmaceutical company, has a debt ratio of 10.30% and is considering increasing its debt ratio to 30%. Its cost of capital is expected to drop from 14.51% to 13.45%. Pfizer had an EBI...

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Stock buybacks really do not return cash to stockholders because only those who sell back stock receive the cash. Is this statement true or false? Explain.

Q: RJR Nabisco, in response to stockholder pressure in 1996, announced

RJR Nabisco, in response to stockholder pressure in 1996, announced a significant increase in dividends paid to stockholders financed by the sale of some of its assets. What would you expect the stock...

Q: In the face of disappointing earnings results and increasingly assertive institutional stockholders

In the face of disappointing earnings results and increasingly assertive institutional stockholders, Eastman Kodak was considering the sale of its health division, which earned $560 million in EBIT in...

Q: A prominent beta estimation service reports the beta of Comcast Corporation,

A prominent beta estimation service reports the beta of Comcast Corporation, a major cable TV operator, to be 1.45. The service claims to use weekly returns on the stock over the prior five years and...

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In Germany, large banks are often large lenders and large equity investors in the same firm. For instance, Deutsche Bank is the largest stockholder in Daimler Chrysler, as well as its largest lender....

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Q: You are analyzing two mutually exclusive projects with the following cash flows

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Q: You have been asked to compare three alternative investments and make a

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Q: The unlevered beta of electronics firms, on average, is 1

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Q: You have been asked to analyze the capital structure of DASA,

You have been asked to analyze the capital structure of DASA, an environmental waste disposal firm, and make recommendations on a future course of action. DASA has 40 million shares outstanding, selli...

Q: Upjohn, also a major pharmaceutical company, is considering increasing its

Upjohn, also a major pharmaceutical company, is considering increasing its debt ratio from 11% to 40%, which is its optimal debt ratio. Its beta is 1.17, and the current Treasury bond rate is 6.50%. T...

Q: The following table lists returns on the market portfolio and on Microsoft

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You are trying to choose a new siding for your house. A salesman offers you two choices: a. Wood siding, which will last 10 years and cost $5,000to install and $1,000/year to maintain. b. Aluminum sid...

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Q: Safecorp, which owns and operates grocery stores across the United States

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Q: Zycor Corporation obtains most of its funding internally. Assume that the

Zycor Corporation obtains most of its funding internally. Assume that the stock has a beta of 1.2, the riskless rate is 6.5%, and the market risk premium is 6%. a. Estimate the cost of internal equity...

Q: Tech Products reported a net loss of $80 million for the

Tech Products reported a net loss of $80 million for the latest financial year. In addition, the firm reported a net capital expenditure of $70 million and a change in non- cash working capital of $10...

Q: Novell, which had a market value of equity of $2

Novell, which had a market value of equity of $2 billion and a beta of 1.50, announced that it was acquiring Word- Perfect, which had a market value of equity of $1 billion and a beta of 1.30. Neither...

Q: You have been asked to estimate a Markowitz portfolio across a universe

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Q: The following is a regression of dividend payout ratios on the risk

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Q: You are a small business owner considering two alternatives for your phone

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Q: Sunshine Media has just completed an IPO, where 50 million shares

Sunshine Media has just completed an IPO, where 50 million shares of the 125 million shares outstanding were issued to the public at an offering price of $22 per share. On the offering date, the sto...

Q: You have been asked to analyze the standard deviation of a portfolio

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Q: You are the manager of a pharmaceutical company and are considering what

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Q: United Airlines has a beta of 1.50. The standard

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Q: National City, a bank holding company, reported earnings per share

National City, a bank holding company, reported earnings per share of $2.40 and paid dividends per share of $1.06. The earnings had grown 7.5% a year over the prior five years, and were expected to...

Q: You are using the multifactor model to estimate the expected return on

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Q: You are stockholder in a SmallTech, a company that is planning

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Q: You are the owner of a small hardware store, and you

You are the owner of a small hardware store, and you are considering opening a gardening store in a vacant area in the back of your present store. You estimate that it will cost you $50,000 to set u...

Q: The following regression was run using all NYSE firms in 1995

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Q: In the illustration in Problem 25, what would the tax rate

In the illustration in Problem 25, what would the tax rate on equity income need to be for debt to not have an effect on value?  

Q: Cello is a manufacturer of pianos. It earned an after-

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Q: Assume you have all your wealth (a million dollars) invested

Assume you have all your wealth (a million dollars) invested in the Vanguard 500 index fund, and that you expect to earn an annual return of 12%, with a standard deviation in returns of 25%. Since y...

Q: If Consolidated Power is priced at $50.00 with dividend

If Consolidated Power is priced at $50.00 with dividend, and its price falls to $46.50 when a dividend of $5.00 is paid, what is the implied marginal rate of personal taxes for its stockholders? Ass...

Q: Assume in the previous question with Vernon Enterprises that the firm will

Assume in the previous question with Vernon Enterprises that the firm will earn a return on capital of 15% in perpetuity. a. Assume that the firm is in stable growth, growing 5% a year forever; est...

Q: Lube Oil, a chain of automobile service stations, reports net

Lube Oil, a chain of automobile service stations, reports net income of $100 million after depreciation of $50 million. The firm has capital expenditures of $80 mil- lion, and the noncash working capi...

Q: Southern Rail has just declared a dividend of $1. The

Southern Rail has just declared a dividend of $1. The average investor in Southern Rail faces an ordinary tax rate of 50%. Although the capital gains rate is also 50%, it is believed that the investor...

Q: LMN Corporation, a real estate company, is planning to pay

LMN Corporation, a real estate company, is planning to pay a dividend of $0.50 per share. Most of the investors in LMN are other corporations that pay 40% of their ordinary income and 28% of their cap...

Q: Imagine a decision task in which you are to choose between two

Imagine a decision task in which you are to choose between two alternatives that involve blindly drawing a single chip from one of two urns, labeled A and B respectively. Both urns contain colored bal...

Q: Excel has a function, BINOM.DIST, for the binomial

Excel has a function, BINOM.DIST, for the binomial probability distribution. This function computes the probability of drawing x successes in n independent trials when the probability of drawing a suc...

Q: Discuss the psychological aspects associated with how Groupon’s board and executives analyzed

Discuss the psychological aspects associated with how Groupon’s board and executives analyzed whether or not they should accept Google’s offer.

Q: Consider the notion of “transaction utility.” How does this concept

Consider the notion of “transaction utility.” How does this concept apply to Group on’s business strategy?

Q: Compare the IPOs of Groupon, Facebook, and Twitter in respect

Compare the IPOs of Groupon, Facebook, and Twitter in respect to hot issue market, initial under pricing, and long term underperformance.

Q: Given the details in the minicase, to what extent did Groupon

Given the details in the minicase, to what extent did Groupon, Facebook, and Twitter engage in either catering behavior or market timing?

Q: Discuss the chronology of Twitter through the lens of the Baker-

Discuss the chronology of Twitter through the lens of the Baker-Wurgler sentiment framework.

Q: Based on the information presented in the minicase, and the discussion

Based on the information presented in the minicase, and the discussion in both Chapter 2 and this chapter, to what extent does Elon Musk fit the general characteristics of an entrepreneur and a CEO, e...

Q: Consider the manner in which the readers of Aswath Damodaran’s blog responded

Consider the manner in which the readers of Aswath Damodaran’s blog responded to his $67 valuation for Tesla, as discussed in the minicase. Analyze the psychological basis for their responses.

Q: From the MHHE web site for Chapter 6, download the free

From the MHHE web site for Chapter 6, download the free cash flow analysis file associated with this minicase. Compare the various cash flow analyses, for both the same point in time in 2013, to ident...

Q: Consider the possibility that the volatility of Tesla’s stock has placed some

Consider the possibility that the volatility of Tesla’s stock has placed some investors in a situation where they are averse to a sure loss. On October 22, 2015, an article on the site seekingalpha.co...

Q: On April 19, 2016, an article that appeared on the

On April 19, 2016, an article that appeared on the web site seekingalpha.com discussed the implications of selling Tesla stock short.33 The article warns short sellers to be cautious in believing that...

Q: For the period 2010 through 2014, the Morgan Stanley team’s 2010

For the period 2010 through 2014, the Morgan Stanley team’s 2010 report on eBay forecasted that free cash flow would on average grow by 5.7 percent. Free cash flow actually grew by an average growth r...

Q: Based on the information presented in the minicase, how would you

Based on the information presented in the minicase, how would you characterize PSINet CEO William Schrader’s susceptibility to psychological phenomena?

Q: Discuss the extent to which PSINet’s financing and investment decisions conform to

Discuss the extent to which PSINet’s financing and investment decisions conform to the BPV framework presented in the chapter.

Q: Discuss the extent to which Cogent’s financing and investment decisions conform to

Discuss the extent to which Cogent’s financing and investment decisions conform to the BPV framework presented in the chapter.

Q: Analyze the ratio that Cogent Communication uses to measure leverage, and

Analyze the ratio that Cogent Communication uses to measure leverage, and compare it to common textbook ratios measuring leverage.

Q: What are the main issues that the traditional approach emphasizes in respect

What are the main issues that the traditional approach emphasizes in respect to Apple’s dividend policy?

Q: What are the main issues that the behavioral approach emphasizes in respect

What are the main issues that the behavioral approach emphasizes in respect to Apple’s dividend policy?

Q: Drawing on the discussion in Chapters 5 and 7, as well

Drawing on the discussion in Chapters 5 and 7, as well as this chapter, analyze Apple’s policy in respect to debt, repurchasing shares, and splitting its stock.

Q: In January 2004, a multifactor regression analysis of Apple’s stock return

In January 2004, a multifactor regression analysis of Apple’s stock return, based on five years of past monthly returns, indicated that only the excess return on the market was stati...

Q: Discuss whether there are any behavioral issues in the minicase that have

Discuss whether there are any behavioral issues in the minicase that have not arisen in connection with any of the preceding questions.

Q: How would you assess the review conducted by Hertz’s compensation committee in

How would you assess the review conducted by Hertz’s compensation committee in 2013?

Q: In 2010, the Morgan Stanley analysts covering eBay had stopped using

In 2010, the Morgan Stanley analysts covering eBay had stopped using PEG to value eBay, relying on P/E, P/S, and discounted values of free cash flows. In 2013, they dropped P/E and P/S, and only used...

Q: With reference to the Hertz minicase, what psychological phenomenon or phenomena

With reference to the Hertz minicase, what psychological phenomenon or phenomena were involved in the fraud triangle?

Q: How would you use the COSO internal control framework to assess the

How would you use the COSO internal control framework to assess the internal control environment at Hertz?

Q: In what ways was the situation at Hertz, as described in

In what ways was the situation at Hertz, as described in the minicase, similar to that of HealthSouth, and in what ways was it different?

Q: Which psychological phenomena might have been at play in leading Microsoft to

Which psychological phenomena might have been at play in leading Microsoft to make the offer it did to acquire Yahoo!?

Q: The minicase makes reference to some of the examples discussed in the

The minicase makes reference to some of the examples discussed in the chapter. Discuss the connection between the minicase and the other examples with reference to how the examples are mentioned in th...

Q: In September 2016, between the time that Yahoo! and Verizon

In September 2016, between the time that Yahoo! and Verizon negotiated the terms of their deal and the completion of the deal, Yahoo! announced its discovery that in 2014 a “state-sponsored actor” had...

Q: Which psychological phenomena might have been at play in leading Yahoo!

Which psychological phenomena might have been at play in leading Yahoo!’s board to reject Microsoft’s offer?

Q: Discuss the discussion of reference point heuristics in the press coverage of

Discuss the discussion of reference point heuristics in the press coverage of the Microsoft offer, and indicate whether the comments in the press are consistent with the actual merger talks between th...

Q: Estimate the value of the synergy associated with the projected cost savings

Estimate the value of the synergy associated with the projected cost savings of $1.5 billion per year, assuming that the stream of cost savings would begin a year after the acquisition announcement, a...

Q: Had Microsoft acquired Yahoo!, would the acquisition have been classified as

Had Microsoft acquired Yahoo!, would the acquisition have been classified as a bad merger? The technical definition of a bad acquisition can be found in the endnotes to this chapter.

Q: The Morgan Stanley report on eBay, dated July 23, 2015

The Morgan Stanley report on eBay, dated July 23, 2015, established a one-year forward price target of $29 per share.19 At the time of the report, eBay’s stock price was $28.45, which the report noted...

Q: Identify behavioral issues associated with Microsoft’s decisions about capital structure and capital

Identify behavioral issues associated with Microsoft’s decisions about capital structure and capital budgeting.

Q: Discuss whether there are any behavioral issues associated with whether Microsoft pays

Discuss whether there are any behavioral issues associated with whether Microsoft pays for Yahoo! using 100 percent cash, or instead 50 percent cash and 50 percent stock.

Q: Financial economist Aswath Damordaran was quoted in The New York Times about

Financial economist Aswath Damordaran was quoted in The New York Times about the dangers of the Steve Jobs effect, whereby CEOs seek to emulate Jobs’s success in taking Apple from being close to failu...

Q: What does the information presented in the minicase suggest about goal setting

What does the information presented in the minicase suggest about goal setting at Toshiba?

Q: Discuss the issue of process loss in the events described in the

Discuss the issue of process loss in the events described in the minicase.

Q: What are the major lessons to be learned from the minicase about

What are the major lessons to be learned from the minicase about corporate governance?

Q: Discuss any psychological phenomena that you perceive to have been at work

Discuss any psychological phenomena that you perceive to have been at work in the S&L crisis, emphasizing the implicit option features described in the case. Relate these phenomena to the issues descr...

Q: Describe the most important factors that impeded the Packard Foundation from diversifying

Describe the most important factors that impeded the Packard Foundation from diversifying, but not the Hewlett Foundation.

Q: George Vera, CFO of the Packard Foundation, was quoted as

George Vera, CFO of the Packard Foundation, was quoted as saying: “This is a family foundation. The family makes these kinds of decisions, and the board is comfortable with this as a starting point.”...

Q: Was there an endowment effect at work at the Packard Foundation?

Was there an endowment effect at work at the Packard Foundation?

Q: In its April 2003 report, the Morgan Stanley team computed EBITDA

In its April 2003 report, the Morgan Stanley team computed EBITDA as “Adjusted Operating Income plus Depreciation Add back.” The adjustment in question is to “Reported Operating Income.” The report ex...

Q: Does the chapter present any information that would lead you to conclude

Does the chapter present any information that would lead you to conclude that managers at Sun Microsystems were averse to a sure loss? Discuss.

Q: During its most profitable years in the late 1990s, Sun did

During its most profitable years in the late 1990s, Sun did not carry any debt. In 1999, Sun paid $138.6 million in taxes. Compare the situation at Sun with the situation at Merck in respect to their...

Q: Discuss the comment Scott McNealy made in his interview about not having

Discuss the comment Scott McNealy made in his interview about not having hired a chief operating officer.

Q: You can find Sun’s statement of cash flows on the book web

You can find Sun’s statement of cash flows on the book web site. Do these statements suggest that Sun engaged in market timing during the technology bubble?

Q: Did Merck’s managers exhibit confirmation bias in their assessment of Vioxx?

Did Merck’s managers exhibit confirmation bias in their assessment of Vioxx? Discuss this question.

Q: At the beginning of 2001, Merck’s CFO Judy Lewent predicted that

At the beginning of 2001, Merck’s CFO Judy Lewent predicted that Vioxx sales for the year would be between $3 and $3.5 billion. In June she qualified her prediction to say that altho...

Q: Merck’s VIGOR study used 8,000 subjects. Notably, Merck

Merck’s VIGOR study used 8,000 subjects. Notably, Merck chose to include only subjects whose risk of experiencing a heart attack was low. Half the subjects in the study received Vioxx, and the other h...

Q: On November 2, 2004, The Wall Street Journal published an

On November 2, 2004, The Wall Street Journal published an article describing the manner in which Merck’s executives made decisions about Vioxx. The Wall Street Journal article pointed out that the Nov...

Q: Compare two positions about Merck’s handling of Vioxx. The first position

Compare two positions about Merck’s handling of Vioxx. The first position is that Merck should have warned patients about the enhanced risk of heart attack or stroke (after prolonged use of the drug)...

Q: On May 20, 2004, The Wall Street Journal ran a

On May 20, 2004, The Wall Street Journal ran a front page story entitled “Biotech’s Dismal Bottom Line: More Than $40 Billion in Losses.” The article makes several points. First, the majority of biote...

Q: In the section of the book web site for this chapter,

In the section of the book web site for this chapter, you will find an Excel file containing counterparts to the free cash flow table in Exhibit 3-3, but for forecasts and valuations made in 2010 and...

Q: Despite the growing popularity of cellular phones during the middle and late

Despite the growing popularity of cellular phones during the middle and late 1990s, Iridium undertook a $180 million promotional campaign to launch its product. It ran advertisements in The Wall Stree...

Q: The column “Ahead of the Tape” that appeared in the

The column “Ahead of the Tape” that appeared in the February 13, 2004, issue of The Wall Street Journal states that prudent investors prefer to value firms using free cash flow instead of EBITDA. The...

Q: Analyst Safa Rashtchy developed his 2010 forecast for eBay’s revenue by assuming

Analyst Safa Rashtchy developed his 2010 forecast for eBay’s revenue by assuming that its annual growth would be about a 30 percent compounded annual growth rate between 2002 and 2010. In the previous...

Q: The March 11, 2004, issue of Businessweek magazine reported that

The March 11, 2004, issue of Businessweek magazine reported that Standard & Poor’s had reduced Sun Microsystem’s debt rating to junk status. Over the course of the next two days, Sun’s stock price fel...

Q: An episode of the BBC program Horizons featured the following experiment.

An episode of the BBC program Horizons featured the following experiment. A researcher in a park with a lot of pedestrians invited passersby to examine an unopened bottle of wine, which the researcher...

Q: Consider the responses to a survey conducted of geologists working in the

Consider the responses to a survey conducted of geologists working in the mining industry.46 The survey put the following question to the geologists: “If an economic deposit was discovered tomorrow, h...

Q: On April 23, 2003, The Wall Street Journal published an

On April 23, 2003, The Wall Street Journal published an article suggesting that the analysts following eBay were excessively optimistic about eBay’s future revenue stream. The article pointed out that...

Q: In the chapter discussion of the merger between HP and Compaq,

In the chapter discussion of the merger between HP and Compaq, HP director Sam Ginn initially voiced doubts about the deal. However, the McKinsey experts retorted that even a slim profit in PCs would...

Q: HP director Patricia Dunn works in the banking industry, where consolidation

HP director Patricia Dunn works in the banking industry, where consolidation mergers have worked out well in the long run but are vulnerable in the first two years. She responded positively to the McK...

Q: Consider a statement that begins, “I see myself as someone

Consider a statement that begins, “I see myself as someone who” Below are five phrases that might conclude this statement. Associate exactly one of the big five psychological characteristics to each p...

Q: In the spring of 2003, analysts at Prudential established a target

In the spring of 2003, analysts at Prudential established a target price for eBay, justifying the P/E values in their analysis by appeal to PEG. Their report stated that their assumptions of a P/E of...

Q: Answer the following six sub questions: 7.1.

Answer the following six sub questions: 7.1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in your acco...

Q: The Times article notes that three days after the ACP awarded a

The Times article notes that three days after the ACP awarded a $158 million contract to the Spanish firm that manufactures the tugboats, the son of the canal administrator joined the law firm represe...

Q: In your view, how similar is the personality of Cogent Communications

In your view, how similar is the personality of Cogent Communications CEO Dave Schaeffer to the personality of PSINet CEO William Schrader?

Q: With five family members and the former CEO of HP comprising half

With five family members and the former CEO of HP comprising half the Packard Foundation board, was the Packard board largely a homogenous group or a heterogeneous group?

Q: Did the composition of the Packard Foundation finance committee predispose it to

Did the composition of the Packard Foundation finance committee predispose it to groupthink?

Q: Was there an endowment effect at work at the Hewlett Foundation?

Was there an endowment effect at work at the Hewlett Foundation?

Q: Which psychological phenomena might have been at play in the negotiations between

Which psychological phenomena might have been at play in the negotiations between Carol Bartz and Steve Ballmer?

Q: Discuss Scott McNealy’s comments about sentiment in his interview with Fortune magazine

Discuss Scott McNealy’s comments about sentiment in his interview with Fortune magazine. In your answer, describe any valuation metric Scott McNealy mentions. Do McNealy’s comments suggest that Sun en...

Q: In 2005, eBay CFO Rajiv Dutta stated that eBay’s investments were

In 2005, eBay CFO Rajiv Dutta stated that eBay’s investments were reflected in the firm’s income statement rather than its balance sheet. Discuss the extent to which Dutta’s perspective, in foresight,...

Q: Consider the following excerpt from a Prudential report on Wal-Mart

Consider the following excerpt from a Prudential report on Wal-Mart, dated May 13, 2003.16 The report states: We are maintaining our Hold rating on Wal-Mart as we believe the stock’s current valuation...

Q: In respect to the Morgan Stanley 2003 report on eBay, eBay’s

In respect to the Morgan Stanley 2003 report on eBay, eBay’s annualized geometric return between May 2003 and December 2014 was 7.9 percent, its annualized arithmetic return was 14.2 percent, and its...

Q: Imagine yourself at a conference center, where there are two groups

Imagine yourself at a conference center, where there are two groups meeting in adjoining rooms, one a group of lawyers and the other a group of engineers. In fact, the room with lawyers contains 30 la...

Q: In what way were the situations at Boeing (with the 787

In what way were the situations at Boeing (with the 787) and Airbus (with the A380) similar, and in what way were they different? Discuss this question through the lens of the planning fallacy.

Q: In what way were the situations at Boeing (with the 787

In what way were the situations at Boeing (with the 787) and Motorola (with the Iridium project) the same, and in what way were they different? Discuss this question through the lens of the planning f...

Q: In 1999 Iridium declared bankruptcy and was sold to private investors.

In 1999 Iridium declared bankruptcy and was sold to private investors. Suppose that you were to learn that by the end of 2003, Iridium had gone out of business. How surprised would you be? How would y...

Q: Consider Robert Galvin’s approach to evaluating the satellite project proposal. The

Consider Robert Galvin’s approach to evaluating the satellite project proposal. The text suggests that in not developing discounted cash flow analysis, Galvin’s approach was flawed. In hindsight, Irid...

Q: Consider the contention that excessive optimism and overconfidence are important characteristics of

Consider the contention that excessive optimism and overconfidence are important characteristics of leadership. Might these traits help managers initiate and complete daunting projects that they would...

Q: One of the points made in the discussion about the construction of

One of the points made in the discussion about the construction of the Anglo-French tunnel is that engineers designed the tunnels before they designed the trains, so there were many design changes bec...

Q: In April 2003, analysts at Morgan Stanley and Prudential had set

In April 2003, analysts at Morgan Stanley and Prudential had set 12-month target prices of $106 and $108 for the firm eBay. At that time, eBay’s stock price was $89.22 and the consensus forecast for e...

Q: Consider the comments of Brian Walker, the president of Herman-

Consider the comments of Brian Walker, the president of Herman-Miller North America, who was quoted in the chapter as having said: “For dot.coms, it appears that the market has implicitly capitalized...

Q: For many years, the large retail firm Walmart chose not to

For many years, the large retail firm Walmart chose not to provide guidance. The firm’s legendary founder, Sam Walton, wrote in his autobiography that he did not care what the market thought. Beginnin...

Q: On August 19, 2004, the Internet search firm Google went

On August 19, 2004, the Internet search firm Google went public, at an offer price of $85 per share. The IPO was unconventional in that Google used an auction to determine its offer price and to sell...

Q: Suppose that you are offered the opportunity to accept a risk involving

Suppose that you are offered the opportunity to accept a risk involving the toss of a fair coin, in which you will win $450 if heads comes up and lose $450 if tails comes up. a. Would you accept this...

Q: In 2004, 55 percent of firms provided guidance to analysts,

In 2004, 55 percent of firms provided guidance to analysts, down from 72 percent in the prior year.30 Before Google’s IPO, the firm’s executives announced that they did not plan to issue earnings guid...

Q: Discuss whether any of the three IPO phenomena apply in regard to

Discuss whether any of the three IPO phenomena apply in regard to the Palm IPO described in the Behavioral Pitfalls box.

Q: Use the ideas developed in this chapter to assess whether Palm and

Use the ideas developed in this chapter to assess whether Palm and 3Com were efficiently priced on Palm’s first day of trading.

Q: Analyze the assessment of Palm made by analyst Paul Sagawa.

Analyze the assessment of Palm made by analyst Paul Sagawa.

Q: During a presentation in February 2001, the CFO of Palm Inc

During a presentation in February 2001, the CFO of Palm Inc. was asked how frequently her firm assesses and uses its cost of capital. In response, she stated that Palm computes its cost of capital “fr...

Q: In 1999, the S&P 500 returned 21 percent,

In 1999, the S&P 500 returned 21 percent, closing out a streak of five consecutive stellar up-years. Then in 2000, the S&P 500 returned −9.1 percent. In 2001, the S&P 500 returned −16.1 percent. At th...

Q: One behavioral school of thought holds that in complex situations where it

One behavioral school of thought holds that in complex situations where it is difficult to estimate probabilities, simple heuristics are generally better than complicated heuristics. Discuss this pers...

Q: Chapter 3 contains a discussion about how the Morgan Stanley analyst team

Chapter 3 contains a discussion about how the Morgan Stanley analyst team computed a discount rate to use in its free cash flow valuation of eBay stock. Discuss any similarities between the procedure...

Q: The Duke/CFO study on financial executives’ forecasts for the 10

The Duke/CFO study on financial executives’ forecasts for the 10-year horizon features a negative correlation between forecasts of return and forecasts of volatility. Discuss this property in light of...

Q: In August 2004, Google went public at a price of $

In August 2004, Google went public at a price of $85 per share. One year later, its stock price reached $285, as the firm’s earnings consistently exceeded analysts’ consensus forecasts. At that time,...

Q: Consider a trivia test consisting of 10 questions for you to answer

Consider a trivia test consisting of 10 questions for you to answer from memory alone. In addition to giving your best guess, consider a range: a low guess and a high guess so that you feel 90 percent...

Q: From January 1990 through March 1993, the stock of Cypress Semiconductor

From January 1990 through March 1993, the stock of Cypress Semiconductor Corp. underperformed the S&P 500 by 26.5 percent on a cumulative basis. Then in April, the firm announced that its board author...

Q: On December 19, 2000, an article appeared in The Wall

On December 19, 2000, an article appeared in The Wall Street Journal discussing stock price declines that followed share repurchases made by AT&T, Intel, Microsoft, and Hewlett-Packard.51 The article...

Q: Imagine that AutoNation is contemplating a project that requires a $350

Imagine that AutoNation is contemplating a project that requires a $350 million initial outlay and features an NPV of $48 million. The firm is all-equity financed and has $150 million in cash that it...

Q: Imagine that Adaptec is contemplating a project that requires a $3

Imagine that Adaptec is contemplating a project that requires a $3.75 billion initial outlay and features an NPV of $466 million. The firm is all-equity financed and has $1 billion in cash that it pla...

Q: In 2011, Millard Drexler, the CEO of fashion retailing firm

In 2011, Millard Drexler, the CEO of fashion retailing firm J. Crew, together with two private equity firms, TPG and Leonard Green & Partners, did a $3 billion leveraged buyout. The strategy left J. C...

Q: Solar energy firm Solyndra manufactured cylindrical solar panels that, while expensive

Solar energy firm Solyndra manufactured cylindrical solar panels that, while expensive to produce, were easy to install on the roofs of commercial buildings. The firm was founded in 2004. In March 200...

Q: On July 23, 2002, an article entitled “Investors Appreciate

On July 23, 2002, an article entitled “Investors Appreciate Dividends Again, See Them as Safer Bets in Bear Market” appeared on Associated Press Newswires.21 The article described two reasons why fina...

Q: Ashland Inc. is an oil services and diversified chemical company that

Ashland Inc. is an oil services and diversified chemical company that is located in Covington, Kentucky. In 2002 Ashland Inc. was paying an annual dividend of $1.10 per share and was planning to keep...

Q: An article that appeared in The Wall Street Journal in February 2001

An article that appeared in The Wall Street Journal in February 2001 described the experiences of several investors who held dividend-paying stocks.22 The article mentions two investors, Wayne Denny a...

Q: In 1996, Kodak paid a cash dividend of $1.

In 1996, Kodak paid a cash dividend of $1.60 per share. At year-end 1996, Kodak shares were trading at about $80 per share. Between 1997 and 2001, Kodak paid $1.76, and in 2002 raised its dividend to...

Q: Imagine 100 book bags, each of which contains 1,000

Imagine 100 book bags, each of which contains 1,000 poker chips. Forty-five bags contain 700 black chips and 300 red chips. The other 55 bags contain 300 black chips and 700 red chips. You cannot see...

Q: On January 31, 2005, an article appeared in The Wall

On January 31, 2005, an article appeared in The Wall Street Journal comparing the relative performance of stocks in the S&P 500 that pay dividends with stocks in the S&P 500 that do not pay dividends....

Q: Analyze whether there are any behavioral issues in Cogent Communications’ dividend policy

Analyze whether there are any behavioral issues in Cogent Communications’ dividend policy, which is described in the minicase for Chapter 7.

Q: Analyze whether there are any behavioral issues associated with CFO Judy Lewent’s

Analyze whether there are any behavioral issues associated with CFO Judy Lewent’s views about Merck’s dividend policy in respect to the Vioxx incident discussed in Chapter 2.

Q: In December of 1998, energy firm British Petroleum acquired American-

In December of 1998, energy firm British Petroleum acquired American-based Amoco and became BP-Amoco. BP’s stock was listed on the London Stock Exchange and also traded on U.S markets through an Ameri...

Q: In July 2003 Samuel Waksal, the founder of ImClone Systems Inc

In July 2003 Samuel Waksal, the founder of ImClone Systems Inc., began a seven-year prison term. In December 2001 Waksal received word that the Federal Drug Administration (FDA) was about to issue a n...

Q: Discuss any agency conflicts associated with HealthSouth’s pristine-audit program.

Discuss any agency conflicts associated with HealthSouth’s pristine-audit program.

Q: Eleanor Bloxham is the founder and CEO of the Value Alliance Company

Eleanor Bloxham is the founder and CEO of the Value Alliance Company and the Corporate Governance Alliance, and is a respected authority on matters involving corporate governance and valuation. In 201...

Q: When the Internet firm eToys went public in May 1999, its

When the Internet firm eToys went public in May 1999, its CEO Toby Lenk’s stockholdings were worth $850 million on the first day the company’s stock traded on the New York Stock Exchange. Lenk is quot...

Q: Michael Jensen developed some of the seminal ideas underlying agency theory.

Michael Jensen developed some of the seminal ideas underlying agency theory. He suggests that at the time the market value of Enron peaked at approximately $70 billion, its intrinsic value was approxi...

Q: In 2016, automobile manufacturer Volkswagen was charged in the United States

In 2016, automobile manufacturer Volkswagen was charged in the United States for having installed software that engaged antipollution technology in diesel cars not at all times as regulations required...

Q: Suppose that a university is attempting to predict the grade point average

Suppose that a university is attempting to predict the grade point average (GPA) of some graduating students based upon their high school GPA levels. GPA scores lie between 0 and 4. Below are some dat...

Q: Under the purchase accounting method, an acquirer that pays more than

Under the purchase accounting method, an acquirer that pays more than the fair value for a target amortizes the difference over time on its income statement. In the 1990s, mergers between equally size...

Q: HP executives indicate that they use traditional discounted cash flow (DCF

HP executives indicate that they use traditional discounted cash flow (DCF) analysis to evaluate investment projects and that the firm’s cost of capital is about 12 percent. Consider...

Q: Identify any psychological phenomena that were germane in HP’s acquisition of Autonomy

Identify any psychological phenomena that were germane in HP’s acquisition of Autonomy.

Q: A traditional counterargument to the behavioral position described in the chapter is

A traditional counterargument to the behavioral position described in the chapter is that the chapter arguments only focus on problematic acquisitions. For example, consider consumer products firm Col...

Q: What insights are to be gleaned from the comments Steve Case made

What insights are to be gleaned from the comments Steve Case made at various times about AOL’s acquisition of Time Warner?

Q: On February 23, 2000 MGM Grand, Inc. announced its

On February 23, 2000 MGM Grand, Inc. announced its intention to acquire Mirage Resorts, Inc. Over a three day window beginning the day before the announcement, MGM Grand’s market value fell by more th...

Q: In May 2002, Hewlett-Packard acquired Compaq Computer in a

In May 2002, Hewlett-Packard acquired Compaq Computer in a takeover that featured considerable drama. In deliberating the acquisition, HP director Walter Hewlett, son of founder William Hewlett, sugge...

Q: In 2001 the chief executive of AOL Time Warner, Gerald Levin

In 2001 the chief executive of AOL Time Warner, Gerald Levin, sought to acquire AT&T’s cable business, the only cable business larger than the one already owned by AOL Time Warner. In doing so, he did...

Q: What are the main psychological challenges that Ford CEO Alan Mulally faced

What are the main psychological challenges that Ford CEO Alan Mulally faced in respect to Ford’s regular Thursday managers’ meetings, and how do these relate to issues of process and culture at the fi...

Q: In respect to the experiences of financial firms in the lead-

In respect to the experiences of financial firms in the lead-up to the global financial crisis, for each firm identify the most important psychological phenomena that destroyed value, and wherever pos...

Q: Consider the assumptions in Exhibit 3-2 that underlie the valuations

Consider the assumptions in Exhibit 3-2 that underlie the valuations associated with P/E, PEG, and price-to-sales. Analyze the degree to which these assumptions are mutually consistent, and correspond...

Q: The financial instability hypothesis holds that firms take on excessive debt during

The financial instability hypothesis holds that firms take on excessive debt during periods of euphoria. Discuss the behavioral basis for this perspective, drawing if necessary from discussions in pre...

Q: Problem 7 in Chapter 9 pertains to Volkswagen’s having installed “defeat

Problem 7 in Chapter 9 pertains to Volkswagen’s having installed “defeat devices.” In describing the issue, media reports pointed to Volkswagen’s corporate culture, which according to the New York Sta...

Q: Discuss whether the comments of John McCormack that were quoted in Section

Discuss whether the comments of John McCormack that were quoted in Section 12.2 involve any behavioral issues.

Q: Imagine that the current date is t1. A year ago (

Imagine that the current date is t1. A year ago (t0), the firm invested $125 million in the project depicted in the illustrative example in Section 12.5 at a time when expected cash flows were $25 mil...

Q: Suppose that the firm just had the one project (see Question

Suppose that the firm just had the one project (see Question 2) and you were thinking about acquiring the firm. What would the fair value of the acquisition be today, under the assumption that the fir...

Q: Section 12.5 contains a real-option example involving a

Section 12.5 contains a real-option example involving a discount rate of 10 percent. Analyze how the real-option exercise policy is affected if the required return on the project is 15 percent instead...

Q: Make three modifications to the example in Question 4 and then reanalyze

Make three modifications to the example in Question 4 and then reanalyze the problem. The three changes are: (1) Change the up-move to 15 percent from 25 percent and the down-move to –13 percent from...

Q: An overconfident manager misjudges the risk associated with a project and uses

An overconfident manager misjudges the risk associated with a project and uses a discount rate that is too low. Suppose that the true situation is described by the situation in Question 4, but the man...

Q: On January 26, 2005, James Stewart wrote about eBay in

On January 26, 2005, James Stewart wrote about eBay in his Wall Street Journal column “Common Sense.” Stewart indicated that he would consider purchasing eBay stock in the wake of its decline. While a...

Q: On February 13, 2016, The New York Times published

On February 13, 2016, The New York Times published a story by journalist Jeff Sommer entitled “Dividends, Wall Street’s Battered Status Symbol.” Sommer discussed the fact that firms had been reducin...

Q: In connection with chapter question 2, answer the following questions.

In connection with chapter question 2, answer the following questions. a. What probability would you assign to Jack being an engineer if the question instead stated that the room with lawyers has 70 l...

Q: Warren Buffett described his investment philosophy as being greedy when others are

Warren Buffett described his investment philosophy as being greedy when others are fearful and being fearful when others are greedy. Bob Goldfarb is the chairman of Ruane, Cunniff & Goldfarb, the inve...

Q: Impact investors make investments in firms, organizations, and funds in

Impact investors make investments in firms, organizations, and funds in order to generate positive social and environmental impacts alongside a financial return. Toniic is an organization dedicated to...

Q: The minicase in Chapter 3 contains an excerpt from a ValuEngine analyst

The minicase in Chapter 3 contains an excerpt from a ValuEngine analyst report about the firm Aetna. The report states that ValuEngine’s forecasting models capture important features of stock price dy...

Q: On the MHHE web site for this book, in the Chapter

On the MHHE web site for this book, in the Chapter 13 files, you will find an Excel file with return data on Valeant and other firms. Use regression analysis to assess the factor structure of the stoc...

Q: Precept Capital Management is a hedge fund located in Dallas, Texas

Precept Capital Management is a hedge fund located in Dallas, Texas. The fund employs several investment strategies, one of which is based on comparing the trajectory of stock prices to the trajecto...

Q: Given the information provided in the chapter, discuss the psychological phenomena

Given the information provided in the chapter, discuss the psychological phenomena associated with Martha Stewart’s investment decisions.

Q: Discuss if the manner in which people’s answers to questions 7.

Discuss if the manner in which people’s answers to questions 7.1 through 7.6 above provides an indication of their financial literacy.90 Questions 7.1: Suppose you had $100 in a savings account and...

Q: Consider the financial planning case study in Chapter 13 about William and

Consider the financial planning case study in Chapter 13 about William and Mira Bold. At the end of the case, financial planner Claire begins to prepare for her second meeting with the Bolts. How can...

Q: Of the 10 psychological phenomena introduced in Chapter 1, identify which

Of the 10 psychological phenomena introduced in Chapter 1, identify which ones apply to the minicase, and give reasons to support your answer.

Q: As of July 2015, 30 countries worldwide are operating 438 nuclear

As of July 2015, 30 countries worldwide are operating 438 nuclear reactors for electricity generation and 67 new nuclear plants are under construction in 15 countries. Nuclear power plants provided 10...

Q: Imagine a decision task in which you are to choose between two

Imagine a decision task in which you are to choose between two alternatives that involve blindly drawing a single chip from one of two urns, labeled A and B respectively. Both urns contain colored bal...

Q: The U.S. Army Corps of Engineers maintains locks and

The U.S. Army Corps of Engineers maintains locks and dams on U.S. waterways, and engages consultants to analyze the kinds of issues described in the minicase. One of these consultants points out that...

Q: Identify the psychological phenomena in the minicase. Prioritize the phenomena from

Identify the psychological phenomena in the minicase. Prioritize the phenomena from most important to least important. Begin your answer by defining the phenomena, and then describing their role in th...

Q: How would you use behavioral concepts to explain generally why different analysts

How would you use behavioral concepts to explain generally why different analysts arrive at different price targets?

Q: What insights from the discussion of the Morgan Stanley 2003 report on

What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by Jefferies?

Q: What insights from the discussion of the Morgan Stanley 2003 report on

What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by Cantor Fitzgerald?

Q: What insights from the discussion of the Morgan Stanley 2003 report on

What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by Leerink Swann?

Q: What insights from the discussion of the Morgan Stanley 2003 report on

What insights from the discussion of the Morgan Stanley 2003 report on eBay apply to the 2013 report on Aetna by ValuEngine?

Q: Consider the issues of project budget, scope, and project timetable

Consider the issues of project budget, scope, and project timetable. Discuss the extent to which the City Center project reflects survey evidence discussed in the chapter about capital budgeting biase...

Q: Consider whether MGM faced issues in the City Center project that could

Consider whether MGM faced issues in the City Center project that could be characterized as sunk costs, and if so, whether they exhibited behavior consistent with “escalation of commitment.”

Q: Compare the City Center project with specific projects discussed in the chapter

Compare the City Center project with specific projects discussed in the chapter, namely: Sony’s Chromatron, Syntex’s Enrprostil, Motorola’s Iridium, Eurotunnel’s Channel Tunnel, Boeing’s Dreamliner, a...

Q: What are the portfolio weights for a portfolio that has

What are the portfolio weights for a portfolio that has 180 shares of Stock A that sell for $45 per share and 140 shares of Stock B that sell for $27 per share?

Q: Consider the following information:

Consider the following information:a. Your portfolio is invested 30 percent each in A and C, and 40 percent in B. What is the expected return of the portfolio?b. What is the variance of this portfolio...

Q: Suppose the spot exchange rate for the Hungarian forint is

Suppose the spot exchange rate for the Hungarian forint is HUF 152.93. The inflation rate in the United States will be 4.9 percent per year. It will be 8.6 percent in Hungary. What do you predict the...

Q: Use the information in Figure 21.1 to answer the following

Use the information in Figure 21.1 to answer the following questions:Figure 21.1:a. Which would you rather have, $100 or £100? Why?b. Which would you rather have, 100 Swiss francs (SF) or...

Q: Use the information in Figure 21.1 to answer the following

Use the information in Figure 21.1 to answer the following questions:Figure 21.1: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...

Q: Suppose the spot exchange rate for the Canadian dollar is

Suppose the spot exchange rate for the Canadian dollar is Can$1.06 and the six-month forward rate is Can$1.11.a. Which is worth more, a U.S. dollar or a Canadian dollar?b. Assuming absolute PPP holds,...

Q: Suppose the Japanese yen exchange rate is ¥112 =

Suppose the Japanese yen exchange rate is ¥112 = $1, and the British pound exchange rate is £1 = $1.93.a. What is the cross-rate in terms of yen per pound?b. Suppose the cross-rate is ¥209 = £1. Is t...

Q: Use Figure 21.1 to answer the following questions: Suppose interest

Use Figure 21.1 to answer the following questions: Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 2.2 percent. What must the six-month risk-free r...

Q: The treasurer of a major U.S. firm has $30 million

The treasurer of a major U.S. firm has $30 million to invest for three months. The interest rate in the United States is .37 percent per month. The interest rate in Great Britain is .51 percent per mo...

Q: Suppose the current exchange rate for the Polish zloty is

Suppose the current exchange rate for the Polish zloty is Z 2.17. The expected exchange rate in three years is Z 2.26. What is the difference in the annual inflation rates for the United States and Po...

Q: Suppose your company imports computer motherboards from Singapore. The exchange

Suppose your company imports computer motherboards from Singapore. The exchange rate is given in Figure 21.1 . You have just placed an order for 30,000 motherboards at a cost to you of 204.7 Singapore...

Q: Indicate the likely impact of each of the following on

Indicate the likely impact of each of the following on a company’s target cash balance. Use the letter I to denote an increase and D to denote a decrease. Briefly explain your reasoning in each case:a...

Q: You own a stock portfolio invested 25 percent in Stock

You own a stock portfolio invested 25 percent in Stock Q, 20 percent in Stock R, 15 percent in Stock S, and 40 percent in Stock T. The betas for these four stocks are .84, 1.17, 1.11, and 1.36, respec...

Q: All Night Corporation has determined that its target cash balance

All Night Corporation has determined that its target cash balance if it uses the BAT model is $2,700. The total cash needed for the year is $28,000, and the order cost is $10. What interest rate must...

Q: Given the following information, calculate the target cash balance using

Given the following information, calculate the target cash balance using the BAT model:Annual interest rate ……………………………….…………. 6%Fixed order cost ………………………………………..……… $25Total cash needed ………………………………...

Q: White Whale Corporation has an average daily cash balance of

White Whale Corporation has an average daily cash balance of $1,300. Total cash needed for the year is $43,000. The interest rate is 5 percent, and replenishing the cash costs $8 each time. What are t...

Q: Debit and Credit Bookkeepers needs a total of $16,000 in

Debit and Credit Bookkeepers needs a total of $16,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells $1,500 in securities and transfers the cash in. The...

Q: The All Day Company is currently holding $690,000 in cash.

The All Day Company is currently holding $690,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by $140,000 per month. How much of the current cash holdings s...

Q: Econoline Crush, Inc., uses a Miller–Orr cash management approach with

Econoline Crush, Inc., uses a Miller–Orr cash management approach with a lower limit of $43,000, an upper limit of $125,000, and a target balance of $80,000. Explain what each of these points represen...

Q: Slap Shot Corporation has a fixed cost associated with buying

Slap Shot Corporation has a fixed cost associated with buying and selling marketable securities of $40. The interest rate is currently .021 percent per day, and the firm has estimated that the standar...

Q: Based on the Miller–Orr model, describe what will happen to

Based on the Miller–Orr model, describe what will happen to the lower limit, the upper limit, and the spread (the distance between the two) if the variation in net cash flow grows. Give an intuitive e...

Q: The variance of the daily cash flows for the Pele

The variance of the daily cash flows for the Pele Bicycle Shop is $890,000. The opportunity cost to the firm of holding cash is 7 percent per year. What should the target cash level and the upper limi...

Q: Bismark Co. is in the process of considering a change

Bismark Co. is in the process of considering a change in its terms of sale. The current policy is cash only; the new policy will involve one period’s credit. Sales are 40,000 units per period at a pri...

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

You own a portfolio equally invested in a risk free asset and two stocks. If one of the stocks has a beta of 1.38 and the total portfolio is equally as risky as the market, what must the beta be for t...

Q: The Johnson Company sells 3,300 pairs of running shoes per

The Johnson Company sells 3,300 pairs of running shoes per month at a cash price of $90 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to $91.84...

Q: Silicon Wafers, Inc. (SWI), is debating whether or not to

Silicon Wafers, Inc. (SWI), is debating whether or not to extend credit to a particular customer. SWI’s products, primarily used in the manufacture of semiconductors, currently sell for $1,140 per uni...

Q: Consider the following information about two alternative credit strategies:

Consider the following information about two alternative credit strategies:The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the exist...

Q: Suppose a corporation currently sells Q units per month for

Suppose a corporation currently sells Q units per month for a cash-only price of P . Under a new credit policy that allows one month’s credit, the quantity sold will be Q and the price per unit will b...

Q: Night Shades Inc. (NSI) manufactures biotech sunglasses. The variable materials

Night Shades Inc. (NSI) manufactures biotech sunglasses. The variable materials cost is $5.43 per unit, and the variable labor cost is $3.13 per unit.a. What is the variable cost per unit?b. Suppose N...

Q: Consider a project with the following data: accounting break-even quantity

Consider a project with the following data: accounting break-even quantity = 15,500 units; cash break-even quantity = 13,200 units; life = five years; fixed costs = $140,000; variable costs = $24 per...

Q: At an output level of 65,000 units, you calculate that

At an output level of 65,000 units, you calculate that the degree of operating leverage is 3.40. If output rises to 70,000 units, what will the percentage change in operating cash flow be? Will the ne...

Q: In the previous problem, suppose fixed costs are $130,000. What

In the previous problem, suppose fixed costs are $130,000. What is the operating cash flow at 58,000 units? The degree of operating leverage?Previous problem:At an output level of 65,000 units, you ca...

Q: A proposed project has fixed costs of $73,000 per year.

A proposed project has fixed costs of $73,000 per year. The operating cash flow at 8,000 units is $87,500. Ignoring the effect of taxes, what is the degree of operating leverage? If units sold rise fr...

Q: At an output level of 10,000 units, you have calculated

At an output level of 10,000 units, you have calculated that the degree of operating leverage is 2.35. The operating cash flow is $43,000 in this case. Ignoring the effect of taxes, what are fixed cos...

Q: A stock has a beta of 1.05, the expected return

A stock has a beta of 1.05, the expected return on the market is 11 percent, and the risk-free rate is 5.2 percent. What must the expected return on this stock be?

Q: In the previous problem, what will be the new degree

In the previous problem, what will be the new degree of operating leverage in each case?Previous problem:At an output level of 10,000 units, you have calculated that the degree of operating leverage i...

Q: Titan Mining Corporation has 9 million shares of common stock

Titan Mining Corporation has 9 million shares of common stock outstanding, 250,000 shares of 6 percent preferred stock outstanding, and 105,000 7.5 percent semiannual bonds outstanding, par value $1,0...

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

An all-equity firm is considering the following projects:The T-bill rate is 5 percent, and the expected return on the market is 11 percent.a. Which projects have a higher expected return than the firm...

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

Suppose your company needs $20 million to build a new assembly line. Your target debtequity ratio is .75. The flotation cost for new equity is 8 percent, but the flotation cost for debt is only 5 perc...

Q: Southern Alliance Company needs to raise $45 million to start

Southern Alliance Company needs to raise $45 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: K-Too Ever wear Corporation can manufacture mountain climbing shoes for

K-Too Ever wear Corporation can manufacture mountain climbing shoes for $24.86 per pair in variable raw material costs and $14.08 per pair in variable labor expense. The shoes sell for $135 per pair....

Q: Olin Transmissions, Inc. has the following estimates for its new

Olin Transmissions, Inc. has the following estimates for its new gear assembly project: price = $1,900 per unit; variable costs = $240 per unit; fixed costs = $4.8 million; quantity = 95,000 units. Su...

Q: For the company in the previous problem, suppose management is

For the company in the previous problem, suppose management is most concerned about the impact of its price estimate on the project’s profitability. How could you address this concern? Describe how yo...

Q: We are evaluating a project that costs $724,000, has an

We are evaluating a project that costs $724,000, 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: In the previous problem, suppose the projections given for price,

In the previous problem, suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ± 10 percent. Calculate the best-case and worst-case NPV fi gures...

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

A stock has an expected return of 10.2 percent, the risk-free rate is 4.5 percent, and the market risk premium is 8.5 percent. What must the beta of this stock be?

Q: In each of the following cases, calculate the accounting break-even

In each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even.,,,

Q: In each of the following cases, find the unknown variable:

In each of the following cases, find the unknown variable:,,,

Q: A project has the following estimated data: price = $57

A project has the following estimated data: price = $57 per unit; variable costs = $32 per unit; fixed costs = $9,000; required return = 12 percent; initial investment = $18,000; life = four years. Ig...

Q: The Gecko Company and the Gordon Company are two firms

The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield...

Q: As discussed in the text, in the absence of market

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once...

Q: National Business Machine Co. (NBM) has $2 million of extra

National Business Machine Co. (NBM) has $2 million of extra cash after taxes have been paid. NBM has two choices to make use of this cash. One alternative is to invest the cash in fi nancial assets. T...

Q: After completing its capital spending for the year, Carlson Manufacturing

After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 6 percent or pay...

Q: In exchange for a $400 million fixed commitment line of

In exchange for a $400 million fixed commitment line of credit, your firm has agreed to do the following:1. Pay 1.9 percent per quarter on any funds actually borrowed.2. Maintain a 4 percent compensat...

Q: Come and Go Bank offers your firm a 10 percent

Come and Go Bank offers your firm a 10 percent discount interest loan for up to $25 million, and in addition requires you to maintain a 5 percent compensating balance against the amount borrowed. What...

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

In a world of corporate taxes only, show that the WACC can be written as WACC = R U × [1 - T C ( D / V )]

Q: A stock has an expected return of 13.5 percent, its

A stock has an expected return of 13.5 percent, its beta is 1.17, and the risk-free rate is 5.5 percent. What must the expected return on the market be?

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

Assume a firm’s debt is risk-free, so that the cost of debt equals the risk-free rate, R f . Define

Q: In Problem 14, what is the break-even quantity for the

In Problem 14, what is the break-even quantity for the new credit policy?Problem 14:The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. B...

Q: In Problem 14, what is the break-even price per unit

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 4,100 units and all other values remain th...

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

Photo chronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt ­equity ratio of .70. It’s considering building a new $45 million manufacturing f...

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

You have $100,000 to invest in a portfolio containing Stock X and Stock Y. Your goal is to create a portfolio that has an expected return of 18.5 percent. If Stock X has an expected return of 17.2 per...

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

Consider the following information about Stocks I and II:The market risk premium is 8 percent, and the risk-free rate is 4 percent. Which stock has the most systematic risk? Which one has the most uns...

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: 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 stock...

Q: Use the results of Problem 25 to find the accounting,

Use the results of Problem 25 to find the accounting, cash, and financial break-even quantities for the company in Problem 27

Q: A stock has an expected return of 14 percent, its

A stock has an expected return of 14 percent, its beta is 1.45, and the expected return on the market is 11.5 percent. What must the risk-free rate be?

Q: Use the results of Problem 26 to find the degree

Use the results of Problem 26 to find the degree of operating leverage for the company in Problem 27 at the base-case output level of 35,000 units. How does this number compare to the sensitivity figu...

Q: Trower Corp. has a debtequity ratio of 1.20. The company

Trower Corp. has a debtequity ratio of 1.20. 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: This is a comprehensive project evaluation problem bringing together much

This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a fi nancial consultant to Defense Elec...

Q: In Problem 15, what is the break-even price per unit

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:Happy Times currently has an all-cash credit policy. It is consider...

Q: In the previous problem, assume the equity increases by 1,250

In the previous problem, assume the equity increases by 1,250 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: From our discussion of the Fisher effect in Chapter 7,

From our discussion of the Fisher effect in Chapter 7, we know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as:1 + r = (1 + R)/ (1 +...

Q: This problem concerns the effect of taxes on the various

This problem concerns the effect of taxes on the various break-even measures.a. Show that, when we consider taxes, the general relationship between operating cash flow, OCF, and sales volume, Q , can...

Q: Show that if we consider the effect of taxes, the

Show that if we consider the effect of taxes, the degree of operating leverage can be written as: DOL = 1 + [FC × (1 - T ) - T × D ] / OCF Notice that this reduces to our previous result if T = 0. Can...

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 $3,200,000 investment in threading equipment to get the project sta...

Q: In Problem 27, suppose you’re confident about your own projections,

In Problem 27, suppose you’re confident about your own projections, but you’re a little unsure about Detroit’s actual machine screw requirement. What is the sensitivity of the project OCF to changes i...

Q: A stock has a beta of 1.35 and an expected

A stock has a beta of 1.35 and an expected return of 16 percent. A risk-free asset currently earns 4.8 percent.a. What is the expected return on a portfolio that is equally invested in the two assets?...

Q: Teardrop, Inc., wishes to expand its facilities. The company currently

Teardrop, Inc., wishes to expand its facilities. The company currently has 8 million shares outstanding and no debt. The stock sells for $50 per share, but the book value per share is $18. Net income...

Q: The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent fi nancial information for the company is shown here:MHMM is considering an investment that has the s...

Q: In the previous problem, what would the ROE on the

In the previous problem, what would the ROE on the investment have to be if we wanted the price after the offering to be $98 per share? (Assume the PE ratio remains constant.) What is the NPV of this...

Q: Keira Mfg. is considering a rights offer. The company has

Keira Mfg. is considering a rights offer. The company has determined that the ex-rights price would be $71. The current price is $76 per share, and there are 19 million shares outstanding. The rights...

Q: You bought one of Great White Shark Repellant Co.’s 8

You bought one of Great White Shark Repellant Co.’s 8 percent coupon bonds one year ago for $1,030. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bond...

Q: You find a certain stock that had returns of 7

You find a certain stock that had returns of 7 percent, - 12 percent, 18 percent, and 19 percent for four of the last five years. If the average return of the stock over this period was 10.5 percent,...

Q: A stock has had returns of 3 percent, 38 percent,

A stock has had returns of 3 percent, 38 percent, 21 percent, -15 percent, 29 percent, and - 13 percent over the last six years. What are the arithmetic and geometric returns for the stock?

Q: A stock has had the following yearend prices and dividends:

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

Q: Consider a four-year project with the following information: initial fixed

Consider a four-year project with the following information: initial fixed asset investment = $490,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $32; var...

Q: In the previous problem, what is the degree of operating

In the previous problem, what is the degree of operating leverage at the given level of output? What is the degree of operating leverage at the accounting break-even level of output?Previous problem:C...

Q: Asset W has an expected return of 15.2 percent and

Asset W has an expected return of 15.2 percent and a beta of 1.25. If the risk-free rate is 5.3 percent, complete the following table for portfolios of Asset W and a risk-free asset. Illustrate the re...

Q: You are considering a new product launch. The project will

You are considering a new product launch. The project will cost $1,700,000, have a four-year life, and have no salvage value; depreciation is straight-line to zero. Sales are projected at 190 units pe...

Q: McGilla Golf has decided to sell a new line of

McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $750 per set and have a variable cost of $330 per set. The company has spent $150,000 for a marketing study that dete...

Q: In the previous problem, you feel that the values are

In the previous problem, you feel that the values are accurate to within only ±10 percent. What are the best-case and worst-case NPVs? (Hint: The price and variable costs for the two existing sets of...

Q: Hybrid cars are touted as a “green” alternative; however, the

Hybrid cars are touted as a “green” alternative; however, the fi nancial aspects of hybrid ownership are not as clear. Consider the 2006 Honda Accord Hybrid, which had a list price of $5,450 (includin...

Q: In an effort to capture the large jet market, Airbus

In an effort to capture the large jet market, Airbus invested $13 billion developing its A380, which is capable of carrying 800 passengers. The plane has a list price of $280 million. In discussing th...

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

Suppose the returns on long-term corporate bonds are normally distributed. Based on the historical record, what is the approximate probability that your return on these bonds will be less than - 2.2 p...

Q: In Problem 18, what is the probability that the return

In Problem 18, what is the probability that the return is less than -100 percent (think)? What are the implications for the distribution of returns?Problem 18:Assuming that the returns from holding sm...

Q: Over a 40-year period an asset had an arithmetic return

Over a 40-year period an asset had an arithmetic return of 15.3 percent and a geometric return of 11.9 percent. Using Blume’s formula, what is your best estimate of the future annual returns over 5 ye...

Q: Assume that the historical return on large-company stocks is a

Assume that the historical return on large-company stocks is a predictor of the future returns. What return would you estimate for large company stocks over the next year? The next 5 years? 20 years?...

Q: Stock Y has a beta of 1.3 and an expected

Stock Y has a beta of 1.3 and an expected return of 18.5 percent. Stock Z has a beta of .70 and an expected return of 12.1 percent. If the risk-free rate is 8 percent and the market risk premium is 7....

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

Scanlin, Inc., is considering a project that will result in initial after tax cash savings of $2.7 million at the end of the first year, and these savings will grow at a rate of 4 percent per year ind...

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 $15 million, and the company paid $850,000 in flotation costs. In addition, the equity issued had a flotation c...

Q: Ying Import has several bond issues outstanding, each making semiannual

Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table. If the corporate tax rate is 34 percent, what is the after tax c...

Q: Floyd Industries stock has a beta of 1.50. The company

Floyd Industries stock has a beta of 1.50. The company just paid a dividend of $.80, and the dividends are expected to grow at 5 percent. The expected return of the market is 12 percent, and Treasury...

Q: Show that the value of a right just prior to

Show that the value of a right just prior to expiration can be written as:Value of a right = PRO – PX = (PRO – PS)/(N + 1) Where P RO , P S , and P X stand for the rights-on price, the subscription pr...

Q: Roth Corp. wants to raise $5.6 million via a rights

Roth Corp. wants to raise $5.6 million via a rights offering. The company currently has 650,000 shares of common stock outstanding that sell for $50 per share. Its underwriter has set a subscription p...

Q: Knight Inventory Systems, Inc., has announced a rights offer. The

Knight Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take four rights to buy a new share in the offering at a subscription price of $35. At the close of...

Q: Tool Manufacturing has an expected EBIT of $64,000 in perpetuity

Tool Manufacturing has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has $95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of ca...

Q: Until It Sleeps Corporation expects an EBIT of $14,000 every

Until It Sleeps Corporation expects an EBIT of $14,000 every year forever. Until It Sleeps currently has no debt, and its cost of equity is 16 percent. The firm can borrow at 9 percent. If the corpora...

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

The Veblen Company and the Knight Company are identical in every respect except that Veblen is not levered. Financial information for the two firms appears in the following table. All earnings streams...

Q: You own a portfolio that has $2,950 invested in Stock

You own a portfolio that has $2,950 invested in Stock A and $3,700 invested in Stock B. If the expected returns on these stocks are 11 percent and 15 percent, respectively, what is the expected return...

Q: The Down and Out Co. just issued a dividend of

The Down and Out Co. just issued a dividend of $2.40 per share on its common stock. The company is expected to maintain a constant 5.5 percent growth rate in its dividends indefinitely. If the stock s...

Q: You own 1,000 shares of stock in Avondale Corporation. You

You own 1,000 shares of stock in Avondale Corporation. You will receive a $2.30 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $53 per share. The required re...

Q: In the previous problem, suppose you want only $750 total

In the previous problem, suppose you want only $750 total in dividends the first year. What will your homemade dividend be in two years?Previous problem:You own 1,000 shares of stock in Avondale Corpo...

Q: Fly chucker Corporation is evaluating an extra dividend versus a

Fly chucker Corporation is evaluating an extra dividend versus a share repurchase. In either case, $9,000 would be spent. Current earnings are $1.30 per share, and the stock currently sells for $64 pe...

Q: You’ve worked out a line of credit arrangement that allows

You’ve worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .64 percent per month. In addition, 5 percent of the amount that you borrow...

Q: A bank offers your firm a revolving credit arrangement for

A bank offers your firm a revolving credit arrangement for up to $70 million at an interest rate of 2.3 percent per quarter. The bank also requires you to maintain a compensating balance of 4 percent...

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

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 $240 million. Accounts receivable at the...

Q: Rework Problem 15 assuming:

Rework Problem 15 assuming:Problem 15:Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:Wildcat’s purchases from suppliers in a quarter are equal...

Q: Bird’s Eye Tree houses, Inc., a Kentucky company, has determined

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: 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: 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: Sixx AM Manufacturing has a target debt equity ratio of

Sixx AM Manufacturing has a target debt equity ratio of .65. Its cost of equity is 15 percent, and its cost of debt is 9 percent. If the tax rate is 35 percent, what is the company’s WACC?

Q: Happy Times currently has an all-cash credit policy. It is

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: The Silver Spokes Bicycle Shop has decided to offer credit

The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 500 bicycles. The average cost to the shop of a bicycle is $490....

Q: Lakonishok Equipment has an investment opportunity in Europe. The project

Lakonishok Equipment has an investment opportunity in Europe. The project costs €14 million and is expected to produce cash flows of €2.1 million in year 1, €3.4 million in year 2, and €4.3 million in...

Q: You are evaluating a proposed expansion of an existing subsidiary

You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 24 million. The cash flows from the project would be SF 6.6 million per...

Q: Atreides International has operations in Arrakis. The balance sheet for

Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 23,000 solaris, debt in the amount of 9,000 solaris, and equity of 14,000 sola...

Q: Suppose a stock had an initial price of $91 per

Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an ending share price of $102. Compute the percentage total return

Q: In Problem 1, what was the dividend yield? The capital

In Problem 1, what was the dividend yield? The capital gains yield?Problem 1:Suppose a stock had an initial price of $91 per share, paid a dividend of $2.40 per share during the year, and had an endin...

Q: Rework Problems 1 and 2 assuming the ending share price

Rework Problems 1 and 2 assuming the ending share price is $83.Problems 1:what was the dividend yield? The capital gains yield?Problems 2:Suppose a stock had an initial price of $91 per share, paid a...

Q: Suppose you bought a 7 percent coupon bond one year

Suppose you bought a 7 percent coupon bond one year ago for $1,040. The bond sells for $1,070 today.a. Assuming a $1,000 face value, what was your total dollar return on this investment over the past...

Q: What was the average annual return on large-company stock from

What was the average annual return on large-company stock from 1926 through 2007:a. In nominal terms?b. In real terms?

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

Fama’s Llamas has a weighted average cost of capital of 8.9 percent. The company’s cost of equity is 12 percent, and its pretax cost of debt is 7.9 percent. The tax rate is 35 percent. What is the com...

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

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

Q: Refer to Table 12.1 in the text and look at

Refer to Table 12.1 in the text and look at the period from 1970 through 1975.Table 12.1:a. Calculate the arithmetic average returns for large-company stocks and T-bills over this period.b. Calculate...

Q: You’ve observed the following returns on Crash-n-Burn Computer’s stock over

You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 7 percent, - 12 percent, 11 percent, 38 percent, and 14 percent.a. What was the arithmetic average retu...

Q: For Problem 9, suppose the average inflation rate over this

For Problem 9, suppose the average inflation rate over this period was 3.5 percent and the average T-bill rate over the period was 4.2 percent.Problem 9:You’ve observed the following returns on Crash-...

Q: Given the information in Problem 10, what was the average

Given the information in Problem 10, what was the average real risk-free rate over this time period? What was the average real risk premium?Problem 10:suppose the average inflation rate over this peri...

Q: Look at Table 12.1 and Figure 12.7 in the text.

Look at Table 12.1 and Figure 12.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2007? Why do you think they were so high during this period? What relationship...

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 standard...

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

Suppose the returns on large-company stocks are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value) in the appendix o...

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

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

Q: Suppose the returns on long-term corporate bonds and T-bills are

Suppose the returns on long-term corporate bonds and T-bills are normally distributed. Based on the historical record, use the cumulative normal probability table (rounded to the nearest table value)...

Q: Filer Manufacturing has 11 million shares of common stock outstanding.

Filer Manufacturing has 11 million shares of common stock outstanding. The current share price is $68, and the book value per share is $6. Filer Manufacturing also has two bond issues outstanding. The...

Q: In Problem 12, suppose the most recent dividend was $4.10

In Problem 12, suppose the most recent dividend was $4.10 and the dividend growth rate is 6 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding...

Q: Jungle, Inc., has a target debtequity ratio of 1.05. Its

Jungle, Inc., has a target debtequity ratio of 1.05. Its WACC is 9.4 percent, and the tax rate is 35 percent.a. If Jungle’s cost of equity is 14 percent, what is its pretax cost of debt?b. If instead...

Q: Given the following information for even flow Power Co., find

Given the following information for even flow Power Co., find the WACC. Assume the company’s tax rate is 35 percent.Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to matu...

Q: The Up and Coming Corporation’s common stock has a beta

The Up and Coming Corporation’s common stock has a beta of 1.05. If the risk-free rate is 5.3 percent and the expected return on the market is 12 percent, what is the company’s cost of equity capital?

Q: Stock in Country Road Industries has a beta of .85.

Stock in Country Road Industries has a beta of .85. The market risk premium is 8 percent, and T-bills are currently yielding 5 percent. The company’s most recent dividend was $1.60 per share, and divi...

Q: Suppose In a Found Ltd. just issued a dividend of

Suppose In a Found Ltd. just issued a dividend of $1.43 per share on its common stock. The company paid dividends of $1.05, $1.12, $1.19, and $1.30 per share in the last four years. If the stock curre...

Q: You own a portfolio that is 60 percent invested in

You own a portfolio that is 60 percent invested in Stock X, 25 percent in Stock Y, and 15 percent in Stock Z. The expected returns on these three stocks are 9 percent, 17 percent, and 13 percent, resp...

Q: Holdup Bank has an issue of preferred stock with a

Holdup Bank has an issue of preferred stock with a $6 stated dividend that just sold for $96 per share. What is the bank’s cost of preferred stock?

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

Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 15 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments...

Q: Jiminy’s Cricket Farm issued a 30-year, 8 percent semiannual bond

Jiminy’s Cricket Farm issued a 30-year, 8 percent semiannual bond 7 years ago. The bond currently sells for 95 percent of its face value. The company’s tax rate is 35 percent.a. What is the pretax cos...

Q: For the firm in Problem 7, suppose the book value

For the firm in Problem 7, suppose the book value of the debt issue is $80 million. In addition, the company has a second debt issue on the market, a zero coupon bond with seven years left to maturity...

Q: Mullineaux Corporation has a target capital structure of 60 percent

Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 6 per...

Q: Big Time, Inc., is proposing a rights offering. Presently there

Big Time, Inc., is proposing a rights offering. Presently there are 500,000 shares outstanding at $81 each. There will be 60,000 new shares offered at $70 each.a. What is the new market value of the c...

Q: The Clifford Corporation has announced a rights offer to raise

The Clifford Corporation has announced a rights offer to raise $40 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonre...

Q: Red Shoe Co. has concluded that additional equity financing will

Red Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined t...

Q: The Woods Co. and the Mickelson Co. have both announced

The Woods Co. and the Mickelson Co. have both announced IPOs at $40 per share. One of these is undervalued by $7, and the other is overvalued by $5, but you have no way of knowing which is which. You...

Q: The Educated Horses Corporation needs to raise $60 million to

The Educated Horses Corporation needs to raise $60 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds....

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

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 10.5 percent. If your goal is to create a portfol...

Q: In the previous problem, if the SEC fi ling fee

In the previous problem, if the SEC fi ling fee and associated administrative expenses of the offering are $900,000, how many shares need to be sold?Previous problem:The Educated Horses Corporation ne...

Q: The Raven Co. has just gone public. Under a firm

The Raven Co. has just gone public. Under a firm commitment agreement, Raven received $18.20 for each of the 10 million shares sold. The initial offering price was $20 per share, and the stock rose to...

Q: Left Turn, Inc., has 120,000 shares of stock outstanding. Each

Left Turn, Inc., has 120,000 shares of stock outstanding. Each share is worth $94, so the company’s market value of equity is $11,280,000. Suppose the firm issues 25,000 new shares at the following pr...

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

Maynard, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are normal. If there is strong...

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

Wood Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $23 million and there are no taxes, what is EBIT?

Q: In the previous question, suppose the corporate tax rate is

In the previous question, suppose the corporate tax rate is 35 percent. What is EBIT in this case? What is the WACC? Explain.Previous question:Wood Corp. uses no debt. The weighted average cost of cap...

Q: Maxwell Industries has a debt–equity ratio of 1.5. Its WACC

Maxwell Industries has a debt–equity ratio of 1.5. Its WACC is 10 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent.a. What is the company’s cost of equity capital?b. Wh...

Q: Empress Corp. has no debt but can borrow at 8.2

Empress Corp. has no debt but can borrow at 8.2 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent.a. What is the company’s cost of equity?b. If the firm converts to 25 p...

Q: Frederick & Co. expects its EBIT to be $92,000 every

Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35 percen...

Q: In Problem 14, what is the cost of equity after

In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision?Problem 14:Frederick & Co. expects its EBIT to b...

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

Based on the following information, calculate the expected return:,,,

Q: Repeat parts (a) and (b) in Problem 1 assuming Maynard

Repeat parts (a) and (b) in Problem 1 assuming Maynard has a tax rate of 35 percent.Parts (a) and (b) in Problem 1:a. Calculate earnings per share (EPS) under each of the three economic scenarios befo...

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.Problem 1:Maynard, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are...

Q: James Corporation is comparing two different capital structures: an all-equity

James Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 160,000 shares of stock outstanding. Und...

Q: In Problem 4, use M&M Proposition I to find the

In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Problem 4:James Corporation is comparing two different cap...

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

Keenan Corp. is comparing two different capital structures. Plan I would result in 7,000 shares of stock and $160,000 in debt. Plan II would result in 5,000 shares of stock and $240,000 in debt. The i...

Q: Ignoring taxes in Problem 6, what is the price per

Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?Problem 6:Keenan Corp. is comparing two different capital struct...

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

Seether, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 35 percent debt. Currently, there are 8,000 shares outstanding, and th...

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 $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is wort...

Q: So Much, Inc., has declared a $4.60 per share dividend.

So Much, Inc., has declared a $4.60 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the d...

Q: The owners’ equity accounts for Quadrangle International are shown here:

The owners’ equity accounts for Quadrangle International are shown here:a. If Quadrangle stock currently sells for $30 per share and a 10 percent stock dividend is declared, how many...

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

Based on the following information, calculate the expected return:,,,

Q: For the company in Problem 2, show how the equity

For the company in Problem 2, show how the equity accounts will change if:Problem 2:The owners’ equity accounts for Quadrangle International are shown here:a. Quadrangle declares a f...

Q: Red Rocks Corporation (RRC) currently has 350,000 shares of stock

Red Rocks Corporation (RRC) currently has 350,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a....

Q: The balance sheet for Chevelle Corp. is shown here in

The balance sheet for Chevelle Corp. is shown here in market value terms. There are 8,000 shares of stock outstanding.The company has declared a dividend of $1.30 per share. The stock goes ex dividend...

Q: In the previous problem, suppose Chevelle has announced it is

In the previous problem, suppose Chevelle has announced it is going to repurchase $10,400 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outs...

Q: The market value balance sheet for Vena Sera Manufacturing is

The market value balance sheet for Vena Sera Manufacturing is shown here. Vena Sera has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend i...

Q: The company with the common equity accounts shown here has

The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $35 per share. What effects on the equity accounts will the distri...

Q: In the previous problem, suppose the company instead decides on

In the previous problem, suppose the company instead decides on a four-for-one stock split. The firm’s 85-cent per share cash dividend on the new (post-split) shares represents an in...

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

The following is the sales budget for Trickle, Inc., for the first quarter of 2009:Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the sale15 per...

Q: Here are some important fi gures from the budget of

Here are some important fi gures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:The company predicts that 5 percent of its credit sales will never be collected, 35 percent...

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

Below 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: Based on the following information, calculate the expected return and

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

Q: Rocco Corp. has a book net worth of $10,380. Long-term

Rocco Corp. has a book net worth of $10,380. Long-term debt is $7,500. Net working capital, other than cash, is $2,105. Fixed assets are $15,190. How much cash does the company have? If current liabil...

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

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. Average receivables go...

Q: The Morning Jolt Coffee Company has projected the following quarterly

The Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $360. Morning Jolt has a 45-day collecti...

Q: Consider the following financial statement information for the Mediate Corporation:

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

Q: Your firm has an average collection period of 32 days.

Your firm has an average collection period of 32 days. Current practice is to factor all receivables immediately at a 1.5 percent discount. What is the effective cost of borrowing in this case? Assume...

Q: Iron Man Products has projected the following sales for the

Iron Man 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 suppliers a...

Q: The Torrey Pine Corporation’s purchases from suppliers in a quarter

The Torrey Pine 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. Wa...

Q: In a typical month, the Jeremy Corporation receives 80 checks

In a typical month, the Jeremy Corporation receives 80 checks totaling $156,000. These are delayed four days on average. What is the average daily float?

Q: No More Books Corporation has an agreement with Floyd Bank

No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4 million in collections a day and requires a $400,000 compensating balance. No More Books is contemplating canceli...

Q: Each business day, on average, a company writes checks totaling

Each business day, on average, a company writes checks totaling $14,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its...

Q: A portfolio is invested 25 percent in Stock G, 55

A portfolio is invested 25 percent in Stock G, 55 percent in Stock J, and 20 percent in Stock K. The expected returns on these stocks are 8 percent, 15 percent, and 24 percent, respectively. What is t...

Q: Your neighbor goes to the post office once a month

Your neighbor goes to the post office once a month and picks up two checks, one for $17,000 and one for $6,000. The larger check takes four days to clear after it is deposited; the smaller one takes f...

Q: Your firm has an average receipt size of $108. A

Your firm has an average receipt size of $108. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 8,500 checks per...

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

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 sy...

Q: It takes Cookie Cutter Modular Homes, Inc., about six days

It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection time...

Q: No More Pencils, Inc., disburses checks every two weeks that

No More Pencils, Inc., disburses checks every two weeks that average $93,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an intere...

Q: You place an order for 400 units of inventory at

You place an order for 400 units of inventory at a unit price of $125. 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 peri...

Q: Devour, Inc., is considering a change in its cash only

Devour, 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 Devour should proceed or not. Descri...

Q: Redan Manufacturing uses 2,500 switch assemblies per week and then

Redan Manufacturing uses 2,500 switch assemblies per week and then reorders another 2,500. If the relevant carrying cost per switch assembly is $9, and the fixed order cost is $1,700, is Redan’s inven...

Q: The Techtronic’s store begins each week with 300 phasers in

The Techtronic’s store begins each week with 300 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $41 per year and the fixed order cost is $95, what...

Q: The Sand Surfer Corporation has annual sales of $47 million.

The Sand Surfer Corporation has annual sales of $47 million. The average collection period is 36 days. What is the average investment in accounts receivable as shown on the balance sheet?

Q: Consider the following information:

Consider the following information:a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B and...

Q: Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its

Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 210, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average coll...

Q: Skye Flyer, Inc., has weekly credit sales of $19,400, and

Skye Flyer, Inc., has weekly credit sales of $19,400, and the average collection period is 34 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable f...

Q: Rise Above This, Inc., has an average collection period of

Rise Above This, Inc., has an average collection period of 39 days. Its average daily investment in receivables is $47,500. What are annual credit sales? What is the receivables turnover?

Q: Essence of Skunk Fragrances, Ltd., sells 5,600 units of its

Essence of Skunk Fragrances, Ltd., sells 5,600 units of its perfume collection each year at a price per unit of $425. All sales are on credit with terms of 1/10, net 40. The discount is taken by 60 pe...

Q: The Arizona Bay Corporation sells on credit terms of net

The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 8 days past due. If annual credit sales are $8.4 million, what is the company’s balance sheet amount in accou...

Q: Air Spares is a wholesaler that stocks engine components and

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: Take a look back at Figure 21.1 to answer the

Take a look back at Figure 21.1 to answer the following questions:Figure 21.1:a. If you have $100, how many euros can you get?b. How much is one euro worth?c. If you have 5 million euros, how many dol...

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 5.15 and Kr 5.22, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate...

Q: You observe that the inflation rate in the United States

You observe that the inflation rate in the United States is 3.9 percent per year and that T-bills currently yield 5.8 percent annually. What do you estimate the inflation rate to be in:a. Australia, i...

Q: Suppose the spot and three-month forward rates for the yen

Suppose the spot and three-month forward rates for the yen are ¥114.32 and ¥116.03, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference between t...

Q: Refer to Table 12.1 in the text and look at

Refer to Table 12.1 in the text and look at the period from 1973 through 1980:Table 12.1:a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index)...

Q: The Abercrombie Supply Company reported the following information for 2017. Prepare

The Abercrombie Supply Company reported the following information for 2017. Prepare a common-size income statement for the year ended June 30, 2017? Abercrombie Supply Company Income Statement for the...

Q: Emily Smith deposits $1,200 in her bank today.

Emily Smith deposits $1,200 in her bank today. a. If the bank pays 4 percent simple interest, how much money will she have at the end of five years? b. What if the bank pays compound interest? c. H...

Q: Caroline Weslin needs to decide whether to accept a bonus of $

Caroline Weslin needs to decide whether to accept a bonus of $1,820 today or wait two years and receive $2,100 then. She can invest at 6 percent. What should she do?

Q: Your aunt is planning to invest in a bank CD that will

Your aunt is planning to invest in a bank CD that will pay 7.5 percent interest compounded semiannually. If she has $5,000 to invest, how much will she have at the end of four years?

Q: Congress and the President have decided to increase the federal tax rate

Congress and the President have decided to increase the federal tax rate in an effort to reduce the budget deficit. Suppose that Caroline Weslin, from problem 5.29, will pay 35 percent of her bonus to...

Q: You have $2,500 that you want to invest in

You have $2,500 that you want to invest in your classmate’s start-up business. You believe the business idea to be great and hope to get $3,700 back at the end of three years. If all goes according to...

Q: Patrick Seeley has $2,400 to invest. His brother

Patrick Seeley has $2,400 to invest. His brother approached him with an investment opportunity that could double his money in four years. What interest rate would the investment have to yield in order...

Q: You have $12,000 in cash. You can deposit

You have $12,000 in cash. You can deposit it today in a mutual fund earning 8.2 percent compounded semiannually, or you can wait, enjoy some of it, and invest $11,000 in your brother’s business in two...

Q: When you were born your parents set up a bank account in

When you were born your parents set up a bank account in your name with an initial investment of $5,000. You are turning 21 in a few days and will have access to all your funds. The account was earnin...

Q: Jared Goff, the number 1 draft pick of the NFL Los

Jared Goff, the number 1 draft pick of the NFL Los Angeles Rams in 2016, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life...

Q: Surmec, Inc., reported sales of $2.1 million

Surmec, Inc., reported sales of $2.1 million last year. The company’s primary business is the manufacture of nuts and bolts. Since this is a mature industry, analysts are confident that sales will gro...

Q: You will be graduating in two years and are thinking about your

You will be graduating in two years and are thinking about your future. You know that you will want to buy a house five years after you graduate and that you will want to put down $60,000. As of right...

Q: Kelly Martin has $10,000 that she can deposit into

Kelly Martin has $10,000 that she can deposit into a savings account for five years. Bank A pays compounds interest annually, Bank B twice a year, and Bank C quarterly. Each bank has a stated interest...

Q: Kate Eden received a graduation present of $2,000 that

Kate Eden received a graduation present of $2,000 that she is planning on investing in a mutual fund that earns 8.5 percent each year. How much money will she have in three years?

Q: Your bank pays 5 percent interest semiannually on your savings account.

Your bank pays 5 percent interest semiannually on your savings account. You don’t expect to add to the current balance of $2,700 over the next four years. How much money can you expect to have at the...

Q: Your birthday is coming up and instead of other presents, your

Your birthday is coming up and instead of other presents, your parents promised to give you $1,000 in cash. Since you have a part time job and thus don’t need the cash immediately, you decide to inves...

Q: Find the future value of a five-year $100,

Find the future value of a five-year $100,000 investment that pays 8.75 percent and that has the following compounding periods: a. Quarterly. b. Monthly. c. Daily. d. Continuous.

Q: Joe Mauer, a catcher for the Minnesota Twins, is expected

Joe Mauer, a catcher for the Minnesota Twins, is expected to hit 15 home runs in 2018. If his home-run-hitting ability is expected to grow by 12 percent every year for the following five years, how ma...

Q: Roy Gross is considering an investment that pays 7.6 percent

Roy Gross is considering an investment that pays 7.6 percent, compounded annually. How much will he have to invest today so that the investment will be worth $25,000 in six years?

Q: Konerko, Inc., management expects the company to earn cash flows

Konerko, Inc., management expects the company to earn cash flows of $13,227, $15,611, $18,970, and $19,114 over the next four years. If the company uses an 8 percent discount rate, what is the future...

Q: Cecelia Thomas is a sales executive at a Baltimore firm. She

Cecelia Thomas is a sales executive at a Baltimore firm. She is 25 years old and plans to invest $3,000 every year in an IRA account, beginning at the end of this year until she reaches the age of 65....

Q: Refer to Problem 6.10. If Cecelia Thomas invests at

Refer to Problem 6.10. If Cecelia Thomas invests at the beginning of each year, how much will she have at age 65? Refer to problem 6.10: Cecelia Thomas is a sales executive at a Baltimore firm. She i...

Q: Kevin Winthrop is saving for an Australian vacation in three years.

Kevin Winthrop is saving for an Australian vacation in three years. He estimates that he will need $5,000 to cover his airfare and all other expenses for a week-long holiday in Australia. If he can in...

Q: What effect does an increase in the demand for business goods and

What effect does an increase in the demand for business goods and services have on the real interest rate? What other factors can affect the real interest rate?

Q: The Elkridge Bar & Grill has a seven-year loan of

The Elkridge Bar & Grill has a seven-year loan of $23,500 with Bank of America. It plans to repay the loan in seven equal installments starting today. If the rate of interest is 8.4 percent, how much...

Q: Your grandfather is retiring at the end of next year. He

Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments of $10,000 a year forever, starting when he retires. If he can earn 6.5 percent annually,...

Q: Calculate the annual cash flows for each of the following investments:

Calculate the annual cash flows for each of the following investments: a. $250,000 invested at 6% b. $50,000 invested at 12% c. $100,000 invested at 10%

Q: Marshall Chavez bought a Honda Civic for $17,345.

Marshall Chavez bought a Honda Civic for $17,345. He put down $6,000 and financed the rest through the dealer at an APR of 4.9 percent for four years. What is the effective annual interest rate (EAR)...

Q: Cyclone Rentals borrowed $15,550 from a bank for three

Cyclone Rentals borrowed $15,550 from a bank for three years. If the quoted rate (APR) is 6.75 percent, and the compounding is daily, what is the effective annual interest rate (EAR)?

Q: You are evaluating a growing perpetuity investment from a large financial services

You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments that will...

Q: Trigen Corp. management will invest $331,000, $

Trigen Corp. management will invest $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75 per...

Q: Ben Woolmer has an investment that will pay him the following cash

Ben Woolmer has an investment that will pay him the following cash flows over the next five years: $2,350, $2,725, $3,128, $3,366, and $3,695. If his investments typically earn 7.65 percent, what is t...

Q: Stephanie Watson is 20 years old and plans to make the following

Stephanie Watson is 20 years old and plans to make the following investments beginning next year. She will invest $3,125 in each of the next three years and will then make investments of $3,650, $3,72...

Q: Carol Jenkins, a lottery winner, will receive the following payments

Carol Jenkins, a lottery winner, will receive the following payments over the next seven years. She has been approached by an investor who will pay Carol a lump sum today for the rights to those futur...

Q: The Huntington Rain Gear Company had $633,125 in taxable

The Huntington Rain Gear Company had $633,125 in taxable income in the year ending September 30, 2017. Calculate the company’s tax using the tax schedule in Exhibit 3.6?

Q: Gary Whitmore is a high school sophomore. He currently has $

Gary Whitmore is a high school sophomore. He currently has $7,500 in a savings account that pays5.65 percent annually. Gary plans to use his current savings plus what he can save over the next four ye...

Q: Modern Energy Company owns several gas stations. Management is looking to

Modern Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility that managers at the company are evaluating is to take...

Q: Jeremy Denham plans to save $5,000 every year for

Jeremy Denham plans to save $5,000 every year for the next eight years, starting today. At the end of eight years, Jeremy will turn 30 years old and plans to use his savings toward the down payment on...

Q: Grant Productions borrowed some money from the California Finance Company at a

Grant Productions borrowed some money from the California Finance Company at a rate of 17.5 percent for a seven-year period. The loan calls for a payment of $1,540,862.19 each year beginning today. Ho...

Q: Sharon Kabana has won a state lottery and will receive a payment

Sharon Kabana has won a state lottery and will receive a payment of $89,729.45 every year, starting today, for the next 20 years. If she invests the proceeds at a rate of 7.25 percent, what is the pre...

Q: You wrote a piece of software that does a better job of

You wrote a piece of software that does a better job of allowing computers to network than any other program designed for this purpose. A large networking company wants to incorporate your software in...

Q: Suppose that the networking company in problem 6.27 will not

Suppose that the networking company in problem 6.27 will not start paying you until the first of new systems that uses your software is sold in two years. What is the present value of that annuity? As...

Q: Calculate the present value of the following perpetuities: a.

Calculate the present value of the following perpetuities: a. $1,250 discounted to the present at 7 percent b. $7,250 discounted to the present at 6.33 percent c. $850 discounted to the present at 20...

Q: You are a freshman in college and are planning a trip to

You are a freshman in college and are planning a trip to Europe when you graduate from college at the end of four years. You plan to save the following amounts annually, starting today: $625, $700, $7...

Q: Find the effective annual interest rate (EAR) on each of

Find the effective annual interest rate (EAR) on each of the following: a. 6 percent compounded quarterly. b. 4.99 percent compounded monthly. c. 7.25 percent compounded semiannually. d. 5.6 percent c...

Q: You lent $100 to a friend for one year at a

You lent $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. Did you experience an increase or decrease in the purchasing power of you...

Q: Which of the following investments has the highest effective annual interest rate

Which of the following investments has the highest effective annual interest rate (EAR)? a. A bank CD that pays 8.25 percent compounded quarterly. b. A bank CD that pays 8.25 percent compounded monthl...

Q: You are considering three alternative investments: (1) A

You are considering three alternative investments: (1) A three-year bank CD paying 7.5 percent compounded quarterly; (2) A three-year bank CD paying 7.3 percent compounded monthly; and (3) A three-yea...

Q: You have been offered the opportunity to invest in a project which

You have been offered the opportunity to invest in a project which is expected to provide you with the following cash flows: $4,000 in one year, $12,000 in two years, and $8,000 in three years. If the...

Q: Tirade Owens, a professional athlete, currently has a contract that

Tirade Owens, a professional athlete, currently has a contract that will pay him a large amount in the first year of his contract and smaller amounts thereafter. He and his agent have asked the team t...

Q: Gary Kornig is 30 years old and wants to retire when he

Gary Kornig is 30 years old and wants to retire when he is 65. So far he has saved (1) $6,950 in an IRA account in which his money is earning 8.3 percent annually and (2) $5,000 in a money market acco...

Q: The top prize for the state lottery is $100,000

The top prize for the state lottery is $100,000,000. You have decided it is time for you to take a chance and purchase a ticket. Before you purchase the ticket, you must decide whether to choose the c...

Q: At what interest rate would you be indifferent between the cash and

At what interest rate would you be indifferent between the cash and annual payment options in problem 6.36?

Q: Babu Baradwaj is saving for his son’s college tuition. His son

Babu Baradwaj is saving for his son’s college tuition. His son is currently 11 years old and will begin college in seven years. Babu has an index fund investment of $7,500 that is earning 9.5 percent...

Q: You are now 50 years old and plan to retire at age

You are now 50 years old and plan to retire at age 65. You currently have a stock portfolio worth $150,000, a 401(k) retirement plan worth $250,000, and a money market account worth $50,000. Your stoc...

Q: Saul Cervantes has just purchased some equipment for his landscaping business.

Saul Cervantes has just purchased some equipment for his landscaping business. For this equipment he must pay the following amounts at the end of each of the next five years: $10,450, $8,500, $9,675,...

Q: You are given the following information about Clarkesville Plumbing Company. Revenues

You are given the following information about Clarkesville Plumbing Company. Revenues in 2017 totaled $896, depreciation expenses $75, costs of goods sold $365, and interest expenses $54. At the end o...

Q: Trevor Diaz wants to purchase a Maserati Qattroporte sedan, which has

Trevor Diaz wants to purchase a Maserati Qattroporte sedan, which has an invoice price of $121,737 and a total cost of $129,482. Trevor plans to put down $20,000 and will pay the rest by taking on a 5...

Q: The Yan family buying a new 3,500-square-

The Yan family buying a new 3,500-square-foot house in Muncie, Indiana, and will borrow $237,000 from Bank One at a rate of 6.375 percent for 15 years. What will be their monthly loan payment? Prepare...

Q: Assume you are now 21 years old and will start working as

Assume you are now 21 years old and will start working as soon as you graduate from college. You plan to start saving for your retirement on your 25th birthday and retire on your 65th birthday. After...

Q: Jeremy Fenloch borrowed some money from his friend and promised to repay

Jeremy Fenloch borrowed some money from his friend and promised to repay him $1,225, $1,350, $1,500, $1,600, and $1,600 over the next five years. If the friend normally discounts investments at 8 perc...

Q: Biogenesis Inc. management expects the following cash flow stream over the

Biogenesis Inc. management expects the following cash flow stream over the next five years. They discount all cash flows using a 23 percent discount rate. What is the present value of this cash flow s...

Q: An investment opportunity requires a payment of $750 for 12 years

An investment opportunity requires a payment of $750 for 12 years, starting a year from today. If your required rate of return is 8 percent, what is the value of the investment to you today?

Q: Dynamics Telecommunications Corp. has made an investment in another company that

Dynamics Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $22,500 each year for the next five years. If the company uses a discount rate of 15 p...

Q: Robert Hobbes plans to invest $25,000 a year at

Robert Hobbes plans to invest $25,000 a year at the end of each year for the next seven years in an investment that will pay him a rate of return of 11.4 percent. How much money will Robert have at th...

Q: Describe the difference between a total holding period return and an expected

Describe the difference between a total holding period return and an expected return?

Q: Susan is expecting the returns on the market portfolio to be negative

Susan is expecting the returns on the market portfolio to be negative in the near term. Since she is managing a stock mutual fund, she must remain invested in a portfolio of stocks. However, she is al...

Q: Amit Patel is planning to invest $10,000 in a

Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for five years. The CD will pay interest of 9 percent. What is the future value of Amit’s investment?

Q: Describe and justify what the value of the beta of a U

Describe and justify what the value of the beta of a U.S. Treasury bill should be?

Q: If the expected rate of return for the market is not much

If the expected rate of return for the market is not much greater than the risk-free rate of return, what does this suggest about the general level of compensation for bearing systematic risk?

Q: Describe the Capital Asset Pricing Model (CAPM) and what it

Describe the Capital Asset Pricing Model (CAPM) and what it tells us?

Q: The distribution of grades in an introductory finance class is normally distributed

The distribution of grades in an introductory finance class is normally distributed, with an expected grade of 75. If the standard deviation of grades is 7, in what range would you expect 95 percent o...

Q: Barbara is considering investing in a company’s stock and is aware that

Barbara is considering investing in a company’s stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggest...

Q: Ben would like to invest in gold and is aware that the

Ben would like to invest in gold and is aware that the returns on such an investment can be quite volatile. Use the following table of states, probabilities, and returns to determine the expected retu...

Q: John is watching an old game show rerun on television called Let’s

John is watching an old game show rerun on television called Let’s Make a Deal in which the contestant chooses a prize behind one of two curtains. Behind one of the curtains is a gag prize worth $150,...

Q: Using the information from Problems 7.17, 7.18

Using the information from Problems 7.17, 7.18, and 7.19, calculate the coefficient of variation for each of the investments in those problems?

Q: Emmy is analyzing a two-stock portfolio that consists of a

Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on...

Q: You have constructed a diversified portfolio of stocks such that there is

You have constructed a diversified portfolio of stocks such that there is no unsystematic risk. Explain why the expected return of that portfolio should be greater than the expected return of a risk-f...

Q: The Ellicott City Ice Cream Company management has just completed an assessment

The Ellicott City Ice Cream Company management has just completed an assessment of the company’s assets and liabilities and has obtained the following information. The firm has total current assets wo...

Q: Write out the equation for the covariance in the returns of two

Write out the equation for the covariance in the returns of two assets, Asset 1 and Asset 2. Using that equation, explain the easiest way for the two asset returns to have a covariance of zero?

Q: Evaluate the following statement: “By fully diversifying a portfolio,

Evaluate the following statement: “By fully diversifying a portfolio, such as by buying every asset in the market, we can completely eliminate all types of risk, thereby creating a synthetic Treasury...

Q: You have chosen biology as your college major because you would like

You have chosen biology as your college major because you would like to be a medical doctor. However, you find that the probability of being accepted to medical school is about 10 percent. If you are...

Q: Peter knows that the covariance in the return on two assets is

Peter knows that the covariance in the return on two assets is –0.0025. Without knowing the expected return of the two assets, explain what that covariance means?

Q: In order to expect that it will fund her retirement, Glenda

In order to expect that it will fund her retirement, Glenda needs her portfolio to have an expected return of 12 percent per year over the next 30 years. She has decided to invest in Stocks 1, 2, and...

Q: Explain why investors who have diversified their portfolios will determine the price

Explain why investors who have diversified their portfolios will determine the price and, consequently, the expected return on an asset?

Q: Brad is about to purchase an additional asset for his well-

Brad is about to purchase an additional asset for his well-diversified portfolio. He notices that when he plots the historical returns of the asset against those of the market portfolio, the line of b...

Q: Draw the Security Market Line (SML) for the case where

Draw the Security Market Line (SML) for the case where the market risk premium is 5 percent and the risk-free rate is 7 percent. Now suppose an asset has a beta of –1.0 and an expected return of 4 per...

Q: If the CAPM describes the relation between systematic risk and expected returns

If the CAPM describes the relation between systematic risk and expected returns, can both an individual asset and the market portfolio of all risky assets have negative expected real rates of return?...

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

You have been provided the following data on the securities of three firms and the market: Assume the CAPM and SML are true and fill in the missing values in the table. Would you invest in the stock...

Q: Mike White is planning to save up for a trip to Europe

Mike White is planning to save up for a trip to Europe in three years. He will need $7,500 when he is ready to make the trip. He plans to invest the same amount at the end of each of the next three ye...

Q: Describe the general relation between risk and return that we observe in

Describe the general relation between risk and return that we observe in the historical bond and stock market data?

Q: Stocks A, B, and C have expected returns of 15

Stocks A, B, and C have expected returns of 15 percent, 15 percent, and 12 percent, respectively, while their standard deviations are 45 percent, 30 percent, and 30 percent, respectively. If you were...

Q: What was the average annual return that Tanner earned over the 2012

What was the average annual return that Tanner earned over the 2012 through 2015 period (see problem 7.6)?

Q: Describe how investing in more than one asset can reduce risk through

Describe how investing in more than one asset can reduce risk through diversification?

Q: BA Corp is issuing a 10-year bond with a coupon

BA Corp is issuing a 10-year bond with a coupon rate of 8 percent. The interest rate for similar bonds is currently 6 percent. Assuming annual payments, what is the value of the bond?

Q: Rudy Sandberg wants to invest in four-year bonds that are

Rudy Sandberg wants to invest in four-year bonds that are currently priced at $868.43. These bonds have a coupon rate of 6 percent and make semiannual coupon payments. What is the current market yield...

Q: Josh Kavern bought 10-year, 12 percent coupon bonds issued

Josh Kavern bought 10-year, 12 percent coupon bonds issued by the U.S. Treasury three years ago at $913.44. If he sells these bonds, for which he paid the face value of $1,000, at the current price of...

Q: Four years ago, Lisa Stills bought six-year, 5

Four years ago, Lisa Stills bought six-year, 5.5 percent coupon bonds issued by the Fairways Corp. for $947.68. If she sells these bonds at the current price of $894.52, what will be her realized yiel...

Q: The International Publishing Group is raising $10 million by issuing 15

The International Publishing Group is raising $10 million by issuing 15-year bonds with a coupon rate of 8.5 percent. Coupon payments will be made annually. Investors buying the bonds today will earn...

Q: Lopez Information Systems management is planning to issue 10-year bonds

Lopez Information Systems management is planning to issue 10-year bonds. The going market yield for such bonds is 8.125 percent. Assume that coupon payments will be made semiannually. Management is tr...

Q: Becky Scholes has $150,000 to invest. She wants

Becky Scholes has $150,000 to invest. She wants to be able to withdraw $12,500 every year forever without using up any of her principal. What interest rate would her investment have to earn in order f...

Q: Marshall Company is issuing eight-year bonds with a coupon rate

Marshall Company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? I...

Q: Rockne, Inc., has outstanding bonds that will mature in six

Rockne, Inc., has outstanding bonds that will mature in six years and pay an 8 percent coupon semiannually. If you paid $1036.65 today and your required rate of return was 6.6 percent, did you pay the...

Q: Nanotech, Inc., has a bond issue maturing in seven years

Nanotech, Inc., has a bond issue maturing in seven years that is paying a coupon rate of 9.5 percent (semiannual payments). Management wants to retire a portion of the issue by buying the securities i...

Q: Kintel, Inc., management wants to raise $1 million by

Kintel, Inc., management wants to raise $1 million by issuing six-year zero coupon bonds with a face value of $1,000. The company’s investment banker states that investors would use an 11.4 percent di...

Q: Rockinghouse Corp. management plans to issue seven-year zero coupon

Rockinghouse Corp. management plans to issue seven-year zero coupon bonds. It has learned that these bonds will sell today at a price of $439.76. Assuming annual coupon payments, what is the yield to...

Q: Pierre Dupont just received a cash gift from his grandfather. He

Pierre Dupont just received a cash gift from his grandfather. He plans to invest in a five-year bond issued by Venice Corp. that pays an annual coupon rate of 5.5 percent. If the current market rate i...

Q: Electrolex, Inc., has four-year bonds outstanding that pay

Electrolex, Inc., has four-year bonds outstanding that pay a coupon rate of 6.6 percent and make coupon payments semiannually. If these bonds are currently selling at $914.89, what is the yield to mat...

Q: Serengeti Corp. has five-year bonds outstanding that pay a

Serengeti Corp. has five-year bonds outstanding that pay a coupon of 8.8 percent. If these bonds are priced at $1,064.86, what is the yield to maturity on these bonds? Assume semiannual coupon payment...

Q: Adrienne Dawson is planning to buy 10-year zero coupon bonds

Adrienne Dawson is planning to buy 10-year zero coupon bonds issued by the U.S. Treasury. If these bonds have a face value of $1,000 and are currently selling at $404.59, what is the expected return o...

Q: Brown & Co. issued seven-year bonds two years ago

Brown & Co. issued seven-year bonds two years ago that can be called after two years. The bonds make semiannual coupon payments at a coupon rate of 7.875 percent. Each bond has a market value of $1,05...

Q: Prepare a common-size balance sheet from the following information for

Prepare a common-size balance sheet from the following information for Abercrombie Supply Company.

Q: Dynamo Corp. is expecting annual payments of $34,225

Dynamo Corp. is expecting annual payments of $34,225 for the next seven years from a customer. What is the present value of this annuity if the discount rate is 8.5 percent?

Q: Trevor Price bought 10-year bonds issued by Harvest Foods five

Trevor Price bought 10-year bonds issued by Harvest Foods five years ago for $936.05. The bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bonds is $1,048.77...

Q: You bought a six-year bond issued by Runaway Corp.

You bought a six-year bond issued by Runaway Corp. four years ago. At that time, you paid $974.33 for the bond. The bond pays a coupon rate of 7.375 percent, and coupon payments are made semiannually....

Q: Pullman Corp issued 10-year bonds four years ago with a

Pullman Corp issued 10-year bonds four years ago with a coupon rate of 9.375 percent. At the time of issue, the bonds sold at par. Today bonds of similar risk and maturity must pay an annual coupon of...

Q: Showbiz, Inc., has issued eight-year bonds with a

Showbiz, Inc., has issued eight-year bonds with a coupon of 6.375 percent and semiannual coupon payments. The market’s required rate of return on such bonds is 7.65 percent. a. What is the market pri...

Q: Peabody Corp. has seven-year bonds outstanding. The bonds

Peabody Corp. has seven-year bonds outstanding. The bonds pay a coupon of 8.375 percent semiannually and are currently worth $1,063.49. The bonds can be called in three years at price of $1,075. a. Wh...

Q: The Maryland Department of Transportation has issued 25-year bonds that

The Maryland Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a rate of 9.875 percent. The current market rate for similar securities is 11 percent. a. Wh...

Q: Knight, Inc., has issued a three-year bond that

Knight, Inc., has issued a three-year bond that pays a coupon rate of 6.10 percent. Coupon payments are made semiannually. Given the market rate of interest of 5.80 percent, what is the market value o...

Q: Rachette Corp. has18-year bonds outstanding. These bonds,

Rachette Corp. has18-year bonds outstanding. These bonds, which pay interest semiannually, have a coupon rate of 9.735 percent and a yield to maturity of 7.95 percent. a. Compute the current price of...

Q: Zippy Corporation just sold $30 million of convertible bonds with a

Zippy Corporation just sold $30 million of convertible bonds with a conversion ratio of 40. Each $1,000 bond is convertible into 25 shares of Zippy’s stock. a. What is the conversion price of Zippy’s...

Q: Regatta, Inc., has seven-year bonds outstanding that pay

Regatta, Inc., has seven-year bonds outstanding that pay a 12 percent coupon rate. Investors buying these bonds today can expect to earn a yield to maturity of 8.875 percent. What is the current value...

Q: Kaaran made a friendly wager with a colleague that involves the result

Kaaran made a friendly wager with a colleague that involves the result from flipping a coin. If heads comes up, Kaaran must pay her colleague $15; otherwise, her colleague will pay Kaaran $15. What is...

Q: You are interested in investing in a five-year bond that

You are interested in investing in a five-year bond that pays a 7.8 percent coupon rate with interest to be received semiannually. Your required rate of return is 8.4 percent. What is the most you wou...

Q: Diane Carter is interested in buying a five-year zero coupon

Diane Carter is interested in buying a five-year zero coupon bond with a face value of $1,000. She understands that the market interest rate for similar investments is 9 percent. Assume annual coupon...

Q: Ten-year zero coupon bonds issued by the U.S

Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and interest is compounded semiannually. If similar bonds in the market yield 10.5 percent, what is the value of thes...

Q: Northrop Real Estate Company management is planning to fund a development project

Northrop Real Estate Company management is planning to fund a development project by issuing 10-year zero coupon bonds with a face value of $1,000. Assuming semiannual compounding, what will be the pr...

Q: Ruth Hornsby is looking to invest in a three-year bond

Ruth Hornsby is looking to invest in a three-year bond that makes semiannual coupon payments at a rate of 5.875 percent. If these bonds have a market price of $981.13, what yield to maturity can she e...

Q: What is the difference between saver–lenders and borrower–spenders

What is the difference between saver–lenders and borrower–spenders, and who are the major representatives of each group?

Q: How does the use of market-value accounting help managers?

How does the use of market-value accounting help managers?

Q: Suppose you own a security that you know can be easily sold

Suppose you own a security that you know can be easily sold in the secondary market, but the security will sell at a lower price than you paid for it. What does this imply for the security’s marketabi...

Q: The financial information for Laurel Electronics referred to in Problem 3.

The financial information for Laurel Electronics referred to in Problem 3.5 is all at book value. Suppose marking to market reveals that the market value of the firm’s inventory is 20 percent below it...

Q: Trader Inc. is a $300 million company, as measured

Trader Inc. is a $300 million company, as measured by asset value, and Horst Corp. is a $35 million company. Both are privately held corporations. Explain which firm more likely to go public and regis...

Q: You know that the price of CFI, Inc., stock will

You know that the price of CFI, Inc., stock will be $12 exactly one year from today. Today the price of the stock is $11. Describe what must happen to the price of CFI, Inc., today in order for an inv...

Q: Describe the organization of the statement of cash flows?

Describe the organization of the statement of cash flows?

Q: During 2017, Towson Recording Company increased its investment in marketable securities

During 2017, Towson Recording Company increased its investment in marketable securities by $36,845, funded fixed-assets acquisitions of $109,455, and had marketable securities of $14,215 mature. What...

Q: What does it mean to “underwrite” a new security issue

What does it mean to “underwrite” a new security issue? What compensation does an investment banker get from underwriting a security issue?

Q: Identify and describe the noncash expenses that a firm may incur?

Identify and describe the noncash expenses that a firm may incur?

Q: Caustic Chemicals management identified the following cash flows as significant in its

Caustic Chemicals management identified the following cash flows as significant in its year-end meeting with analysts. During the year Caustic had repaid existing debt of $312,080 and raised additiona...

Q: Explain how the choice of FIFO versus LIFO can affect a firm’s

Explain how the choice of FIFO versus LIFO can affect a firm’s balance sheet and income statement?

Q: Laurel Electronics reported the following information at its annual meetings: The

Laurel Electronics reported the following information at its annual meetings: The company had cash and marketable securities worth $1,235,455, accounts payables worth $4,159,357, inventory of $7,121,5...

Q: The Oakland Mills Company has disclosed the following financial information in its

The Oakland Mills Company has disclosed the following financial information in its annual reports for the period ending March 31, 2017: sales of $1.45 million, cost of goods sold of $812,500, deprecia...

Q: What is the primary role of money markets? Explain how the

What is the primary role of money markets? Explain how the money markets work?

Q: Manz Property Management Company announced that in the year ended June 30

Manz Property Management Company announced that in the year ended June 30, 2017, its earnings before taxes amounted to $1,478,936. Calculate its taxes using Exhibit 3.6?

Q: The expected value of a normal distribution of prices for a stock

The expected value of a normal distribution of prices for a stock is $50. If you are 90 percent sure that the price of the stock will be between $40 and $60, then what is the variance of the prices fo...

Q: Tim Dye, the CFO of Blackwell Automotive, Inc., is

Tim Dye, the CFO of Blackwell Automotive, Inc., is putting together this year’s financial statements. He has gathered the following balance sheet information. The firm had a cash balance of $23,015, a...

Q: Describe the informational differences that distinguish the three forms of market efficiency

Describe the informational differences that distinguish the three forms of market efficiency?

Q: Zippy Computers announced strong fourth quarter results. Sales and earnings were

Zippy Computers announced strong fourth quarter results. Sales and earnings were both above analysts’ expectations. You notice in the newspaper that Zippy’s stock price went up sharply on the day of t...

Q: In problem 2.20, if the market is efficient,

In problem 2.20, if the market is efficient, would it have been possible for Zippy’s stock price to go down on the day that the firm announced the strong fourth quarter results?

Q: If the market is strong-form efficient, then trading on

If the market is strong-form efficient, then trading on tips you hear from Jim Cramer (the host of Mad Money on CNBC) will generate no excess returns (i.e., returns in excess of fair compensation for...

Q: Fraser Corporation has announced that its net income for the year ended

Fraser Corporation has announced that its net income for the year ended June 30, 2017, was $1,353,412. The company had EBITDA of $ 4,967,855, and its depreciation and amortization expense was equal to...

Q: For its most recent fiscal year, Carmichael Hobby Shop recorded EBITDA

For its most recent fiscal year, Carmichael Hobby Shop recorded EBITDA of $512,725.20, EBIT of $362,450.20, zero interest expense, and cash flow to investors from operating activity of $348,461.25. A...

Q: What is the real rate of interest, and how is it

What is the real rate of interest, and how is it determined?

Q: How does the nominal rate of interest vary over time?

How does the nominal rate of interest vary over time?

Q: What is the Fisher equation, and how is it used?

What is the Fisher equation, and how is it used?

Q: During the period from 2011 through 2015 the annual returns on small

During the period from 2011 through 2015 the annual returns on small U.S. stocks were -3.26 percent, 18.23 percent, 45.07 percent, 2.92 percent, and -3.60 percent, respectively. What would a $1 inves...

Q: Imagine you borrow $500 from your roommate, agreeing to pay

Imagine you borrow $500 from your roommate, agreeing to pay her back $500 plus 7 percent nominal interest in one year. Assume inflation over the life of the contract is expected to be 4.25 percent. Wh...

Q: Your parents have given you $1,000 a year before

Your parents have given you $1,000 a year before your graduation so that you can take a trip when you graduate. You wisely decide to invest the money in a bank CD that pays 6.75 percent interest. You...

Q: Menomonie Casino Company earned $23,458,933 before interest

Menomonie Casino Company earned $23,458,933 before interest and taxes for the fiscal year ending March 31, 2017. If the casino had interest expenses of $1,645,123, calculate its tax obligation using E...

Q: Vanderheiden Hog Products Corp. provided the following financial information for the

Vanderheiden Hog Products Corp. provided the following financial information for the quarter ending June 30, 2017: Net income: …………………….…….………. $189,425 Depreciation and amortization: ….……... $63,114...

Q: Analysts following the Tomkovick Golf Company were given the following balance sheet

Analysts following the Tomkovick Golf Company were given the following balance sheet information for the years ended June 30, 2017 and June 30 2016: In addition, it was reported that the company had...

Q: Based on the financial statements for Tomkovick Golf Company in Problem 3

Based on the financial statements for Tomkovick Golf Company in Problem 3.32, compute the cash flow invested in net working capital and the cash flow invested in long-term assets that you would use in...

Q: Mukhopadhya Network Associates has a current ratio of 1.60,

Mukhopadhya Network Associates has a current ratio of 1.60, where the current ratio is defined as follows: current ratio = current assets/current liabilities. The firm’s current assets are equal to $1...

Q: Reservoir Bottling Co. reported the following information at the end of

Reservoir Bottling Co. reported the following information at the end of the year. Total current assets are worth $237,513 at book value and $219,344 at market value. In addition, plant and equipment h...

Q: Nimitz Rental Company provided the following information to its auditors. For

Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2017, the company had revenues of $878,412, general and administrative expenses of $352,666, depr...

Q: Sosa Corporation recently reported an EBITDA of $31.3 million

Sosa Corporation recently reported an EBITDA of $31.3 million and net income of $9.7 million. The company had $6.8 million in interest expense, and its average corporate tax rate was 35 percent. What...

Q: You must choose between investing in stock A and stock B.

You must choose between investing in stock A and stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given their systematic risk and decided...

Q: Columbia Construction Company earned $451,888 during the year ended

Columbia Construction Company earned $451,888 during the year ended June 30, 2017. After paying out $225,794 in dividends, the balance went into retained earnings. If the firm’s total retained earning...

Q: Mount Hebron Electrical Company’s financial statements indicated that the company had earnings

Mount Hebron Electrical Company’s financial statements indicated that the company had earnings before interest and taxes of $718,323. The interest rate on its $850,000 debt was 8.95 percent. Calculate...

Q: The Centennial Chemical Corporation announced that, for the period ending March

The Centennial Chemical Corporation announced that, for the period ending March 31, 2017, it had earned income after taxes of $2,768,028.25 on revenues of $13,144,680. The company’s costs (excluding d...

Q: Eau Claire Paper Mill, Inc., had, at the beginning

Eau Claire Paper Mill, Inc., had, at the beginning of the current fiscal year, April 1, 2016, retained earnings of $323,325. During the year ended March 31, 2017, the company produced net income after...

Q: Explain why the quick ratio or acid-test ratio is a

Explain why the quick ratio or acid-test ratio is a better measure of a firm’s liquidity than the current ratio?

Q: Trademark Corp.’s financial manager collected the following information for its

Trademark Corp.’s financial manager collected the following information for its peer group to compare its performance against that of its peers. a. Explain how Trademark is perform...

Q: Rockwell Jewelers management announced that the company had net earnings of $

Rockwell Jewelers management announced that the company had net earnings of $6,481,778 for this year. The company has 2,543,800 shares outstanding, and the year-end stock price is $54.21. What are Roc...

Q: Chisel Corporation has 3 million shares outstanding at a price per share

Chisel Corporation has 3 million shares outstanding at a price per share of $3.25. If the debt-to-equity ratio is 1.7 and total book value of debt equals $12,400,000, what is the market-to-book ratio...

Q: Laurel Electronics has a quick ratio of 1.15, current

Laurel Electronics has a quick ratio of 1.15, current liabilities of $5,311,020, and inventories of $7,121,599. What is the firm’s current ratio?

Q: Lambda Corporation has current liabilities of $450,000, a

Lambda Corporation has current liabilities of $450,000, a quick ratio of 1.8, inventory turnover of 5.0, and a current ratio of 3.5. What is the cost of goods sold for Lambda Corporation?

Q: Calculate the price of a five-year bond that has a

Calculate the price of a five-year bond that has a coupon of 6.5 percent paid annually. The current market rate is 5.75 percent?

Q: Norwood Corp. currently has accounts receivable of $1,223

Norwood Corp. currently has accounts receivable of $1,223,675 on net sales of $6,216,900. What are its accounts receivable turnover and days’ sales outstanding (DSO)?

Q: If Norwood Corp.’s management wants to reduce the DSO from

If Norwood Corp.’s management wants to reduce the DSO from that calculated in Problem 4.16 to an industry average of 56.3 days and its net sales are expected to decline by about 12 percent, what would...

Q: Nimitz Rental Company had depreciation expenses of $108,905,

Nimitz Rental Company had depreciation expenses of $108,905, interest expenses of $78,112, and an EBIT of $1,254,338 for the year ended June 30, 2017. What are the times interest earned and cash cover...

Q: Conseco, Inc., has a debt ratio of 0.56

Conseco, Inc., has a debt ratio of 0.56. What are the company’s debt-to-equity ratio and equity multiplier?

Q: Flying Penguins Corp. has total current assets of $11,

Flying Penguins Corp. has total current assets of $11,845,175, current liabilities of $5,311,020, and a quick ratio of 0.89. How much inventory does it have?

Q: Cisco Systems has total assets of $35.594 billion,

Cisco Systems has total assets of $35.594 billion, total debt of $9.678 billion, and net sales of $22.045 billion. Its net profit margin for the year is 20 percent, while the operating profit margin i...

Q: Procter & Gamble reported the following information for its fiscal year end

Procter & Gamble reported the following information for its fiscal year end: On net sales of $51.407 billion, the company earned net income after taxes of $6.481 billion. It had cost of goods sold of...

Q: Wal-Mart, Inc., has net income of $9

Wal-Mart, Inc., has net income of $9,054,000 on net sales of $256,329,812. The company has total assets of $104,912,112 and stockholders’ equity of $43,623,445. Use the extended DuPont identity to fin...

Q: Xtreme Sports Innovations has disclosed the following information: EBIT =

Xtreme Sports Innovations has disclosed the following information: EBIT = $25,664,300 ……………………………. Net income = $13,054,000 …………………………………….…………………….…… Net sales = $83,125,336 Total debt = $20,885,753...

Q: Cisco Systems had net income of $4.401 billion and

Cisco Systems had net income of $4.401 billion and at year end 6.735 billion shares outstanding. Calculate the earnings per share for the company?

Q: Bigbie Corp. issued a five-year bond a year ago

Bigbie Corp. issued a five-year bond a year ago with a coupon of 8 percent. The bond pays interest semiannually. If the yield to maturity on this bond is 9 percent, what is the price of the bond?

Q: Use the information for Cisco Systems in Problem 4.24.

Use the information for Cisco Systems in Problem 4.24. In addition, the company’s EBITDA was $6.834 billion and its share price was $22.36. Compute the firm’s price-earnings ratio and the price-EBITDA...

Q: Carter, Inc., a manufacturer of electrical supplies, has an

Carter, Inc., a manufacturer of electrical supplies, has an ROE of 23.1 percent, a profit margin of 4.9 percent, and a total asset turnover ratio of 2.6 times. Its peer group also has an ROE of 23.1 p...

Q: Grossman Enterprises has an equity multiplier of 2.6 times,

Grossman Enterprises has an equity multiplier of 2.6 times, total assets of $2,312,000, an ROE of 14.8 percent, and a total asset turnover ratio of 2.8 times. Calculate the firm’s sales and ROA?

Q: Complete the balance sheet of Flying Roos Corporation. /

Complete the balance sheet of Flying Roos Corporation. You have the following information: Debt ratio = 40% ………..…&acir...

Q: For the year ended June 30, 2017, Northern Clothing Company

For the year ended June 30, 2017, Northern Clothing Company has total assets of $87,631,181, ROA of 11.67 percent, ROE of 21.19 percent, and a net profit margin of 11.59 percent. What are the company’...

Q: If Newton Manufacturers has an accounts receivable turnover of 4.8

If Newton Manufacturers has an accounts receivable turnover of 4.8 times and net sales of $7,812,379, what would its receivables be?

Q: Blackwell Automotive’s balance sheet at the end of its most recent fiscal

Blackwell Automotive’s balance sheet at the end of its most recent fiscal year shows the following information? In addition, it was reported that the firm had a net income of $156,0...

Q: The following are the financial statements for Nederland Consumer Products Company for

The following are the financial statements for Nederland Consumer Products Company for the fiscal year ended September 30, 2017. Nederland Consumer Products Company Income Statement for the Fiscal Yea...

Q: Refer to the preceding information for Nederland Consumer Products Company. Compute

Refer to the preceding information for Nederland Consumer Products Company. Compute the firm’s ratios for the following categories and briefly evaluate the company’...

Q: Refer to the earlier information for Nederland Consumer Products Company. Using

Refer to the earlier information for Nederland Consumer Products Company. Using the DuPont identity, calculate the return on equity for Nederland, after calculating the ratios that make up the DuPont...

Q: Rockwell Industries has a three-year bond outstanding that pays a

Rockwell Industries has a three-year bond outstanding that pays a 7.25 percent coupon and is currently priced at $913.88. What is the yield to maturity of this bond? Assume annual coupon payments?

Q: Nugent, Inc., has a gross profit margin of 31.

Nugent, Inc., has a gross profit margin of 31.7 percent on net sales of $9,865,214 and total assets of $7,125,852. The company has a current ratio of 2.7 times, accounts receivable of $1,715,363, cash...

Q: Recreational Supplies Co. has net sales of $11,655

Recreational Supplies Co. has net sales of $11,655,000, an ROE of 17.64 percent, and a total asset turnover of 2.89 times. If the firm has a debt-to-equity ratio of 1.43, what is the company’s net inc...

Q: Nutmeg Houseware, Inc., has an operating profit margin of 10

Nutmeg Houseware, Inc., has an operating profit margin of 10.3 percent on revenues of $24,547,125 and total assets of $8,652,352. a. Calculate the company’s total asset turnover ratio and its operati...

Q: Modern Appliances Corporation has reported its financial results for the year ended

Modern Appliances Corporation has reported its financial results for the year ended December 31, 2017? Modern Appliances Corporation Income Statement for the Fiscal Year Ended December 31, 2017 Net Sa...

Q: The TBI Company has a number of days of inventory of 50

The TBI Company has a number of days of inventory of 50. Therefore, the TBI Company’s inventory turnover is closest to: a. 4.8 times. b. 7.3 times. c. 8.4 times. d. 9.6 times.

Q: Bummel and Strand Corp. has a gross profit margin of 33

Bummel and Strand Corp. has a gross profit margin of 33.7 percent, sales of $47,112,365, and inventory of $14,595,435. What is its inventory turnover ratio?

Q: If a company’s net profit margin is –5 percent, its

If a company’s net profit margin is –5 percent, its total asset turnover is 1.5 times, and its equity multiplier is 1.2 times, its return on equity is closest to a. –9.0 percent. b. –7.5 percent. c. –...

Q: Sorenson Inc. has sales of $3,112,489

Sorenson Inc. has sales of $3,112,489, a gross profit margin of 23.1 percent, and inventory of $833,145. What are the company’s inventory turnover ratio and days’ sales in inventory?

Q: Breckenridge Ski Company has total assets of $422,235,

Breckenridge Ski Company has total assets of $422,235,811 and a debt ratio of 29.5 percent. Calculate the company’s debt-to-equity ratio and equity multiplier?

Q: Norton Company has a debt-to-equity ratio of 1

Norton Company has a debt-to-equity ratio of 1.65, ROA of 11.3 percent, and total equity of $1,322,796. What are the company’s equity multiplier, debt ratio, and ROE?

Q: Hindenberg, Inc., has a 10-year bond that is

Hindenberg, Inc., has a 10-year bond that is priced at $1,100.00. It has a coupon of 8 percent paid semiannually. What is the yield to maturity on this bond?

Q: The Rangoon Timber Company has the following ratios: Net sales

The Rangoon Timber Company has the following ratios: Net sales/Total assets = 2.23; …………………. ROA = 9.69%; …………………. ROE = 16.4% What are Rangoon’s profit margin and debt ratios?

Q: Lemmon Enterprises has a total asset turnover of 2.1 and

Lemmon Enterprises has a total asset turnover of 2.1 and a net profit margin of 7.5%. If its equity multiplier is 1.90, what is the ROE for Lemmon Enterprises?

Q: Chuck Tomkovick is planning to invest $25,000 today in

Chuck Tomkovick is planning to invest $25,000 today in a mutual fund that will provide a return of 8 percent each year. What will be the value of the investment in 10 years?

Q: Maria Addai has been offered a future payment of $750 two

Maria Addai has been offered a future payment of $750 two years from now. If she can earn an annual rate of 6.5 percent, compounded daily, on her investment, what should she pay for this investment to...

Q: Your brother has asked you for a loan and has promised to

Your brother has asked you for a loan and has promised to pay you $7,750 at the end of three years. If you normally invest to earn 6 percent per year, how much will you be willing to lend to your brot...

Q: Tracy Chapman is saving to buy a house in five years.

Tracy Chapman is saving to buy a house in five years. She plans to put 20 percent down at that time, and she believes that she will need $35,000 for the down payment. If Tracy can invest in a fund tha...

Q: You want to buy some bonds that will have a value of

You want to buy some bonds that will have a value of $1,000 at the end of seven years. The bonds pay 4.5 percent interest annually. How much should you pay for them today?

Q: Elizabeth Sweeney wants to accumulate $12,000 by the end

Elizabeth Sweeney wants to accumulate $12,000 by the end of 12 years. If the annual interest rate is 7 percent and interest compounds semiannually, how much will she have to invest today to achieve he...

Q: You are in desperate need of cash and turn to your uncle

You are in desperate need of cash and turn to your uncle, who has offered to lend you some money. You decide to borrow $1,300 and agree to pay back $1,500 in two years. Alternatively, you could borrow...

Q: You invest $150 in a mutual fund today that pays 9

You invest $150 in a mutual fund today that pays 9 percent interest annually. How long will it take to double your money?

Q: Using the 2017 data above for Abercrombie Supply Company calculate the following

Using the 2017 data above for Abercrombie Supply Company calculate the following liquidity ratios: a. Current ratio b. Quick ratio

Q: Highland Corp., a U.S. company, has a

Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. The bond has no coupon payments. What is the price of this zero coupon bond?

Q: Your finance textbook sold 53,250 copies in its first year

Your finance textbook sold 53,250 copies in its first year. The publishing company expects the sales to grow at a rate of 20 percent each year for the next three years and by 10 percent in the fourth...

Q: CelebNav, Inc., had sales last year of $700,

CelebNav, Inc., had sales last year of $700,000, and the analysts are predicting a good year for the start-up, with sales growing 20 percent a year for the next three years. After that, the sales shou...

Q: You decide to take advantage of the current online dating craze and

You decide to take advantage of the current online dating craze and start your own Web site. You know that you have 450 people who will sign up immediately and, through a careful marketing research an...

Q: Ted Rogers is investing $7,500 in a bank CD

Ted Rogers is investing $7,500 in a bank CD that pays a 6 percent annual interest. How much will the CD be worth at the end of five years?

Q: Find the future value of an investment of $2,500

Find the future value of an investment of $2,500 made today for the following rates and periods: a. 6.25 percent compounded semiannually for 12 years b. 7.63 percent compounded quarterly for 6 years c...

Q: Find the present value of $3,500 under each of

Find the present value of $3,500 under each of the following rates and periods. a. 8.9% compounded monthly for five years. b. 6.6% compounded quarterly for eight years. c. 4.3% compounded daily for fo...

Q: Samantha plans to invest some money so that she has $5

Samantha plans to invest some money so that she has $5,500 at the end of three years. How much should she invest today given the following choices: a. 4.2 percent compounded daily. b. 4.9 percent com...

Q: You are able to deposit $850 in a bank CD today

You are able to deposit $850 in a bank CD today, and you will withdraw the money only once the balance is $1,000. If the bank pays 5 percent interest, how long will it take for the balance to reach $1...

Q: Neon Lights Company is a private company with sales of $1

Neon Lights Company is a private company with sales of $1.3 million a year. Management wants to take the company public but has to wait until the sales reach $2 million. If the sales are expected to g...

Q: You have just inherited $550,000. You plan to

You have just inherited $550,000. You plan to save this money and continue to live off the money that you are earning in your current job. If you can invest the money in a bond that pays 4.6 percent i...

Q: Kronka, Inc., is expecting cash inflows of $13,

Kronka, Inc., is expecting cash inflows of $13,000, $11,500, $12,750, and $9,635 over the next four years. What is the present value of these cash flows if the appropriate discount rate is 8 percent?...

Q: Xenix Corp had sales of $353,866 in 2017.

Xenix Corp had sales of $353,866 in 2017. If management expects its sales to be $476,450 in three years, what is the rate at which the company’s sales are expected to grow?

Q: Given the following information about Elkridge Sporting Goods, Inc., construct

Given the following information about Elkridge Sporting Goods, Inc., construct a balance sheet for June 30, 2017. On that date the firm had cash and marketable securities of $25,135, accounts receivab...

Q: What is the difference between FIFO and LIFO accounting?

What is the difference between FIFO and LIFO accounting?

Q: Identify seven mechanisms that can help better align the goals of managers

Identify seven mechanisms that can help better align the goals of managers with those of stockholders?

Q: How are brokers different from dealers?

How are brokers different from dealers?

Q: What is the matching principle, and how can it cause accounting

What is the matching principle, and how can it cause accounting expenses to differ from actual cash outflows?

Q: Wolf Pack Enterprises has total current assets of $346,002

Wolf Pack Enterprises has total current assets of $346,002 and fixed assets of $476,306. The company also has long-term debt of $276,400, $100,000 in its common stock account, and retained earnings of...

Q: What is the difference between a book-value balance sheet and

What is the difference between a book-value balance sheet and a market-value balance sheet? Which provides better information to investors and management?

Q: ACME Corporation had revenues of $867,030 in 2017.

ACME Corporation had revenues of $867,030 in 2017. It also had expenses (excluding depreciation) of $356,240, depreciation of $103,456, and interest expense of $52,423. What was the company’s net inco...

Q: True Blue Company increased its investments in marketable securities by $323

True Blue Company increased its investments in marketable securities by $323,370 and paid $1,220,231 for new fixed assets during 2017. The company also repaid $779,200 of existing long-term debt while...

Q: Your grandfather has agreed to deposit a certain amount of money each

Your grandfather has agreed to deposit a certain amount of money each year into an account paying 7.25 percent annually to help you go to graduate school. Starting next year, and for the following fou...

Q: Sun Devil Corporation reported EBITDA of $7,300,125

Sun Devil Corporation reported EBITDA of $7,300,125 and net income of $3,328,950 for the fiscal year ended December 31, 2017. During the same period, the company had $1,155,378 in interest expense, $1...

Q: Refer to the preceding balance sheet and income statement for Greenfern Corporation

Refer to the preceding balance sheet and income statement for Greenfern Corporation for the fiscal year ended July 31, 2017. What are the company’s current ratio and quick ratio? Wha...

Q: Refer to the preceding balance sheet and income statement for Greenfern Corporation

Refer to the preceding balance sheet and income statement for Greenfern Corporation for the fiscal year ended July 31, 2017. Calculate the following ratios: Refer to the income statement of Greenfer...

Q: Refer to the preceding balance sheet and income statement for Greenfern Corporation

Refer to the preceding balance sheet and income statement for Greenfern Corporation for the fiscal year ended July 31, 2017. Use the DuPont identity to calculate the return on equity (ROE). In the pro...

Q: Last year Pontiff Enterprises reported net sales of $13,144

Last year Pontiff Enterprises reported net sales of $13,144,680, a gross profit $4,127,429, EBIT of $2,586,150, and net income of $867,555. Compute Pontiff’s cost of goods sold, gross profit margin, o...

Q: National City Bank has 646,749,650 shares of common

National City Bank has 646,749,650 shares of common stock outstanding that are currently selling for $37.55 per share on the New York Stock Exchange. If National City’s net income was $2,780,955,000 i...

Q: Juliette Bronson anticipates needing $500,000 to start a business

Juliette Bronson anticipates needing $500,000 to start a business. If she can earn 4.5 percent compounded annually on her investments, how much money would Juliette have to invest today to have $500,0...

Q: Christopher Thompkins must decide how to invest $10,000 that

Christopher Thompkins must decide how to invest $10,000 that he just inherited. What would be the future value of his investment after five years under each of the following three investment opportuni...

Q: Tina DeLeon deposited $2,500 today in an account paying

Tina DeLeon deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? With annual compounding, how much intere...

Q: The state of Texas had 42,725 active patient care physicians

The state of Texas had 42,725 active patient care physicians in 2013 and by 2017 this number had grown to 47,663. What was the compound annual growth rate (CAGR) in the number of active care physician...

Q: Compound growth is exponential over time. Explain?

Compound growth is exponential over time. Explain?

Q: Freisinger, Inc., is expecting a new project to start paying

Freisinger, Inc., is expecting a new project to start paying off, beginning at the end of next year. It expects cash flows to be as follows: If Freisinger can reinvest these cash flows to earn a retu...

Q: You plan to set up an endowment at your alma mater that

You plan to set up an endowment at your alma mater that will fund $200,000 of scholarships each year indefinitely. If the principal (the amount you donate) can be invested at 5.5 percent, compounded a...

Q: Annalise Genric wants to open a restaurant in a historic building.

Annalise Genric wants to open a restaurant in a historic building. The property can be leased for 20 years, but not purchased. She believes her restaurant can generate a net cash flow of $76,000 the f...

Q: A credit card offers financing at an APR of 18 percent,

A credit card offers financing at an APR of 18 percent, with monthly compounding on outstanding charges. What is the effective annual rate (EAR)?

Q: You are considering investing in a mutual fund. The fund is

You are considering investing in a mutual fund. The fund is expected to earn a return of 15 percent in the next year. If its annual return is normally distributed with a standard deviation of 6.5 perc...

Q: What would you recommend to an investor who is considering making an

What would you recommend to an investor who is considering making an investment in a stock which plots below the security market line (SML)? Explain.

Q: Why does an investor want a diversified portfolio? Can an investor

Why does an investor want a diversified portfolio? Can an investor eliminate all risk?

Q: Seven years ago Eastern Corporation issued 20-year bonds that had

Seven years ago Eastern Corporation issued 20-year bonds that had a $1000 face value, paid interest annually, and that had a coupon rate of 7 percent. If the market rate of interest is 5.5 percent tod...

Q: You are considering investing in a 10-year zero coupon bond

You are considering investing in a 10-year zero coupon bond that compounds interest semiannually. If the current market rate is 5.65 percent, what is the maximum price you should have pay for this bon...

Q: What is the Rule of 72?

What is the Rule of 72?

Q: Bigbox, Inc. has bonds outstanding that will mature in eight

Bigbox, Inc. has bonds outstanding that will mature in eight years. These bonds pay interest semiannually and have a coupon rate of 4.6 percent. If the bonds are currently selling at $888.92, what is...

Q: Identify three fundamental types of decisions that financial managers make and identify

Identify three fundamental types of decisions that financial managers make and identify which part of the balance sheet each of these decisions affects?

Q: What are the two basic mechanisms through which funds flow through the

What are the two basic mechanisms through which funds flow through the financial system, and how do they differ?

Q: Why is stock value maximization superior to profit maximization as a goal

Why is stock value maximization superior to profit maximization as a goal for management?

Q: What are agency costs? Explain.

What are agency costs? Explain.

Q: In this chapter we showed that the formula for a perpetuity can

In this chapter we showed that the formula for a perpetuity can be obtained from the formula for the present value of an ordinary annuity if n is set equal to ∞. It is also possible to go the other wa...

Q: In the chapter text, you saw that the formula for a

In the chapter text, you saw that the formula for a growing perpetuity can be obtained from the formula for the present value of a growing annuity if n is set equal to ∞. It is also possible to go the...

Q: Why are capital budgeting decisions among the most important decisions in the

Why are capital budgeting decisions among the most important decisions in the life of a firm?

Q: What are the three most basic types of financial decisions managers must

What are the three most basic types of financial decisions managers must make?

Q: Explain why you would make an investment if the value of the

Explain why you would make an investment if the value of the expected cash flows exceeds the cost of the project?

Q: Identify the steps involved in computing the future value when you have

Identify the steps involved in computing the future value when you have multiple cash flows?

Q: What are some advantages and disadvantages of operating as a public corporation

What are some advantages and disadvantages of operating as a public corporation?

Q: Explain why professional partnerships such as physicians’ groups organize as limited liability

Explain why professional partnerships such as physicians’ groups organize as limited liability partnerships?

Q: Identify three financial officers who typically report to the CFO and describe

Identify three financial officers who typically report to the CFO and describe their duties?

Q: Explain why maximizing the current market price of a firm’s stock is

Explain why maximizing the current market price of a firm’s stock is an appropriate goal for the firm’s management?

Q: What is the fundamental determinant of an asset’s value?

What is the fundamental determinant of an asset’s value?

Q: Why is profit maximization an unsatisfactory goal for managing a firm?

Why is profit maximization an unsatisfactory goal for managing a firm?

Q: What are corporate raiders?

What are corporate raiders?

Q: What is a conflict of interest in a business setting?

What is a conflict of interest in a business setting?

Q: What critical economic role does the financial system play in the economy

What critical economic role does the financial system play in the economy?

Q: Why might a firm prefer to have a security issue underwritten by

Why might a firm prefer to have a security issue underwritten by an investment banking firm?

Q: Suppose three investments have equal lives and multiple cash flows. A

Suppose three investments have equal lives and multiple cash flows. A high discount rate tends to favor: a. The investment with large cash flows early. b. The investment with large cash flows late. c....

Q: How and why do large business firms use money markets?

How and why do large business firms use money markets?

Q: What is strong-form market efficiency? Semistrong-form market

What is strong-form market efficiency? Semistrong-form market efficiency? Weak-form market efficiency?

Q: What are some services that commercial banks provide to businesses?

What are some services that commercial banks provide to businesses?

Q: What is an IPO, and what role does an investment banker

What is an IPO, and what role does an investment banker play in the process?

Q: Explain how the real rate of interest is determined?

Explain how the real rate of interest is determined?

Q: Explain why interest rates follow the business cycle?

Explain why interest rates follow the business cycle?

Q: What is the realization principle, and why may it lead to

What is the realization principle, and why may it lead to a difference in the timing of when revenues are recognized on the books and cash is collected?

Q: What types of information does a firm’s annual report contain?

What types of information does a firm’s annual report contain?

Q: What are some objections to the preparation of marked-to-

What are some objections to the preparation of marked-to-market balance sheets?

Q: What is the difference between book value and market value?

What is the difference between book value and market value?

Q: Explain whether or not each of the following statements is correct.

Explain whether or not each of the following statements is correct. a. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate. b. If an...

Q: What is EBITDA, and what does it measure?

What is EBITDA, and what does it measure?

Q: Explain how the four financial statements are related?

Explain how the four financial statements are related?

Q: What does it mean when a firm’s cash flow to investors is

What does it mean when a firm’s cash flow to investors is negative?

Q: Which type of tax rate, marginal or average, should be

Which type of tax rate, marginal or average, should be used in analyzing the expansion of a product line, and why?

Q: What is the primary concern of a firm’s creditors?

What is the primary concern of a firm’s creditors?

Q: Why does it make sense to standardize financial statements?

Why does it make sense to standardize financial statements?

Q: What are common-size, or standardized, financial statements,

What are common-size, or standardized, financial statements, and how are they prepared?

Q: What are the efficiency ratios, and what do they measure?

What are the efficiency ratios, and what do they measure? Why, for some firms, is the total asset turnover more important than the fixed asset turnover?

Q: List the leverage ratios discussed in this section, and explain how

List the leverage ratios discussed in this section, and explain how they are related?

Q: List the profitability ratios discussed in this section, and explain how

List the profitability ratios discussed in this section, and explain how they differ from each other?

Q: Why is the effective annual rate (EAR) superior to the

Why is the effective annual rate (EAR) superior to the annual percentage rate (APR) in measuring the true economic cost or return?

Q: What are the three major shortcomings of ROE?

What are the three major shortcomings of ROE?

Q: What is the purpose of the DuPont system of analysis?

What is the purpose of the DuPont system of analysis?

Q: What is the equation for ROA in the DuPont system, and

What is the equation for ROA in the DuPont system, and how do the factors in that equation influence the ratio?

Q: In what three ways can a financial manager choose a benchmark?

In what three ways can a financial manager choose a benchmark?

Q: Explain what the SIC codes are, and discuss the pros and

Explain what the SIC codes are, and discuss the pros and cons of using them in financial analysis?

Q: What are the limitations on traditional financial statement analysis?

What are the limitations on traditional financial statement analysis?

Q: List some of the problems that financial analysts confront when analyzing financial

List some of the problems that financial analysts confront when analyzing financial statements?

Q: Explain how the DuPont identity allows us to evaluate a firm’s performance

Explain how the DuPont identity allows us to evaluate a firm’s performance?

Q: What is a time line, and why is it important in

What is a time line, and why is it important in financial analysis?

Q: Why is a dollar today worth more than a dollar one year

Why is a dollar today worth more than a dollar one year from now?

Q: Because the conversion feature in a convertible bond is valuable to bondholders

Because the conversion feature in a convertible bond is valuable to bondholders, convertible bond issues have lower coupon payments than otherwise similar bonds that are not convertible. Does this mea...

Q: What is compounding, and how does it affect the future value

What is compounding, and how does it affect the future value of an investment?

Q: How does changing the compounding period affect the amount of interest earned

How does changing the compounding period affect the amount of interest earned on an investment?

Q: Explain why you would expect the discount factor to become smaller when

Explain why you would expect the discount factor to become smaller when based on the longer the time to payment?

Q: Explain how to calculate the present value of a stream of cash

Explain how to calculate the present value of a stream of cash flows?

Q: Why is it important to adjust all cash flows to a common

Why is it important to adjust all cash flows to a common date?

Q: Explain how to calculate the future value of a stream of cash

Explain how to calculate the future value of a stream of cash flows?

Q: How do an ordinary annuity, an annuity due, and a

How do an ordinary annuity, an annuity due, and a perpetuity differ?

Q: Give two examples of perpetuities?

Give two examples of perpetuities?

Q: What is the annuity transformation method?

What is the annuity transformation method?

Q: What is the difference between a growing annuity and a growing perpetuity

What is the difference between a growing annuity and a growing perpetuity?

Q: Refer above to the balance sheet and income statement for Abercrombie Supply

Refer above to the balance sheet and income statement for Abercrombie Supply Company for the year ended June 30, 2017. Calculate the following ratios: Refer data to problem 4.2: Prepare a common-size...

Q: a. Investor A holds a 10-year bond, while

a. Investor A holds a 10-year bond, while investor B holds an 8-year bond. If interest rate increases by 1 percent, which investor has the higher interest rate risk? Explain. b. Investor A holds a 10-...

Q: Distinguish between quoted interest rate, interest rate per period, and

Distinguish between quoted interest rate, interest rate per period, and effective annual interest rate?

Q: What is the APR, and why are lending institutions required to

What is the APR, and why are lending institutions required to disclose this rate?

Q: What is the correct way to annualize an interest rate in financial

What is the correct way to annualize an interest rate in financial decision making?

Q: What does the coefficient of variation tell us, and how is

What does the coefficient of variation tell us, and how is it related to the Sharpe Ratio?

Q: Why does the total risk of a portfolio not approach zero as

Why does the total risk of a portfolio not approach zero as the number of assets in a portfolio becomes very large?

Q: Why are returns on the stock market used as a benchmark in

Why are returns on the stock market used as a benchmark in measuring systematic risk?

Q: How is the expected return on an asset related to its systematic

How is the expected return on an asset related to its systematic risk?

Q: If an asset’s expected return does not plot on the line in

If an asset’s expected return does not plot on the line in question 2 above, what does that imply about its price?

Q: What are the main differences between the corporate bond markets and stock

What are the main differences between the corporate bond markets and stock markets?

Q: A bond has a 7 percent coupon rate, a face value

A bond has a 7 percent coupon rate, a face value of $1,000, and a maturity of four years. On a time line, lay out the cash flows for the bond?

Q: We know that a vanilla bond with a coupon rate below the

We know that a vanilla bond with a coupon rate below the market rate of interest will sell for a discount and that a vanilla bond with a coupon rate above the market rate of interest will sell for a p...

Q: What are zero coupon bonds, and how are they priced?

What are zero coupon bonds, and how are they priced?

Q: Explain conceptually how bonds are priced?

Explain conceptually how bonds are priced?

Q: Explain how bond yields are calculated?

Explain how bond yields are calculated?

Q: What is interest rate risk?

What is interest rate risk?

Q: Explain why long-term bonds with zero coupons are riskier than

Explain why long-term bonds with zero coupons are riskier than short-term bonds that pay coupon interest?

Q: Describe the three most prominent bond rating systems?

Describe the three most prominent bond rating systems?

Q: What are the key factors that most affect the level and shape

What are the key factors that most affect the level and shape of the yield curve?

Q: What are default risk premiums, and what do they measure?

What are default risk premiums, and what do they measure?

Q: Economic units that need to borrow money are said to be:

Economic units that need to borrow money are said to be: a. Lender–savers b. Borrower–spenders c. Balanced budget keepers. d. None of the above.

Q: What is the appropriate decision criterion for financial managers to use when

What is the appropriate decision criterion for financial managers to use when selecting a capital project?

Q: Define yield to maturity. Why is it important?

Define yield to maturity. Why is it important?

Q: What are some of the things that managers do to manage a

What are some of the things that managers do to manage a firm’s working capital?

Q: Which one of the following characteristics does not pertain to corporations?

Which one of the following characteristics does not pertain to corporations? a. Can enter into contracts. b. Can borrow money. c. Are the easiest type of business to form. d. Can be sued. e. Can own...

Q: What are typically the main components of an executive compensation package?

What are typically the main components of an executive compensation package?

Q: Depreciation and amortization expenses are: a. Part of current

Depreciation and amortization expenses are: a. Part of current assets on the balance sheet. b. After-tax expenses that reduce a firm’s cash flows. c. Long-term liabilities that reduce a firm’s net wor...

Q: Explain what the marketability of a security is and how it is

Explain what the marketability of a security is and how it is determined?

Q: What are over-the-counter markets (OTCs), and

What are over-the-counter markets (OTCs), and how do they differ from organized exchanges?

Q: The going concern assumption of GAAP implies that the firm:

The going concern assumption of GAAP implies that the firm: a. Is going under and needs to be liquidated at historical cost. b. Will continue to operate and its assets should be recorded at historical...

Q: How does the business cycle affect the nominal interest rate and inflation

How does the business cycle affect the nominal interest rate and inflation rate?

Q: CSB, Inc., has a beta of 1.35.

CSB, Inc., has a beta of 1.35. If the expected market return is 14.5 percent and the risk-free rate is 5.5 percent, what is the appropriate required return of CSB (using the CAPM)?

Q: How would one explain a low receivables turnover ratio?

How would one explain a low receivables turnover ratio?

Q: Define interest rate risk. How can the CFOs manage this risk

Define interest rate risk. How can the CFOs manage this risk?

Q: Why is ROE generally much higher than ROA for banks relative to

Why is ROE generally much higher than ROA for banks relative to other industries?

Q: What are the two factors to be considered in time value of

What are the two factors to be considered in time value of money?

Q: Explain the difference between future value and present value?

Explain the difference between future value and present value?

Q: If you were given a choice between investing in a savings account

If you were given a choice between investing in a savings account that paid quarterly interest and one that paid monthly interest, which one should you choose if they both offered the same stated inte...

Q: What is the key economic principle involved in calculating the present value

What is the key economic principle involved in calculating the present value or future value of multiple cash flows?

Q: What is the difference between a perpetuity and an annuity?

What is the difference between a perpetuity and an annuity?

Q: Define annuity due. Would an investment be worth more if it

Define annuity due. Would an investment be worth more if it were an ordinary annuity or an annuity due? Explain?

Q: Raymond Bartz is trying to choose between two equally risky annuities,

Raymond Bartz is trying to choose between two equally risky annuities, each paying $5,000 per year for five years. One is an ordinary annuity, the other is an annuity due. Which of the following state...

Q: Which of the following investments will have the highest future value at

Which of the following investments will have the highest future value at the end of three years? Assume that the effective annual rate for all investments is the same. a. You earn $3,000 at the end of...

Q: When will the annual percentage rate (APR) be the same

When will the annual percentage rate (APR) be the same as the effective annual rate (EAR)?

Q: Explain why bond prices and interest rates are negatively related. What

Explain why bond prices and interest rates are negatively related. What are the roles of the coupon rate and the termtomaturity in this relation?

Q: What economic conditions would prompt investors to take advantage of a bond’s

What economic conditions would prompt investors to take advantage of a bond’s convertibility feature?

Q: If interest rates are expected to increase, should investors look to

If interest rates are expected to increase, should investors look to long-term bonds or short-term securities? Explain.

Q: Explain why total financial assets in the economy must equal total financial

Explain why total financial assets in the economy must equal total financial liabilities?

Q: Define book-value accounting and market-value accounting?

Define book-value accounting and market-value accounting?

Q: What does it mean when a company’s return on assets (ROA

What does it mean when a company’s return on assets (ROA) is equal to its return on equity (ROE)?

Q: Why don’t small businesses make greater use of the direct credit markets

Why don’t small businesses make greater use of the direct credit markets since these markets enable firms to finance their activities at a very low cost?

Q: What is the difference between stockholders and stakeholders?

What is the difference between stockholders and stakeholders?

Q: Suppose that a group of accountants wants to start an accounting business

Suppose that a group of accountants wants to start an accounting business. What organizational form would they most likely choose, and why?

Q: Why would the owners of a business choose to form a corporation

Why would the owners of a business choose to form a corporation even though they will face double taxation?

Q: What are two basic services that investment banks provide in the economy

What are two basic services that investment banks provide in the economy?

Q: Explain what you would assume the yield curve would look like during

Explain what you would assume the yield curve would look like during economic expansion and why?

Q: Why are taxes and the tax code important for managerial decision making

Why are taxes and the tax code important for managerial decision making?

Q: Explain why firms prefer to use accelerated depreciation methods over the straight

Explain why firms prefer to use accelerated depreciation methods over the straight-line method for tax purposes?

Q: What is the statement of cash flows, and what is its

What is the statement of cash flows, and what is its role?

Q: You are concerned about one of the investments in your fully diversified

You are concerned about one of the investments in your fully diversified portfolio. You just have an uneasy feeling about the CFO, Iam Shifty, of that particular firm. You do believe, however, that th...

Q: In recent years, investors have agreed that the market portfolio consists

In recent years, investors have agreed that the market portfolio consists of more than just a group of U.S. stocks and bonds. If you are an investor who invests in only U.S. stocks and bonds, describe...

Q: What are the two basic sources of funds for all businesses?

What are the two basic sources of funds for all businesses?

Q: Who are the owners in a corporation, and how is their

Who are the owners in a corporation, and how is their ownership represented?

Q: Explain what is meant by stockholders’ limited liability?

Explain what is meant by stockholders’ limited liability?

Q: What is double taxation?

What is double taxation?

Q: What is the form of business organization taken by most large companies

What is the form of business organization taken by most large companies and why?

Q: An investor holds a 10-year bond paying a coupon rate

An investor holds a 10-year bond paying a coupon rate of 9 percent. The yield to maturity of the bond is 7.8 percent. Would you expect the investor to be holding a par-value, premium, or discount bond...

Q: What are some of the drawbacks to setting profit maximization as the

What are some of the drawbacks to setting profit maximization as the main goal of a company?

Q: What are the major factors that affect a firm’s stock price?

What are the major factors that affect a firm’s stock price?

Q: What is net working capital?

What is net working capital?

Q: What can happen if a firm is poorly managed and its stock

What can happen if a firm is poorly managed and its stock price falls substantially below its maximum potential price?

Q: What are some of the regulations that pertain to boards of directors

What are some of the regulations that pertain to boards of directors that were put in place to reduce agency conflicts?

Q: Explain the difference between profitable and unprofitable firms?

Explain the difference between profitable and unprofitable firms?

Q: What three major decisions are of most concern to financial managers?

What three major decisions are of most concern to financial managers?

Q: What are some of the working capital decisions that a financial manager

What are some of the working capital decisions that a financial manager faces?

Q: What are the common forms of business organization discussed in this chapter

What are the common forms of business organization discussed in this chapter?

Q: What is the role of the financial system, and what are

What is the role of the financial system, and what are the two major components of the financial system?

Q: Why were commercial banks prohibited from engaging in investment banking activities until

Why were commercial banks prohibited from engaging in investment banking activities until 1999?

Q: List the ways a company’s financial manager can benchmark the company’s own

List the ways a company’s financial manager can benchmark the company’s own performance?

Q: Cranjet Inc. is issuing 10,000 bonds, and its

Cranjet Inc. is issuing 10,000 bonds, and its investment banker has guaranteed a price of $985 per bond. If the investment banker sells the entire issue to investors for $10,150,000. a. What is the u...

Q: What are some of the ways in which a financial institution or

What are some of the ways in which a financial institution or intermediary can raise money?

Q: How do financial institutions act as intermediaries to provide services to small

How do financial institutions act as intermediaries to provide services to small businesses?

Q: Which financial institution is usually the most important to businesses?

Which financial institution is usually the most important to businesses?

Q: What is the main difference between money markets and capital markets?

What is the main difference between money markets and capital markets?

Q: What is the relevant tax rate to use when making financial decisions

What is the relevant tax rate to use when making financial decisions? Explain why.

Q: What are the main types of securities in the money markets?

What are the main types of securities in the money markets?

Q: How do capital market instruments differ from money market instruments?

How do capital market instruments differ from money market instruments?

Q: Given the data for Oakland Mills Company in problem 3.7

Given the data for Oakland Mills Company in problem 3.7 above, compute the cash flows to investors from operating activity? Refer to data in problem 3.7: The Oakland Mills Company has disclosed the f...

Q: What is treasury stock? Why do firms have treasury stock?

What is treasury stock? Why do firms have treasury stock?

Q: What does a competitive financial system imply about interest rates?

What does a competitive financial system imply about interest rates?

Q: Hillman Corporation reported current assets of $3,495,055

Hillman Corporation reported current assets of $3,495,055 for the year ending December 31, 2017 and current assets of $3,103,839 on December 31, 2016. Current liabilities for the firm were $2,867,225...

Q: Del Bridge Construction had long-term assets before depreciation of $

Del Bridge Construction had long-term assets before depreciation of $990,560 on December 31, 2016 and $1,211,105 on December 31, 2017. How much cash flow was invested in long-term assets for Del Brid...

Q: Define average tax rate and marginal tax rate?

Define average tax rate and marginal tax rate?

Q: What are the major differences between public and private markets?

What are the major differences between public and private markets?

Q: What are the two risk-hedging instruments discussed in the chapter

What are the two risk-hedging instruments discussed in the chapter?

Q: Zephyr Sales Company has sales of $1.125 million.

Zephyr Sales Company has sales of $1.125 million. If the company’s management expects sales to grow 6.5 percent annually, how long will it be before sales doubles? Use a financial calculator to solve...

Q: Refer to the information given in Problem 3.21. What

Refer to the information given in Problem 3.21. What is the cash flow from operating activity for Nimitz Rental? Refer to information given in problem 3.21: Nimitz Rental Company provided the followi...

Q: In February 2017 the risk free rate was 2.97 percent

In February 2017 the risk free rate was 2.97 percent, the market risk premium was 6 percent and the beta for Twitter stock was 0.99. What is the expected return that was consistent with the systematic...

Q: The market risk premium is 6 percent, and the risk-

The market risk premium is 6 percent, and the risk-free rate is 5 percent. If the expected return on a bond is 6.5 percent, what is its beta?

Q: Explain why profit maximization is not the best goal for a company

Explain why profit maximization is not the best goal for a company. What is a better goal?

Q: David is going to purchase two stocks to form the initial holdings

David is going to purchase two stocks to form the initial holdings in his portfolio. Iron stock has an expected return of 15 percent, while Copper stock has an expected return of 20 percent. If David...

Q: When are the nominal and real interest rates equal?

When are the nominal and real interest rates equal?

Q: If the expected return on the market is 10 percent and the

If the expected return on the market is 10 percent and the risk-free rate is 4 percent, what is the expected return for a stock with a beta equal to 1.5? What is the market risk premium?

Q: Tonalli is putting together a portfolio of 10 stocks in equal proportions

Tonalli is putting together a portfolio of 10 stocks in equal proportions. What is the relative importance of the variance for each stock versus the covariance for the pairs of stocks in her portfolio...

Q: Jose is thinking about purchasing a soft drink machine and placing it

Jose is thinking about purchasing a soft drink machine and placing it in a business office. He knows that there is a 5 percent probability that someone who walks by the machine will make a purchase fr...

Q: Kate recently invested in real estate with the intention of selling the

Kate recently invested in real estate with the intention of selling the property one year from today. She has modeled the returns on that investment based on three economic scenarios. She believes tha...

Q: Given the returns and probabilities for the three possible states listed below

Given the returns and probabilities for the three possible states listed below, calculate the covariance between the returns of Stock A and Stock B. For convenience, assume that the expected returns o...

Q: Damien knows that the beta of his portfolio is equal to 1

Damien knows that the beta of his portfolio is equal to 1, but he does not know the risk-free rate of return or the market risk premium. He also knows that the expected return on the market is 8 perce...

Q: Define systematic risk?

Define systematic risk?

Q: Common-size analysis is used in financial analysis to:

Common-size analysis is used in financial analysis to: a. Evaluate changes in a company’s operating cycle over time. b. Predict changes in a company’s capital structure using regression analysis. c. C...

Q: Last year ABC companies had accounts receivable turnover of 15, total

Last year ABC companies had accounts receivable turnover of 15, total asset turnover of 4.5, and total assets of $1,000,000. What was the value of ABC’s accounts receivable? What was the value of its...

Q: What are some of the major external and internal factors that affect

What are some of the major external and internal factors that affect a firm’s stock price? What is the difference between the two general types of factors?

Q: List the two ways in which a transfer of funds takes place

List the two ways in which a transfer of funds takes place in an economy. What is the main difference between these two?

Q: DuPont analysis involves breaking return-on-assets ratios into their

DuPont analysis involves breaking return-on-assets ratios into their a. Profit components. b. Marginal and average components. c. Operating and financing components. d. Profit margin and turnover comp...

Q: Why are direct financial markets also called wholesale markets?

Why are direct financial markets also called wholesale markets?

Q: Tanner invested $1,000 in large U.S.

Tanner invested $1,000 in large U.S. stocks at the beginning of 2012. This investment earned 15.98 percent in 2012, 32.41 percent in 2013, 13.69 percent in 2014, and 1.41 percent in 2015. What return...

Q: What is a primary market? What does IPO stand for?

What is a primary market? What does IPO stand for?

Q: Primary Markets: Identify whether the following transactions are primary market or

Primary Markets: Identify whether the following transactions are primary market or secondary market transactions. a. Jim Hendry bought 300 shares of IBM through his brokerage account. b. Peggy Jones b...

Q: Holding all else constant, what will happen to the present value

Holding all else constant, what will happen to the present value of a future amount if you increase the discount rate? What if you increase the number of years?

Q: Given a change in market interest rates, which will change more

Given a change in market interest rates, which will change more; the market price of a bond with 20 years until maturity or the market price of a bond with 5 years until maturity? Assume all the chara...

Q: Which of the following classes of securities is likely to have the

Which of the following classes of securities is likely to have the lowest corporate borrowing cost? (LO 5) a. AAA rated bonds. b. A rated bonds. c. BB rated bonds. d. C rated bonds. e. All of the abov...

Q: Which of the following is/are advantages of the corporate form

Which of the following is/are advantages of the corporate form of organization? a. Reduced start-up costs b. Greater access to capital markets c. Unlimited liability d. Single taxation

Q: Identify the sources of agency costs. What are some ways these

Identify the sources of agency costs. What are some ways these costs can be controlled in a company?

Q: You just purchased a share of IBM stock on the New York

You just purchased a share of IBM stock on the New York Stock Exchange. What kind of transaction was this? a. Primary market transaction. b. Secondary market transaction. c. Futures market transaction...

Q: List the three forms of the efficient market hypothesis, and describe

List the three forms of the efficient market hypothesis, and describe what information is assumed to be reflected in security prices under each of these hypotheses.

Q: If the nominal rate of interest is 4.25 percent and

If the nominal rate of interest is 4.25 percent and the expected rate of inflation is 1.75 percent, what is the real rate of interest?

Q: What is the relation between business cycles and the general level of

What is the relation between business cycles and the general level of interest rates?

Q: Compare an annuity due with an ordinary annuity. The payments for

Compare an annuity due with an ordinary annuity. The payments for both are made annually and are of the same dollar amounts. The two annuities also have the same duration in years and the same discoun...

Q: Given the following information from Capstone Corporation, what price would CAPM

Given the following information from Capstone Corporation, what price would CAPM predict that the company’s stock will trade for 1 year from today. Assume that the risk free rate is 3 percent and that...

Q: You have just invested in a portfolio of three stocks. The

You have just invested in a portfolio of three stocks. The amount of money that you invested in each stock and its beta are summarized below. Calculate the beta of the portfolio and use the capital as...

Q: Why are many businesses operated as sole proprietorships or partnerships?

Why are many businesses operated as sole proprietorships or partnerships?

Q: What are the major responsibilities of the CFO?

What are the major responsibilities of the CFO?

Q: Why does the internal auditor report to both the CFO and the

Why does the internal auditor report to both the CFO and the board of directors?

Q: What is the Sarbanes-Oxley Act, and what does it

What is the Sarbanes-Oxley Act, and what does it focus on? Why does it focus in these areas?

Q: What are agency conflicts?

What are agency conflicts?

Q: List the three main objectives of the Sarbanes-Oxley Act?

List the three main objectives of the Sarbanes-Oxley Act?

Q: How would you define an ethical business culture?

How would you define an ethical business culture?

Q: What are the two basic ways in which funds flow through the

What are the two basic ways in which funds flow through the financial system from lender–savers to borrower–spenders?

Q: Why is it difficult for individuals to participate in the direct financial

Why is it difficult for individuals to participate in the direct financial markets?

Q: What is the difference between primary and secondary markets?

What is the difference between primary and secondary markets?

Q: What are capital markets, and why are they important to corporations

What are capital markets, and why are they important to corporations?

Q: How does information about a firm’s prospects get reflected in its share

How does information about a firm’s prospects get reflected in its share price?

Q: What is financial intermediation, and why is it important?

What is financial intermediation, and why is it important?

Q: How are inflationary expectations accounted for in the nominal rate of interest

How are inflationary expectations accounted for in the nominal rate of interest?

Q: Give an example of a conflict of interest in a business setting

Give an example of a conflict of interest in a business setting, other than the one involving the real estate agent discussed in the chapter text?

Q: What is net working capital? Why might a low value for

What is net working capital? Why might a low value for this number be considered undesirable?

Q: Explain the accounting concept behind depreciation?

Explain the accounting concept behind depreciation?

Q: What is treasury stock?

What is treasury stock?

Q: How is net income computed?

How is net income computed?

Q: What accounting events trigger changes to the retained earnings account?

What accounting events trigger changes to the retained earnings account?

Q: How do increases in fixed assets from one period to the next

How do increases in fixed assets from one period to the next affect cash holdings for the firm?

Q: Name two working capital accounts that represent sources of cash for the

Name two working capital accounts that represent sources of cash for the firm?

Q: Explain the difference between cash flows from financing and investing activities?

Explain the difference between cash flows from financing and investing activities?

Q: How does the calculation of net income differ from the calculation of

How does the calculation of net income differ from the calculation of cash flow to investors from operating activity?

Q: All else being equal, if a firm increases its accounts payable

All else being equal, if a firm increases its accounts payable, what effect will this have on cash flow to investors?

Q: When determining the real interest rate, what happens to businesses that

When determining the real interest rate, what happens to businesses that find themselves with unfunded capital projects whose rate of return exceeds the cost of capital?

Q: Why is it important to consider the consequences of taxes when financing

Why is it important to consider the consequences of taxes when financing a new project?

Q: What are the tax implications of a decision to finance a project

What are the tax implications of a decision to finance a project using debt rather than new equity?

Q: Why is it important to look at a firm’s historical financial statements

Why is it important to look at a firm’s historical financial statements?

Q: What is the difference between simple interest and compound interest?

What is the difference between simple interest and compound interest?

Q: What is the present value, and when is it used?

What is the present value, and when is it used?

Q: What is the discount rate? How does the discount rate differ

What is the discount rate? How does the discount rate differ from the interest rate in the future value equation?

Q: What is the relation between the present value factor and the future

What is the relation between the present value factor and the future value factor?

Q: What is the difference between the interest rate (i) and

What is the difference between the interest rate (i) and the growth rate (g) in the future value equation?

Q: What are the two components of a total holding period return?

What are the two components of a total holding period return?

Q: How is the expected return on an investment calculated?

How is the expected return on an investment calculated?

Q: How do large corporations adjust their liquidity in the money markets?

How do large corporations adjust their liquidity in the money markets?

Q: What is the relation between the variance and the standard deviation?

What is the relation between the variance and the standard deviation?

Q: What relation do we generally observe between risk and return when we

What relation do we generally observe between risk and return when we examine historical returns?

Q: What type of return tells you the average compounded return earned by

What type of return tells you the average compounded return earned by an investor?

Q: What are the two components of total risk?

What are the two components of total risk?

Q: How is beta estimated?

How is beta estimated?

Q: How would you interpret a beta of 1.5 for an

How would you interpret a beta of 1.5 for an asset? A beta of 0.75?

Q: What name is given to the relation between risk and expected return

What name is given to the relation between risk and expected return implied by the CAPM?

Q: Explain what a convertible bond is?

Explain what a convertible bond is?

Q: What is the compounding period for most bonds sold in the United

What is the compounding period for most bonds sold in the United States?

Q: The CFO of a certain company always wears his green suit on

The CFO of a certain company always wears his green suit on a day that the firm is about to release positive information about his company. You believe that you can profit from this information by buy...

Q: Shouldn’t the nominal rate of interest (Equation 2.1)

Shouldn’t the nominal rate of interest (Equation 2.1) be determined by the actual rate of inflation (∆Pa), which can be easily measured, rather than by the expected rate of inflation (∆Pe)?

Q: How does Exhibit 2.5 help explain why interest rates were

How does Exhibit 2.5 help explain why interest rates were so high during the early 1980s as compared to the relatively low interest rates in the early 1960s?

Q: What is a major reason for the accounting scandals in the early

What is a major reason for the accounting scandals in the early 2000s? How do firms sometimes attempt to meet Wall Street analysts’ earnings projections?

Q: The equity multiplier for Spiffy Corporation is 1.75, its

The equity multiplier for Spiffy Corporation is 1.75, its EBIT return on assets (EROA) is 0.07, and the value of its equity is $850,000. What is the value of Spiffy’s total assets? What is the value o...

Q: How does a firm’s cash flow to investors from operating activity differ

How does a firm’s cash flow to investors from operating activity differ from net income, and why?

Q: Identify the five fundamental principles of GAAP, and explain briefly their

Identify the five fundamental principles of GAAP, and explain briefly their importance?

Q: Compare and contrast depreciation expense and amortization expense?

Compare and contrast depreciation expense and amortization expense?

Q: Why are retained earnings not considered an asset of the firm?

Why are retained earnings not considered an asset of the firm?

Q: Why is it not enough for an analyst to look at just

Why is it not enough for an analyst to look at just the short-term and long-term debt on a firm’s balance sheet when assessing the firm’s fixed obligations?

Q: Why is too much liquidity not a good thing?

Why is too much liquidity not a good thing?

Q: Inventory is excluded when the quick ratio or acid-test ratio

Inventory is excluded when the quick ratio or acid-test ratio is calculated because inventory is the most difficult current asset to convert to cash without loss of value. What types of inventory are...

Q: What does a very high inventory turnover ratio signify?

What does a very high inventory turnover ratio signify?

Q: What additional information does the fixed asset turnover ratio provide over the

What additional information does the fixed asset turnover ratio provide over the total asset turnover ratio? For which industries does it carry greater significance?

Q: How does financial leverage help stockholders?

How does financial leverage help stockholders?

Q: Give an example of a capital budgeting decision and a financing decision

Give an example of a capital budgeting decision and a financing decision?

Q: Why is the ROE a more appropriate proxy (for stockholder value

Why is the ROE a more appropriate proxy (for stockholder value maximization) for some firms than for other firms?

Q: Explain the phrase “a dollar today is worth more than a

Explain the phrase “a dollar today is worth more than a dollar tomorrow”?

Q: You are planning to take a spring break trip to Cancun your

You are planning to take a spring break trip to Cancun your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you woul...

Q: Explain the importance of a time line?

Explain the importance of a time line?

Q: Explain the difference between compounding and discounting?

Explain the difference between compounding and discounting?

Q: Explain how compound interest differs from simple interest?

Explain how compound interest differs from simple interest?

Q: Describe the cash flows between a firm and its stakeholders?

Describe the cash flows between a firm and its stakeholders?

Q: What are the three fundamental decisions the financial manager is concerned with

What are the three fundamental decisions the financial manager is concerned with, and how do they affect the firm’s balance sheet?

Q: Explain the economic role of brokers and dealers. How does each

Explain the economic role of brokers and dealers. How does each make a profit?

Q: The correlation between stocks A and B is 0.50,

The correlation between stocks A and B is 0.50, while the correlation between stocks A and C is –0.5. You already own stock A and are thinking of buying either stock B or stock C. If you want your por...

Q: Megan Gaumer expects to need $50,000 for a down

Megan Gaumer expects to need $50,000 for a down payment on a house in six years. How much does she need to invest today in an account paying 7.25 percent in order to have $50,000 in six years?

Q: The idea that we can know the return on a security for

The idea that we can know the return on a security for each possible outcome is overly simplistic. However, even though we cannot possibly predict all possible outcomes, this fact has little bearing o...

Q: Which investment category included in Exhibit 7.3 has shown the

Which investment category included in Exhibit 7.3 has shown the greatest degree of risk in the United States since 1926? Explain why that makes sense in a world where the value of an asset in this inv...

Q: The CAPM is used to price the risk (estimate the expected

The CAPM is used to price the risk (estimate the expected return) for any asset. Our examples have focused on stocks, but we could also use CAPM to estimate the expected rate of return for bonds. Expl...

Q: You may have heard the statement that you should not include your

You may have heard the statement that you should not include your home as an asset in your investment portfolio. Assume that your house will comprise up to 75 percent of your assets in the early part...

Q: Suppose that you know the risk and the expected return for two

Suppose that you know the risk and the expected return for two stocks. Discuss the process you might utilize to determine which of the two stocks is a better buy. You may assume that the two stocks wi...

Q: What is the difference between the expected rate of return and the

What is the difference between the expected rate of return and the required rate of return? What does it mean if they are different for a particular asset at a particular point in time?

Q: Suppose that the standard deviation of the returns on the shares of

Suppose that the standard deviation of the returns on the shares of stock at two different companies is exactly the same. Does this mean that the required rate of return will be the same for these two...

Q: What is a firm’s capital structure, and why is it important

What is a firm’s capital structure, and why is it important?

Q: What are the advantages and disadvantages of a sole proprietorship?

What are the advantages and disadvantages of a sole proprietorship?

Q: What is a partnership, and what is the biggest disadvantage of

What is a partnership, and what is the biggest disadvantage of this form of business organization? How can this disadvantage be avoided?

Q: You have an opportunity to invest $2,500 today and

You have an opportunity to invest $2,500 today and receive $3,000 in three years. What would be the return on your investment if you accepted this opportunity?

Q: What is the primary responsibility of the board of directors in a

What is the primary responsibility of the board of directors in a corporation?

Q: All public companies must hire a certified public accounting firm to perform

All public companies must hire a certified public accounting firm to perform an independent audit of their financial statements. What exactly does the term audit mean?

Q: What is the appropriate goal of financial managers? How do managers’

What is the appropriate goal of financial managers? How do managers’ decisions affect how successful the firm is in achieving this goal?

Q: What is an agency relationship, and what is an agency conflict

What is an agency relationship, and what is an agency conflict? How can agency conflicts be reduced in a corporation?

Q: How can a lack of business ethics negatively affect the performance of

How can a lack of business ethics negatively affect the performance of an economy? Give an example.

Q: What are some ways to resolve a conflict of interest?

What are some ways to resolve a conflict of interest?

Q: Describe what an information asymmetry is in a business transaction. Explain

Describe what an information asymmetry is in a business transaction. Explain how the inequity associated with an information asymmetry might be, at least partially, solved through the market for goods...

Q: What ethical conflict does insider trading present?

What ethical conflict does insider trading present?

Q: What is the appropriate decision rule for a firm considering undertaking a

What is the appropriate decision rule for a firm considering undertaking a capital project? Give a real-life example?

Q: Infosys Technologies, Inc., an Indian technology company, reported net

Infosys Technologies, Inc., an Indian technology company, reported net income of $419 million this year. Analysts expect the company’s earnings to be $1.468 billion in five years. What is the expected...

Q: What is the general formula used to calculate the price of a

What is the general formula used to calculate the price of a share of a stock? What does it mean?

Q: What is the cost of capital?

What is the cost of capital?

Q: The profitability index is a tool for measuring a project’s benefits relative

The profitability index is a tool for measuring a project’s benefits relative to its costs. How might this help to eliminate bias in project selection?

Q: Explain why the cost of capital is referred to as the “

Explain why the cost of capital is referred to as the “hurdle” rate in capital budgeting?

Q: Elkridge Construction Company has an overall (composite) cost of capital

Elkridge Construction Company has an overall (composite) cost of capital of 12 percent. This cost of capital reflects the cost of capital for an Elkridge Construction project with average risk. Howeve...

Q: a. Sykes, Inc. management is considering two projects:

a. Sykes, Inc. management is considering two projects: a plant expansion and a new computer system for the firm’s production department. Classify these projects as independent, mutually exclusive, or...

Q: In the context of capital budgeting, what is “capital rationing

In the context of capital budgeting, what is “capital rationing”?

Q: a. A firm invests in a project that is expected to

a. A firm invests in a project that is expected to earn a return of 12 percent. If the appropriate cost of capital is also 12 percent, did the firm make the right decision. Explain. b. What is the im...

Q: Identify the weaknesses of the payback period method?

Identify the weaknesses of the payback period method?

Q: What are the strengths and weaknesses of the accounting rate of return

What are the strengths and weaknesses of the accounting rate of return approach?

Q: Under what circumstances might the IRR and NPV approaches produce conflicting results

Under what circumstances might the IRR and NPV approaches produce conflicting results?

Q: Do you agree or disagree with the following statement given the discussion

Do you agree or disagree with the following statement given the discussion in this chapter? We can calculate future cash flows precisely and obtain an exact value for the NPV of an investment?

Q: Describe the process of capital rationing?

Describe the process of capital rationing?

Q: When two mutually exclusive projects have different lives, how can an

When two mutually exclusive projects have different lives, how can an analyst determine which is better? What is the underlying assumption in this method?

Q: What is the opportunity cost of using an existing asset? Give

What is the opportunity cost of using an existing asset? Give an example of the opportunity cost of using the excess capacity of a machine?

Q: You are providing financial advice to a shrimp farmer who will be

You are providing financial advice to a shrimp farmer who will be harvesting his last crop of farm-raised shrimp. His current shrimp crop is very young and will, therefore, grow and become more valuab...

Q: Suppose that FRA Corporation already has divisions in both Dallas and Houston

Suppose that FRA Corporation already has divisions in both Dallas and Houston. FRA is now considering setting up a third division in Austin. This expansion will require that one senior manager from Da...

Q: MusicHeaven, Inc., is a producer of media players which currently

MusicHeaven, Inc., is a producer of media players which currently have either 20 gigabytes or 30 gigabytes of storage. Now the company is considering launching a new production line making mini media...

Q: QualityLiving Trust is a real estate investment company that builds and remodels

QualityLiving Trust is a real estate investment company that builds and remodels apartment buildings in northern California. It is currently considering remodeling a few idle buildings that it owns in...

Q: High-End Fashions, Inc., bought a production line of

High-End Fashions, Inc., bought a production line of ankle-length skirts last year at a cost of $500,000. This year, however, miniskirts are in and ankle-length skirts are completely out of fashion. H...

Q: How is the MACRS depreciation method under IRS rules different from the

How is the MACRS depreciation method under IRS rules different from the straight-line depreciation allowed under GAAP rules? What is the implication on incremental after-tax free cash flows from firms...

Q: Explain the difference between marginal and average tax rates, and identify

Explain the difference between marginal and average tax rates, and identify which of these rates is used in capital budgeting and why?

Q: You are involved in the planning process for a firm that is

You are involved in the planning process for a firm that is expected to have a large increase in sales next year. Which type of firm would benefit the most from that sales increase: a firm with low fi...

Q: Why are capital investments considered the most important decisions made by a

Why are capital investments considered the most important decisions made by a firm’s management?

Q: What is the advantage of using a simulation analysis instead of a

What is the advantage of using a simulation analysis instead of a scenario analysis to assess the risk of a project?

Q: You own a firm with a single new product that is about

You own a firm with a single new product that is about to be introduced to the public for the first time. Your marketing analysis suggests that the annual demand for this product could be anywhere bet...

Q: Discuss the interpretation of the degree of accounting operating leverage and degree

Discuss the interpretation of the degree of accounting operating leverage and degree of pretax cash flow operating leverage?

Q: Explain how EBITDA differs from incremental after-tax free cash flows

Explain how EBITDA differs from incremental after-tax free cash flows (FCF) and discuss the types of businesses for which this difference would be especially small or large?

Q: Describe how the pretax operating cash flow break-even point is

Describe how the pretax operating cash flow break-even point is related to the economic break-even point?

Q: Is it possible to have a crossover point where the accounting break

Is it possible to have a crossover point where the accounting break-even point is the same for two alternatives - that is, above the break-even point for a low-fixed-cost alternative but below the bre...

Q: What is the fundamental difference between a sensitivity analysis and a scenario

What is the fundamental difference between a sensitivity analysis and a scenario analysis?

Q: The economics break-even calculation assumes that the number of units

The economics break-even calculation assumes that the number of units sold is the same each year during the life of the project. It is possible for the NPV of a project to be negative if unit sakes ar...

Q: How does the pretax operating cash flow for a project differ from

How does the pretax operating cash flow for a project differ from the economic profit for that project?

Q: Explain why the required rate of return on a firm’s assets must

Explain why the required rate of return on a firm’s assets must be equal to the weighted average cost of capital associated with its liabilities and equity?

Q: What are the differences between capital projects that are independent, mutually

What are the differences between capital projects that are independent, mutually exclusive, and contingent?

Q: Your boss just finished computing your firm’s weighted average cost of capital

Your boss just finished computing your firm’s weighted average cost of capital. He is relieved because he says that he can now use that cost of capital to evaluate all projects that the firm is consid...

Q: Which is easier to calculate directly, the expected rate of return

Which is easier to calculate directly, the expected rate of return on the assets of a firm or the expected rate of return on the firm’s debt and equity? Assume that you are an outsider to the firm?

Q: With respect to the level of risk and the required return for

With respect to the level of risk and the required return for a firm’s portfolio of projects, discuss how the market and a firm’s management can have inconsistent information and expectations?

Q: Your friend has recently told you that the federal government effectively subsidizes

Your friend has recently told you that the federal government effectively subsidizes the use of debt financing (vs. equity financing) for corporations. Do you agree with that statement? Explain?

Q: Your firm will have a fixed interest expense for the next 10

Your firm will have a fixed interest expense for the next 10 years. You recently found out that the marginal income tax rate for the firm will change from 30 percent to 40 percent next year. Describe...

Q: Describe why it is not usually appropriate to use the coupon rate

Describe why it is not usually appropriate to use the coupon rate on a firm’s bonds to estimate the pretax cost of debt for the firm?

Q: Maltese Falcone, Inc., has not checked its weighted average cost

Maltese Falcone, Inc., has not checked its weighted average cost of capital for four years. Firm management claims that since Maltese has not had to raise capital for new projects in four years, they...

Q: Ten years ago, the Edson Water Company issued preferred stock at

Ten years ago, the Edson Water Company issued preferred stock at a price equal to the par value of $100. If the dividend yield on that issue was 12 percent, explain why the firm’s current cost of pref...

Q: Discuss under what circumstances you might be able to use a model

Discuss under what circumstances you might be able to use a model that assumes constant growth in dividends to calculate the current cost of equity capital for a firm?

Q: Suppose that you live in a country where it takes 10 days

Suppose that you live in a country where it takes 10 days to settle a stock purchase. By how many days will the ex-dividend date precede the record date?

Q: What is the NPV of a project?

What is the NPV of a project?

Q: Lintner found that firms are reluctant to make dividend changes that might

Lintner found that firms are reluctant to make dividend changes that might have to be reversed. Discuss the rationale for that behavior?

Q: You find that you are the only investor in a particular stock

You find that you are the only investor in a particular stock who is subject to a 15 percent tax rate on dividends (all other investors are subject to a 5 percent tax rate on dividends). Is there grea...

Q: Discuss why the dividend payment process is so much simpler for private

Discuss why the dividend payment process is so much simpler for private companies than for public companies?

Q: You are the CEO of a firm that appears to be the

You are the CEO of a firm that appears to be the target of a hostile takeover attempt. Thibeaux Piques has been accumulating the shares of your stock and now holds a substantial percentage of the outs...

Q: You have accumulated stock in a firm that does not pay cash

You have accumulated stock in a firm that does not pay cash dividends. You have read that, according to Modigliani and Miller, you can create a “homemade” dividend should you require cash. Discuss why...

Q: You have just read a press release in which a firm claims

You have just read a press release in which a firm claims that it will be able to generate a higher level of cash flows for its investors going forward. Justify the choice of a dividend payout that co...

Q: Some people argue that a high tax rate on dividends creates incentives

Some people argue that a high tax rate on dividends creates incentives for managers to go about their business without credibly convincing investors that the firm is doing well, even when it is. Discu...

Q: Fled Flightstone Mining’s management does not like to pay cash dividends due

Fled Flightstone Mining’s management does not like to pay cash dividends due to the volatility of the company’s cash flows. Fled management has found, however, that when it does not pay dividends, its...

Q: Given that many new businesses fail in the first few years after

Given that many new businesses fail in the first few years after they are established, how should an entrepreneur think about the risk of failure associated with a new business? From what you have lea...

Q: Explain why it is difficult to value a young, rapidly growing

Explain why it is difficult to value a young, rapidly growing company?

Q: What are the five steps used in NPV analysis?

What are the five steps used in NPV analysis?

Q: Explain how the taxation of a C-corporation differs from the

Explain how the taxation of a C-corporation differs from the taxation of the other forms of business organization discussed in this chapter?

Q: What is a business plan? Explain how a business plan can

What is a business plan? Explain how a business plan can help an entrepreneur succeed in building a business?

Q: You are entering negotiations to purchase a business and are trying to

You are entering negotiations to purchase a business and are trying to formulate a negotiating strategy. You want to determine the minimum price you should offer and the maximum you should be willing...

Q: You have just received a business valuation report that is dated six

You have just received a business valuation report that is dated six months ago. Describe the factors that might have changed during the past six months and, therefore, caused the value of the busines...

Q: Is the replacement cost of a business generally related to the value

Is the replacement cost of a business generally related to the value of the cash flows that the business is expected to produce in the future? Why or why not? Illustrate your answer with an example?

Q: You want to estimate the value of a company that has three

You want to estimate the value of a company that has three very different lines of business. It manufactures aircraft, is in the data-processing business, and manufactures automobiles. How could you u...

Q: Your boss has asked you to estimate the intrinsic value of the

Your boss has asked you to estimate the intrinsic value of the equity for Google, which does not currently pay any dividends. You are going to use an income approach and are trying to choose between t...

Q: Explain how the financial statements of a private company might differ from

Explain how the financial statements of a private company might differ from those of a public company. What does this imply for valuing a private company?

Q: Why can the market price of a stock differ from its true

Why can the market price of a stock differ from its true (intrinsic) value?

Q: Why are investors and managers concerned about stock market efficiency?

Why are investors and managers concerned about stock market efficiency?

Q: What are the major shortcomings of using the Accounting Rate of Return

What are the major shortcomings of using the Accounting Rate of Return (ARR) method as a capital budgeting method?

Q: Why are common stockholders considered to be more at risk than the

Why are common stockholders considered to be more at risk than the holders of other types of securities?

Q: Under what conditions does it make sense to use the constant-

Under what conditions does it make sense to use the constant-growth dividend model to value a stock?

Q: What does it mean when a company has a very high P

What does it mean when a company has a very high P/E ratio? Give examples of industries in which you believe high P/E ratios are justified?

Q: The Poseidon Shipping Company has paid a $0.25 dividend

The Poseidon Shipping Company has paid a $0.25 dividend per quarter for the past three years. Poseidon just lowered its declared dividend to $0.20 for the next dividend payment. Discuss what this new...

Q: You have just encountered two identical firms with identical investment opportunities,

You have just encountered two identical firms with identical investment opportunities, as well as the ability to fund these opportunities. One of the firms has just announced that it will pay a divide...

Q: Explain what the introduction of transaction costs does to the Modigliani and

Explain what the introduction of transaction costs does to the Modigliani and Miller assumption that dividends are irrelevant. Start with a firm that pays dividends to investors that do not want to re...

Q: CashCo increased its cash dividend each quarter for the past eight quarters

CashCo increased its cash dividend each quarter for the past eight quarters. While this may signal that the firm is financially very healthy, what else could we conclude from these actions?

Q: Undecided Corp. has excess cash on hand right now, although

Undecided Corp. has excess cash on hand right now, although management is not sure about the level of cash flows going forward. If management would like to put cash in stockholders’ hands, what kind o...

Q: A firm can deliver a negative signal to stockholders by increasing the

A firm can deliver a negative signal to stockholders by increasing the level of dividends or by reducing the level of dividends. Explain why this is true?

Q: A commentator on a financial talk show on TV says that “

A commentator on a financial talk show on TV says that “On average, firms pay out too little to stockholders. This is why stock prices go up with dividend increases and down with dividend decreases.”...

Q: What is the Internal Rate of Return (IRR) method?

What is the Internal Rate of Return (IRR) method?

Q: You own shares in a firm that has extra cash on hand

You own shares in a firm that has extra cash on hand to distribute to stockholders. You do not want the cash. What course of action would you prefer the firm take?

Q: Stock repurchases, once announced, do not actually have to occur

Stock repurchases, once announced, do not actually have to occur in total or in part. From a signaling perspective, why would a special dividend be better than a stock repurchase?

Q: Consider a firm that repurchases shares from its stockholders in the open

Consider a firm that repurchases shares from its stockholders in the open market, and explain why this action might be detrimental to the stockholders from whom the firm buys shares?

Q: You read that a number of public companies have been financing their

You read that a number of public companies have been financing their dividend payments in recent years entirely through equity issues. A colleague of yours argues that this only increase taxes paid by...

Q: Briefly discuss the methods available for a firm to repurchase its shares

Briefly discuss the methods available for a firm to repurchase its shares and explain why you might expect the stock price reaction to the announcement of each of these methods to differ?

Q: What is the advantage of a Dutch auction over a fixed-

What is the advantage of a Dutch auction over a fixed-price tender offer?

Q: In the early 1990s, the amount of time that elapsed between

In the early 1990s, the amount of time that elapsed between purchasing a stock and actually obtaining that stock was five business days. This period was known as the settlement period. The settlement...

Q: Dividend reinvestment programs (DRIPs) sometimes sell shares at a discount

Dividend reinvestment programs (DRIPs) sometimes sell shares at a discount to stockholders who reinvest their dividends through such plans. Your boss tells you that such plans are just a scheme to tra...

Q: WeAreProfits, Inc., has not issued any new debt securities in

WeAreProfits, Inc., has not issued any new debt securities in 10 years. It will begin paying cash dividends to its stockholders for the first time next year. Explain how a dividend might help the firm...

Q: Shadows, Inc., had shares outstanding that were valued at $

Shadows, Inc., had shares outstanding that were valued at $120 per share before a two-for-one stock split. After the stock split, the shares were valued at $62 per share. If we accept that the firm’s...

Q: Why should the NPV method be the primary decision tool used in

Why should the NPV method be the primary decision tool used in making capital investment decisions?

Q: Saguaro Company currently has 30,000 shares outstanding. Each share

Saguaro Company currently has 30,000 shares outstanding. Each share has a market value of $20. If the firm pays $5 per share in dividends, what will each share be worth after the dividend payment? Ign...

Q: Cholla Company currently has 30,000 shares outstanding. Each share

Cholla Company currently has 30,000 shares outstanding. Each share has a market value of $20. If the firm repurchases $150,000 worth of shares, then what will be the value of each share outstanding af...

Q: Place the following in the proper chronological order, and describe the

Place the following in the proper chronological order, and describe the purpose of each: ex-dividend date, record date, payment date, and declaration date?

Q: You purchased 1,000 shares of Zebulon Copper Co. five

You purchased 1,000 shares of Zebulon Copper Co. five years ago for $50 per share. Today Zebulon management is trying to decide whether to repurchase shares for $70 per share through a fixed-price ten...

Q: You are the Chief Financial Officer (CFO) of a large

You are the Chief Financial Officer (CFO) of a large publicly traded company. You would like to convey positive information about the firm to the market. If you agree with the conclusions from the Lin...

Q: You are the CFO of a public company that advises distressed companies

You are the CFO of a public company that advises distressed companies about how to manage their businesses. Your company has been performing extremely well. In fact, it has earned so much money that t...

Q: Explain how the issuance of new securities by a firm can produce

Explain how the issuance of new securities by a firm can produce useful information about the issuing firm. How can this information make the shares of the firm more valuable, even if it only confirms...

Q: Explain why holders of a firm’s debt should insist on a covenant

Explain why holders of a firm’s debt should insist on a covenant that restricts the amount of cash dividends the firm pays?

Q: Explain why managers of firms might prefer that their firms’ shares trade

Explain why managers of firms might prefer that their firms’ shares trade in a moderate per-share price range rather than in a high per-share price range. How do managers of firms keep their shares tr...

Q: Explain how a stock repurchase is different from a dividend payment?

Explain how a stock repurchase is different from a dividend payment?

Q: What might cause a firm to face capital constraints?

What might cause a firm to face capital constraints?

Q: List some common forms of business organization, and discuss how access

List some common forms of business organization, and discuss how access to capital differs across these forms of organization?

Q: You want to estimate the total intrinsic value of a large gas

You want to estimate the total intrinsic value of a large gas and electric utility company. This company has publicly traded stock and has been paying a regular dividend for many years. You decide tha...

Q: You are considering investing in a private company that is owned by

You are considering investing in a private company that is owned by a friend of yours. You have read through the company’s financial statements and believe that they are reliable. Multiples of similar...

Q: Does the expected rate of return that is calculated using CAPM,

Does the expected rate of return that is calculated using CAPM, with a beta estimated from stock returns in the public market, reflect a minority or a controlling ownership position? How is it likely...

Q: Discuss the pros and cons of an S-corporation compared with

Discuss the pros and cons of an S-corporation compared with a C-corporation?

Q: You have started a business that sells a home gardening system that

You have started a business that sells a home gardening system that allows people to grow vegetables on the countertop in their kitchens. You are considering two options for marketing your product. Th...

Q: Aggie Motors is a chain of used car dealerships that has publicly

Aggie Motors is a chain of used car dealerships that has publicly traded stock. Using the adjusted book value approach, you have estimated the value of Aggie Motors to be $45,646,000. The company has...

Q: You are an analyst at a private equity firm that buys private

You are an analyst at a private equity firm that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the fair market value of...

Q: Using the enterprise value/EBITDA multiple, what is the total

Using the enterprise value/EBITDA multiple, what is the total value of Johnson Machine Tool Company? What is the per share value of Johnson’s stock? Refer to the information Johnson Machine Tool Comp...

Q: Which of the above multiples analyses do you believe is more appropriate

Which of the above multiples analyses do you believe is more appropriate? Refer to the information Johnson Machine Tool Company: Use the following information concerning Johnson Machine Tool Company....

Q: How do dealers differ from brokers?

How do dealers differ from brokers?

Q: How can the Profitability Index (PI) help in choosing projects

How can the Profitability Index (PI) help in choosing projects when a firm faces capital constraints? What are its limitations?

Q: What are some of the things that the founder of a company

What are some of the things that the founder of a company must do to launch a new business?

Q: You are using the FCFF approach to value a business. You

You are using the FCFF approach to value a business. You have estimated that the FCFF for next year will be $123.65 million and that it will increase at a rate of 8 percent for each of the following f...

Q: You want to estimate the value of a privately owned restaurant that

You want to estimate the value of a privately owned restaurant that is financed entirely with equity. Its most recent income statement is as follows: Revenue ……………………………………………………. $3,000,000 Cost of g...

Q: A few years ago, a friend of yours started a small

A few years ago, a friend of yours started a small business that develops gaming software. The company is doing well and is valued at $1.5 million based on multiples for comparable public companies af...

Q: You plan to start a business that sells waterproof sun block with

You plan to start a business that sells waterproof sun block with a unique formula that reduces the damage of UVA radiation 30 percent more effectively than similar products on the market. You expect...

Q: For the previous question, assume that you do not have sufficient

For the previous question, assume that you do not have sufficient savings to cover the entire amount required to start your sun-block business. You are going to have to get external financing. A local...

Q: Your friend is starting a new company. He wants to write

Your friend is starting a new company. He wants to write a business plan to clarify the company’s business outlook and raise venture capital. Knowing that you have taken this course, he has asked you,...

Q: A friend of yours is trying to value the equity of a

A friend of yours is trying to value the equity of a company and, knowing that you have read this book, has asked for your help. So far she has tried to use the FCFE approach. She estimated the cash f...

Q: Forever Youth Technology is a biochemical company that is two years old

Forever Youth Technology is a biochemical company that is two years old. Its main product, an antioxidant drink that is supposed to energize the consumer and delay aging, is still under development. T...

Q: Mad Rock Inc. is a company that sells mp3 music online

Mad Rock Inc. is a company that sells mp3 music online. It is expected to generate earnings of $1 per share this year after its Web site is upgraded and online marketing is stepped up. Given the popul...

Q: What changes have taken place in the capital budgeting techniques used by

What changes have taken place in the capital budgeting techniques used by U.S. companies?

Q: At the end of 2016 the value of the S&P

At the end of 2016 the value of the S&P 500 Index divided by the estimated 2016 earnings for S&P 500 firms (the S&P 500 P/E multiple) was 25.54. Assume that the long-term Treasury bond yield was 2.88...

Q: Explain how financial liabilities differ among different forms of business organization?

Explain how financial liabilities differ among different forms of business organization?

Q: The S&P 500 P/E multiple of 25.

The S&P 500 P/E multiple of 25.54 at the end of 2016 was higher than its historical average of approximately 15. Some financial commentators argued that this meant that the firms in the S&P 500 were,...

Q: You own a company that produces and distributes course packets for classes

You own a company that produces and distributes course packets for classes at local universities via the Internet. You have asked a friend to invest $35,000 in the business. Your friend wants to know...

Q: List two useful tools to help an entrepreneur to understand the cash

List two useful tools to help an entrepreneur to understand the cash requirements of a business and to estimate the financing needs of his or her business?

Q: You believe you have a great business idea and want to start

You believe you have a great business idea and want to start your own company. However, you do not have enough savings to finance it. Where can you get the additional funds you need?

Q: Why is it especially difficult for an entrepreneur with a new business

Why is it especially difficult for an entrepreneur with a new business to raise capital? What tool can help him or her to raise external capital?

Q: It is April 4, 2018, and your company is considering

It is April 4, 2018, and your company is considering the possibility of purchasing the Chrysler automobile manufacturing business. Managers of Fiat Chrysler Automobiles N.V, the automobile manufacture...

Q: Why is excess cash a nonoperating asset (NOA)? Why does

Why is excess cash a nonoperating asset (NOA)? Why does it make sense to add the value of excess cash to the value of the discounted cash flows when we use the WACC or FCFE approach to value a busines...

Q: Fresno Corp. is a fast-growing company whose management expects

Fresno Corp. is a fast-growing company whose management expects it to grow at a rate of 30 percent over the next two years and then slow down to a growth rate of 18 percent for the following three yea...

Q: Why do we care about incremental cash flows at the firm level

Why do we care about incremental cash flows at the firm level when we evaluate a project?

Q: Riggs Corp. management is planning to spend $650,000

Riggs Corp. management is planning to spend $650,000 on a new- marketing campaign. They believe that this action will result in additional cash flows of $325,000 over the next three years. If the disc...

Q: Quebec, Inc., is purchasing machinery at a cost of $

Quebec, Inc., is purchasing machinery at a cost of $3,768,966. The company’s management expects the machinery to produce cash flows of $979,225, $1,158,886, and $1,881,497 over the next three years, r...

Q: Northern Specialties just purchased inventory-management computer software at a cost

Northern Specialties just purchased inventory-management computer software at a cost of $1,645,276. Cost savings from the investment over the next six years will produce the following cash flow stream...

Q: Nakamichi Bancorp has made an investment in banking software at a cost

Nakamichi Bancorp has made an investment in banking software at a cost of $1,875,000. Management expects productivity gains and cost savings over the next several years. If, as a result of this invest...

Q: Capitol Corp. management is expecting a project to generate after-

Capitol Corp. management is expecting a project to generate after-tax income of $63,435 in each of the next three years. The average book value of the project’s equipment over that period will be $212...

Q: Refer to Problem 10.4. What is the IRR that

Refer to Problem 10.4. What is the IRR that Franklin Mints management can expect on this project? Refer to Problem 10.4. Management of Franklin Mints, a confectioner, is considering purchasing a new...

Q: Reco Corp. is expected to pay a dividend of $2

Reco Corp. is expected to pay a dividend of $2.25 next year. The forecast for the stock price a year from now is $37.50. If the required rate of return is 14 percent, what is the current stock price?...

Q: What is the profitability index, and why is it helpful in

What is the profitability index, and why is it helpful in the capital rationing process?

Q: Champlain Corp. management is investigating two computer systems. The Alpha

Champlain Corp. management is investigating two computer systems. The Alpha 8300 costs $3,122,300 and will generate cost savings of $1,345,500 in each of the next five years. The Beta 2100 system cost...

Q: Briarcrest Condiments is a spice-making firm. Recently, it

Briarcrest Condiments is a spice-making firm. Recently, it developed a new process for producing spices. The process requires new machinery that would cost $1,968,450, have a life of five years, and w...

Q: Why is D&A first subtracted and then added back in

Why is D&A first subtracted and then added back in FCF calculations?

Q: Cranjet Industries is expanding its product line and its production capacity.

Cranjet Industries is expanding its product line and its production capacity. The costs and expected cash flows of the two independent projects are given in the following table. The firm uses a discou...

Q: Emporia Mills management is evaluating two alternative heating systems. Costs and

Emporia Mills management is evaluating two alternative heating systems. Costs and projected energy savings are given in the following table. The firm uses 11.5 percent to discount such project cash fl...

Q: Creative Solutions, Inc., has just invested $4,615

Creative Solutions, Inc., has just invested $4,615,300 in new equipment. The firm uses a payback period criteria of not accepting any project that takes more than four years to recover its costs. Mana...

Q: Timeline Manufacturing Co. management is evaluating two projects. The company

Timeline Manufacturing Co. management is evaluating two projects. The company uses payback criteria of three years or less. Project A has a cost of $912,855, and project B’s cost is...

Q: Regent Corp. management is evaluating three competing types of equipment.

Regent Corp. management is evaluating three competing types of equipment. Costs and cash flow projections for all three are given in the following table. Which would be the best choice based on paybac...

Q: Nugent Communication Corp. is investing $9,365,000

Nugent Communication Corp. is investing $9,365,000 in new technologies. The company’s management expects significant benefits in the first three years after installation (as can be s...

Q: You own a company that competes with Old World DVD Company (

You own a company that competes with Old World DVD Company (in the previous problem). Instead of selling DVDs, however, your company sells music downloads from a web site. Things are going well now, b...

Q: Tre-Bien, Inc., is a fast-growing technology

Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a...

Q: Management of ProCor, a biotech firm, forecasted the following growth

Management of ProCor, a biotech firm, forecasted the following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. Management then expects the company to grow at a constant...

Q: Revarop, Inc., is a fast-growth company that is

Revarop, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent for the next four years. It is then expected to grow at a constant rate of 6 percent. Revarop’s first dividend,...

Q: What is the difference between nominal and real dollars? Why is

What is the difference between nominal and real dollars? Why is it important not to mix them in an NPV analysis?

Q: Quansi, Inc., management expects to pay no dividends for the

Quansi, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant...

Q: Staggert Corp. will pay dividends of $5.00,

Staggert Corp. will pay dividends of $5.00, $6.25, $4`.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 6 percent. If the required rate o...

Q: Diaz Corp. is expected to grow rapidly/ at a rate

Diaz Corp. is expected to grow rapidly/ at a rate of 35 percent for the next seven years. The company’s first dividend, to be paid three years from now, will be $5. After seven years, the company (and...

Q: Tin-Tin Waste Management, Inc., is growing rapidly.

Tin-Tin Waste Management, Inc., is growing rapidly. Dividends are expected to grow at rates of 30 percent, 35 percent, 25 percent, and 18 percent over the next four years. Thereafter, management expec...

Q: Equation 9.4 shows the relation between a stock’s value and

Equation 9.4 shows the relation between a stock’s value and the dividend that is expected next year if dividends grow at a constant rate forever. If a firm pays all of its earnings as dividends, show...

Q: Riker Departmental Stores management has forecasted a growth rate of 40 percent

Riker Departmental Stores management has forecasted a growth rate of 40 percent for the next two years, followed by growth rates of 25 percent and 20 percent for the following two years. It then expec...

Q: Refer to Problem 10.31. a. What are

Refer to Problem 10.31. a. What are the IRRs for the projects? b. Does the IRR criterion suggest a different decision than the NPV criterion? c. Explain how you would expect the management of Draconia...

Q: Management of Dravid, Inc., is currently evaluating three projects that

Management of Dravid, Inc., is currently evaluating three projects that are independent. The cost of funds can be either 13.6 percent or 14.8 percent depending on their financing plan. All three proje...

Q: Perry, Inc., paid a dividend of $2.50

Perry, Inc., paid a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecasted a constant-growth rate of 7 percent for its dividends, forever. The required rate...

Q: ZweitePharma is a fast-growing drug company. Management forecasts that

ZweitePharma is a fast-growing drug company. Management forecasts that in the next three years, the company’s dividend growth rates will be 30 percent, 28 percent, and 24 percent, respectively. Last w...

Q: What is a progressive tax system? What is the difference between

What is a progressive tax system? What is the difference between a firm’s marginal and average tax rates?

Q: Triton Inc., is expected to grow at a rate of 22

Triton Inc., is expected to grow at a rate of 22 percent for the next five years and then settle to a constant growth rate of 6 percent. The company recently paid a dividend of $2.35. The required rat...

Q: Ceebros Builders is expanding very fast and is expected to grow at

Ceebros Builders is expanding very fast and is expected to grow at a rate of 25 percent for the next four years. The company recently paid a dividend of $3.60 but is not expected to pay any dividends...