Introduction to Corporate Finance 1. Two Questions: what investments should the corporation make and how should it pay for those investments? a. Investment decisions involve spending money and financing decisions involving raising money b. Concepts govern good financial decisions c. Financial managers value the shareholders’ investment opportunities outside their company because of the opportunity cost of capital contributed by shareholders d. All managers and employees need to pull together
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will make the firm and its investors wealthier. This point is one of the central and most powerful ideas in finance‚ which we call the Valuation Principle: The value of an asset to the firm or its investors is determined by its competitive market price. The benefits and costs of a decision should be evaluated using these ©2011 Pearson Education 20 Berk/DeMarzo • Corporate Finance‚ Second Edition market prices‚ and when
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Firm ABC has a cost of equity of 8%‚ a cost of debt of 5%. It stock is traded at $10/share‚ and has 10 million shares outstanding. Its debt value is $20 million. Tax rate is 40%. What is its after-tax WACC? Equity Value = 10*10=$100 million‚ Debt Value=$20 million So‚ equity weight = 100/120=83.3%‚ debt weight=20/120=16.7% After-tax WACC= equity weight * cost of equity + debt weight * effective cost of debt =83.3%*8%+16.7%*5%*(1-40%) = 7.2% 4. Suppose you are the founder of
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sales for Massey-Ferguson actually increased between 1979 and 1980. Despite this‚ net income and income from continuing operations both dropped sharply in 1980. Which item on the income statement was most responsible for this drop in income? 5. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt? 6. Why would it be difficult for Massey-Ferguson to conduct an equity issue to pay down its debt? You are responsible for handing in written answers
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1. Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company? Electronic Timing‚ Inc. (ETI) needs to be careful on how it dispenses the extra cash as a dividend. Issuing the extra cash as a dividend would mean that the shareholders collectively will probably drop by the same amount because of the transfer of wealth from the company to the shareholders individually. Hence‚ the
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Chapter 4 15. For discrete compounding‚ to find the EAR‚ we use the equation: EAR = [1 + (APR / m)]m – 1 = .0719‚ or 7.19% EAR = [1 + (.07 / 4)]4 – 1 EAR = [1 + (.16 / 12)]12 – 1 = .1723‚ or 17.23% = .1163‚ or 11.63% EAR = [1 + (.11 / 365)]365 – 1 To find the EAR with continuous compounding‚ we use the equation: EAR = er – 1 EAR = e.12 – 1 = .1275‚ or 12.75% 23. Although the stock and bond accounts have different interest rates‚ we can draw one time line‚ but we need to remember to
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Delay Gratification is an important attribute for self-control (Berk 2013). As children grow up‚ the ability to control themselves improves. The marshmallow test measures the children’s ability to delay gratification (Berk 2013). For this task‚ a 3 year old male and a 5 year old female were chosen to participate. To begin with‚ I set a small table inside my room with a chair and a plate with only one marshmallow. The first participant was the 3 year old male. Before leaving the room‚ I instructed
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CGA-CANADA ADVANCED CORPORATE FINANCE [FN2] EXAMINATION June 2011 Marks Notes: 1. Questions 1 and 2 are multiple choice. For these questions‚ select the best answer for each of the unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example‚ if the best answer for item (a) is (1)‚ write (a)(1) in your examination booklet. If more than one answer is given for an item‚ that item will not be marked. Incorrect answers will be marked as zero
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SCHOOL OF ECONOMICS‚ FINANCE & MARKETING CORPORATE FINANCE MID SEMESTER TEST FIRST SEMESTER 2008 – Part-time STUDENT DETAILS (Please Print Clearly) Family Name: ___________________________________________________________ First Name: _____________________________________________________________ Address: _______________________________________________________________ Tel. No: (BH) ___________________________________________________________ Student Number: _________________________________________________________
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24. We can use the debt-equity ratio to calculate the weights of equity and debt. The debt of the company has a weight for long-term debt and a weight for accounts payable. We can use the weight given for accounts payable to calculate the weight of accounts payable and the weight of long-term debt. The weight of each will be: Accounts payable weight = .15/1.15 = .13 Long-term debt weight = 1/1.15 = .87 Since the accounts payable has the same cost as the overall WACC‚ we can write the equation for
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