Fundamentals of Corporate Finance 4th. Edition by Berk, DeMarz, Harford | 9780134475561 | 0134475569 | Holooly

Corporate Finance

Fundamentals of Corporate Finance

151 SOLVED PROBLEMS

Question: 18.3

Your firm has $70 million in equity and $30 million in debt and forecasts $14 million in net income for the year. It currently pays dividends equal to 20% of its net income. You are analyzing a potential change in payout policy—an increase in dividends to 30% of net income. How would this change ...

Verified Answer:

PLAN We can use Eqs. 18.4 and 18.5 to compute your...

Question: 13.4

Assume the expected return on Target’s equity is 11.5%, and the firm has a yield to maturity on its debt of 6%. Debt accounts for 18% and equity for 82% of Target’s total market value. If its tax rate is 35%, what is an estimate of this firm’s WACC? ...

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PLAN We can compute the WACC using Eq. 13.7. To do...

Question: 20.2

A firm issues three-month commercial paper with a $100,000 face value and receives $98,000. What effective annual rate is the firm paying for its funds? ...

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PLAN First, put the firm’s cash flows on a timelin...

Question: 13.1

Suppose Kenai Corp. has debt with a book (face) value of $10 million, trading at 95% of face value. It also has book equity of $10 million, and 1 million shares of common stock trading at $30 per share. What weights should Kenai use in calculating its WACC? ...

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Plan Equation 13.2 tells us that the weights are t...

Question: 17.1

Suppose Genron does not adopt the third alternative policy and instead pays a $2 dividend per share today. Show how an investor holding 2000 shares could create a homemade dividend of $4.50 per share × 2000 shares = $9000 per year on her own. ...

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Plan If Genron pays a $2 dividend, the investor re...

Question: 7.4

Suppose Crane Sporting Goods decides to cut its dividend payout rate to 75% to invest in new stores, as in Example 7.3. But now suppose that the return on these new investments is 8%, rather than 12%. Given its expected earnings per share this year of $6 and its equity cost of capital of 10% (we ...

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Plan We will follow the steps in Example 7.3, exce...

Question: 2.5

Bolt Industries is facing increased competition and wants to borrow $10 million in cash to protect against future revenue shortfalls. Currently, long-term AA rates are 10%. Given its credit rating, Bolt can borrow at 10.5%. The company is expecting interest rates to fall over the next few years, ...

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Plan Bolt wants to convert its long-term fixed rat...

Question: 2.4

Consider a chocolate maker that will need 10,000 tons of cocoa beans next year. The current market price of cocoa beans is $2900 per ton. At this price, the firm expects earnings before interest and taxes of $44 million next year. What will the firm’s EBIT be if the price of cocoa beans rises to ...

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Plan At $2900 per ton, the firm’s EBIT is $4 milli...

Question: 2.3

Your firm faces a potential $100 million loss that it would like to insure. Because of tax benefits and the avoidance of financial distress and issuance costs, each $1 received in the event of a loss is worth $1.50 to the firm. Two policies are available: One pays $55 million and the other pays ...

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Plan The premium for each policy will be based on ...

Question: 2.2

Suppose the risk of an airline accident for a major airline is 1% per year, with a beta of zero. If the risk-free rate is 4%, what is the actuarially fair premium for a policy that pays $150 million in the event of a loss? What is the NPV of purchasing insurance for an airline that would experience ...

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Plan The expected loss is 1% × $150 million = $1.5...

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