PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 1, Problem 8PS
We at F&H have of course noted the complaints of a few spineless investors and uninformed security analysts about the slow growth of profits and dividends. Unlike those confirmed doubters, we have confidence in the long-run demand for mechanical encabulators, despite competing digital products. We are therefore determined to invest to maintain our share of the overall encabulalor market. F&H has a rigorous CAPFX approval process, and we are confident of returns around 8% on investment. That’s a far better return than F&H earns on its cash holdings. The CFO went on to explain that F&H invested excess cash in short-term U.S. government securities, which are almost entirely risk-free but offered only a 4%
- a. Is a
forecasted 8% return in the encabulator business necessarily better than a 4% safe return on short-term U.S. government securities? Why or why not? - b. Is F&H’s opportunity cost of capital 4%? How in principle should the CFO determine the cost of capital?
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Which of the following is/are true regarding payout policy to shareholders?
A. Most of the time that firms announce an increase in dividends, the market reacts negatively, as this is an admission that the firm has few good investment opportunities going forward.
B. Large, mature firms should return a lot of cash to shareholders because there aren’t enough good investment opportunities out there for them.
C. Flexibility is one key reason why we have seen much more use of share repurchases to return cash to shareholders in the last 3 decades.
D. The primary value driver for the firm is how cash is paid out, not cash generation.
E. (A) and (B)
F. (B) and (C)
G. (C) and (D)
WSP Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently, the risk level of the company’s projects tends to vary a great deal from project to project.
If WSP Inc. does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply.
The firm will increase in value.
The firm’s overall risk level will increase.
The firm could potentially reject projects that provide a higher rate of return than the company should require.
When a project involves an entirely new product line, the firm may be able to obtain betas from to calculate a weighted average cost of capital (WACC) for its new product line.
Consider the case of another company. Chrome Printing is evaluating two mutually exclusive projects. They both require a $1 million investment today and have expected NPVs of…
The Salad Oil Storage Company (SOS) has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet.
a. explain why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue.
b. explain why SOS stockholders could gain by investing in a highly risky, negative-NPV project.
Chapter 1 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 1.A - Prob. 1QCh. 1 - Investment and financing decisions Read the...Ch. 1 - Investment and financing decisions Which of the...Ch. 1 - Prob. 3PSCh. 1 - Prob. 4PSCh. 1 - Prob. 5PSCh. 1 - Corporate goals We can imagine the financial...Ch. 1 - Maximizing shareholder value Ms. Espinoza is...Ch. 1 - Opportunity cost of capital FH Corp. continues to...Ch. 1 - Prob. 9PS
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