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Fundamentals for corporate finance

Stewart C. Myers, Richard A. Brealey, Alan J. Marcus

Chapter 14

Introduction to Corporate Financing - all with Video Answers

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Chapter Questions

Problem 1

True or false? (LO14-1)
a. Smart financial managers know that good financing decisions create as much value for the firm as good investment decisions.
b. Competition between investors means that companies can generally sell their securities for more than they are worth.

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02:00

Problem 2

True or false? (LO14-2)
a. Net stock issues by U.S. nonfinancial corporations are, in most years, small but positive.
b. Most capital investment by U.S. corporations is funded by retained earnings and reinvested depreciation.
c. Debt ratios in the United States have generally increased over the past 20 years.

Crystal Wang
Crystal Wang
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Problem 3

Fill in the blanks in the following passage by choosing the most appropriate term from the following list: debt issues, higher, internally generated cash, lower, risen, financial deficit, fallen, negative, stayed roughly constant. (Note: A term may be used more than once.) (LO14-2)
By far the largest source of cash for most companies comes from __ (a) _. The gap between this cash and the cash that companies need is called the (b) On average, equity issues have been (c) ; in other words, companies have used the cash from (d) and retained earnings to buy back their stock. Debt ratios can be measured using either market values or book values. Generally, book debt ratios are (e) than market-value ratios. In the 30 or so years before 1990 both debt ratios have on average
(f) , but since then they have (g)

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Problem 4

Match each of the following terms with the correct definition: (LO/4-3)
a. additional paid-in capital
b. issued and outstanding
c. retained earnings
d. treasury stock
e. authorized share capital
f. par value
A. The price at which each share is recorded in the company's books
B. Held by investors
C. Cumulative amount of profits that have been plowed back
D. The difference between the amount of cash raised by an equity issue and the par value of the issue
E. The maximum number of shares that can be issued without shareholder approval
F. The amount that the company has spent buying back stock that it has not subsequently resold

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Problem 5

The authorized share capital of the Alfred Cake Company is 100,000 shares. The equity is currently shown in the company's books as follows: (LOI4-3)
$$
\begin{array}{|lr|}
\hline \text { Common stock (\$1 par value) } & \$ 60,000 \\
\text { Additional paid-in capital } & 10,000 \\
\text { Retained earnings } & \frac{30,000}{} \\
\text { Common equity } & \$ 100,000 \\
\text { Treasury stock (2,000 shares) } & 5,000 \\
\text { Net common equity } & \$ 95,000 \\
\hline
\end{array}
$$
a. How many shares are issued?
b. How many shares are outstanding?
c. How many more shares can be issued without the approval of shareholders?

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Problem 6

Common Products has just made its first issue of stock. It raised $$\$ 2$$ million by selling 200,000 shares of stock to the public. These are the only shares outstanding. The par value of each share was $$\$ 2$$. Fill in the following table: ( $2 O 14-3$ )
$$
\begin{array}{|ll|}
\hline \text { Common shares (par value) } & \text { (a) } \\
\text { Additional paid-in capital } & \text { (b) } \\
\text { Retained earnings } & \\
\text { Net common equity } & \$ 2,500,000 \\
\hline
\end{array}
$$

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01:53

Problem 7

(LOI4-3)
a. Rework Table 14.1, supposing that FedEx now issues 2 million shares at $$\$ 250$$ a share. Which of the figures would change?
b. What would happen to Table 14.1 if instead FedEx bought back 2 million shares at $$\$ 150$$ per share?

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02:00

Problem 8

True or false? (LOl4-5)
a. A company's equity includes both common and preferred stock.
b. The sum of common equity and preferred stock is known as net worth.
c. As its name implies, preferred stock is a more important source of financing than common equity.
d. A corporation pays tax on only $50 \%$ of the common or preferred dividends it receives from other corporations.
e. Because of the tax advantage, a large fraction of preferred shares is held by corporations.

Crystal Wang
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Problem 9

Preferred stock of financially strong firms sometimes sells at lower yields than the bonds of those firms. For weaker firms, the preferred stock has a higher yield. What might explain this pattern? ( $\mathrm{LO}$ 14-5)

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Problem 10

Haricot Corp. and Pinto Corp. both have profits of $$\$ 100$$ million. Haricot is financed solely by equity, while Pinto has issued $$\$ 150$$ million of $$8 \%$$ debt. If the corporate tax rate is $21 \%:($ LOI $4-5)$
a. How much tax does each company pay?
b. What is the total payout to investors (debtholders plus shareholders) of each company?

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01:27

Problem 11

Look at the terms of the Apple bond issue in Section 14.5. (LO/4-5)
a. Does the company have a call option?
b. How much interest is paid on each Apple bond in a year?
c. Can Apple issue secured debt that would come ahead of this issue?
d. Does Apple's bond receive Moody's highest credit rating?
e. Are the bonds repaid in one lump or by installments?
f. Are Apple's bonds funded or unfunded debt?

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Problem 12

Other things equal, will the following provisions increase or decrease the yield to maturity at which a firm can issue a bond? (LO14-5)
a. The borrower has the option to repay the loan before maturity.
b. The bond is convertible into shares.
c. The bond is a private placement.

Rashmi Sinha
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Problem 13

Van Gogh Furniture has issued a zero-coupon 10-year bond that can be converted into 10 Van Gogh shares. Comparable nonconvertible bonds are yielding $8 \%$. Van Gogh stock is priced at $$\$ 50$$ a share. If you had to make a now-or-never decision on whether to convert or stay with the bond, which would you do? (LO14-5)

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Problem 14

Fill in the blanks by choosing the appropriate term from the following list: lease, funded, floating-rate, eurobond, convertible, junior, call, sinking find, prime rate, private placement, public issue, senior, unfunded, eurodollar nate, warrant, debentures, term loan. (LO14-5)
a. Debt maturing in more than 1 year is often called debt___________.
b. An issue of bonds that is sold simultaneously in several countries is traditionally called $a(n)$____________
c. If a lender ranks behind the firm's general creditors in the event of default, the loan is said to be___________
d. In many cases, a firm is obliged to make regular contributions to a(n)____________ , which is then used to repurchase bonds.
e. Some bonds give the firm the right to repurchase or__________ the bonds at specified prices.
f. The benchmark interest rate that banks charge to their customers with good credit is generally termed the___________
g. The interest rate on bank loans is often tied to short-term interest rates. These loans are usually called__________ loans.
h. Where there is $a(n)$___________ , securities are sold directly to a small group of institutional investors. These securities cannot be resold to individual investors.
i. In the case of $a(n)$___________ , debt can be freely bought and sold by individual investors.
j. A long-term rental agreement is called a(n)__________
k. $A(n)$__________ bond can be exchanged for shares of the issuing corporation.
1. $A(n)$__________ gives its owner the right to buy shares in the issuing company at a predetermined price.

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