1. Which of the following statements about takeovers is false? a. Mergers create a new firm, while acquisitions do not. b. Both mergers and acquisitions require two‐thirds votes from both firms. c. In the tender offer, the acquiring firm makes a public offer to purchase shares of the target firm. d. Acquisition of assets is one of the types of takeover. 2. Which of the following firm structures is least likely to be the target for a bidder? a. Common shares are widely held. b. The stock is undervalued. c. It has a simple corporate structure. d. There are many legal problems. 3. Which of the following critical shareholder percentages is false? a. 10%: early warning b. 20%: takeover bid c. 50.1%: control d. 100%: minority squeeze‐out 4. Which of the following statements about hostile takeovers is false? a. In hostile takeover bids, there is usually a tender offer. b. A formal vote by the target shareholders is required. c. The target has no desire to be acquired. d. The target actively rebuffs the acquiring firm and refuses to provide any confidential information. 5. Which of the following statements is f alse when the market price immediately jumps above the tender offer price in a hostile bid? a. A competing offer is likely. b. The bid is too low. c. The bidder will have to increase the offer price. d. The bid is too high. 6. Which of the following statements is false regarding a tender offer during hostile takeovers? a. If there is little trading, this is usually a bad sign for the acquiring firm, since shareholders are sitting on the shares and are reluctant to sell. b. A large amount of trading indicates that shares are cycling from regular investors into specialist hands. c. Arbitrageurs are only interested in selling as long as the price is right. d. The motivation of arbitrageurs is to take control of the target. 7. Which of the following is not a defensive tactic in a hostile takeover? a. A shareholder rights plan (a poison pill) b. Selling the crown jewels c. Finding a white knight d. Cooperating with the acquirer
> Why are prospectuses so important for public market issues?
> Which type of lease, operating or financial, gives a higher asset turnover ratio?
> Calculate the after-tax operating cash flow NPV break-even point for the project described in Practice Problem 48 by using a 12-percent discount rate. Also, the asset class will be closed at the end of six years.
> Calculate the market price of the firm’ s common shares using a relative valuation approach. (Round your answer to one decimal.)
> Why don’t the probabilities of going up and down affect the options value?
> What is a hedge ratio?
> Sometimes, bonds are completely worthless when a company defaults on payments. However, in practice, bonds typically have some market value (recovery rate) even after a default. Collingwood’s bonds are unsecured, but are senior to any other debt. Use the
> Rather than take a term loan from the bank, Collingwood Corp. has decided to issue $25 million of 10‐year bonds. DBRS has assigned a rating of “BB” to this bond issue. a. Determine the probability that no default occurs during the life of these bonds, ba
> In Practice Problem 29, if the time value is $5, calculate the intrinsic value.
> Winnipeg Water & Gas Co. recently issued a series of bonds; the gross proceeds were $25 million. The underwriting fees were 2.8 percent, and additional issuance costs were $150,000. How much did the company actually receive from the sale? As a percentage
> Sous‐Chef Inc. is an employment agency that specializes in the restaurant industry. The company intends to sell 800,000 shares in its IPO and the investment dealers working on the issue have been seeking expressions of interest in the s
> What is the waiting period?
> Calculate the initial cash flows (CF0) for the following projects. Which project has a larger CF0? a. Project A: equipment purchase price = $195,000; installation cost = $4,500; extra working capital requirement = $30,500; opportunity cost = $18,000 b. P
> What is the lock‐up period?
> FinCorp Inc. has both a call option and a put option with exercise prices of $50. Both expire in one year. The call is currently selling for $10 per share, while the put is currently selling for $2 per share. If the risk‐free rate is 5 percent per year,
> Briefly explain the pure play method for estimating beta.
> An investment has the following cash inflows: $2,500 at the end of the first year, $2,000 at the end of the second year, and $1,500 at the end of the third year. What is the discounted payback period if the discount rate is 0 percent and the initial cash
> Collingwood Corp. has a revolving line of credit on which it owes $25 million. One of the restrictions imposed with this financing arrangement is that the company must maintain a minimum interest coverage ratio of 2. If this is the only borrowing, and th
> As the newly appointed treasurer for Collingwood Corp., you have to decide how to raise $25 million in short‐term financing. You believe you could issue commercial paper with a promised yield of 10 percent. However, your bank will charge a commitment fee
> Collingwood Corp’s 60‐day commercial paper has a promised yield of 10 percent per year, but the expected yield is just 1.5 percent due to the risk of default. If the current 60‐day T‐bill yield is 1 percent, what is the yield spread on this commercial pa
> Determine the selling price of a Government of Canada treasury bill that has a quoted annual interest rate of 1.2 percent and will mature in 90 days. Assume a par value of $1,000.
> Pills4u.com and Drugs‐R‐Us Co. both sell prescription medications over the Internet. Each company has recently announced an IPO at $20 per share. At this price, one of the companies is undervalued by $3, while the other is overvalued by $2. Unfortunately
> State the three basic tests the CRA uses to ensure interest payments are tax deductible.
> Briefly describe three motivations for leasing.
> Contrast top down and bottom up analysis.
> What are irrevocable investment decisions? Why are they important for capital budgeting?
> Explain how to estimate the intrinsic value and time value for a call option.
> Explain why the payoff from a call option is non-linear.
> Briefly summarize the evidence regarding how well debt ratings work.
> Briefly describe the main factors DBRS considers in determining its debt ratings.
> Explain how firms should decide which projects to accept and which to reject when capital rationing exists.
> What complications arise when firms are rationed in terms of their available capital budget?
> The little company you and your friend started in your parents ’ garage has grown so much that you are now ready to take the firm public. In your discussions with one of the top investment dealers, you have been given a choice between two alternatives: P
> List and briefly describe some possible reasons for the existence of IPO underpricing.
> Differentiate investment-grade debt from junk debt.
> A firm is considering two mutually exclusive projects, as follows. Determine which project should be accepted if the discount rate is 15 percent. Use the chain replication approach. Assume both projects can be replicated. After-Tax After-Tax After-Ta
> Why are securities legislation and corporate laws essential for markets to perform properly?
> Why can increases in interest rates not be used to solve the “lemons problem” in markets?
> GiS Inc. now has the following two projects available: Assume that R F 4%, r isk premium 8%, and b eta 1.25. Use the chain replication approach to determine which project GiS Inc. should choose if they are mutually exclusive. After-Tax After-Tax Afte
> Why is it reasonable to assume that most firms will have a banking relationship?
> What is a creeping takeover?
> What is a takeover circular?
> What is a tender?
> What financial synergies are possible in an M&A transaction?
> Lansdowne Ltd. needs to raise $20 million and intends to sell additional shares. The company ’ s existing shares are trading on the Toronto Stock Exchange for $54. However, the investment dealer hired by Lansdowne has cited investors’ concerns about info
> What is an extension M&A, an overcapacity M&A, and a geographic roll-up M&A?
> What is the difference between vertical and horizontal mergers?
> 1. Which of the following statements about due diligence is false? a. It is designed to ensure the legitimacy of securities offered to the public. b. It is designed to ensure that there is no misleading information when companies issue shares. c. It is e
> 1. Which of the following statements about an operating lease is false ? a. The lessor is responsible for maintaining the asset. b. The lessee is responsible for maintaining the asset. c. An operating lease is usually a full‐service lease. d. Payments of
> 1. Which of the following statements is false? a. CCA recapture occurs when the salvage value is greater than the ending UCC for the asset or asset class. b. Capital gains occur when the salvage value is greater than the original cost of the asset. c. CC
> 1. When making capital expenditure decisions, firms should not consider which of the following? a. After-tax incremental cash flows b. Additional working capital requirements c. Sunk costs d. Salvage value 2. Which of the following will yield the same c
> 1. Which of the following statements about IRR and NPV is incorrect? a. NPV and IRR yield the same ranking when evaluating projects. b. NPV assumes that cash flows are reinvested at the cost of capital of the firm. c. A project may have multiple IRRs whe
> 1. What will probably happen if a firm does not invest effectively? a. The firm could still maintain its competitive advantage. b. The cost of capital of the firm will be unchanged. d. The short‐term performance will be unaffected. 2. Which of the follo
> 1. Which of the following statements about a call option is false? a. A call option is the right, not the obligation, to buy the underlying asset. b. A call option is in the money if the asset price is less than the strike price. c. A call option is at t
> Assume two bonds in the market—bond A and bond B—have the same rating and the same YTM. Discuss three reasons that might make one bond preferable to the other.
> 1. Which of the following is not one of the three types of merger? a. Vertical M&A b. Horizontal M&A c. Proxy contest d. Conglomerate 2. Which of the following M&As is valid? a. VA T $400,000; VA $200,000; VT $205,000 b. VA T $390,000; VA $200,000; VT $
> 1. Which of the following statements about debt is incorrect? a. Interest payments and principal payments are fixed commitments. b. Interest payments are not tax deductible. c. Bond holders are paid a series of fixed periodic amounts before the maturity
> If you were opening a copy centre, do you think you would lease or borrow to buy the equipment and why?
> Why do you think that the major market for leasing is often SMEs, rather than large corporations?
> Why are leases often more flexible than a borrow-purchase option?
> What is a sale and leaseback agreement (SLB)?
> What type of leases do chartered banks normally make?
> What is the difference between an operating and a financial lease?
> Briefly describe the negative pledge and cross-default clauses.
> Discuss the rationale for including debt covenants in a public issue.
> If the interest rate for non‐fraudulent bonds is 8 percent, and chances are that one out of eight bonds is fraudulent, what is the interest rate based on a one‐year investment and assuming the market does not require a risk premium?
> Define mortgage bonds, secured debentures, unsecured debentures, and subordinated debt.
> What is SVAR and why do managers prefer to finance with shares than cash?
> What is the empirical record on the success of M&As in the 1990s?
> What tax benefits can occur in an M&A?
> What real options have you been given over the past year and how valuable were they? What factors do you think influenced your valuation of them?
> How are implied volatilities calculated? What information do they provide?
> Where are options traded?
> Briefly explain why short-form prospectuses are permitted by regulators for a large percentage of seasoned issues, and explain why they have led to the growth in popularity of bought deals.
> How do continuous disclosure requirements protect investors?
> Explain why the lock-up period is an important consideration for investors, especially for issues that are still largely held by insiders.
> You are a risk arbitrageur and you observe the following information about a deal: the current price of the target is $22 per share and the current price of the bidder is $16 per share. The bidder is offering two bidder shares per target share, and you e
> Explain how to synthetically create long and short positions in calls, puts, and the underlying assets using put-call parity.
> Explain why the put-call parity relationship should hold if markets are efficient.
> Illustrate how to combine the four basic option positions to create a variety of net payoff positions.
> Briefly describe the main factors that affect a put or a call option’s value, and explain how they affect the value of each.
> Explain how to estimate the intrinsic value and time value for a put option.
> Contrast the payoff from a put option with that from a call option.
> Discuss any differences in the evaluation of a replacement decision versus the evaluation of an expansion decision.
> What is measured by each of the five Greeks discussed in this section?
> How can the Black-Scholes equation be used to price options?
> Define yield spreads and explain how they arise.
> When Collingwood Corp. issued its 60‐day commercial paper the promised yield was 10 percent, whereas the 60‐day T‐bill yield was 6 percent. There is a 1-percent chance that Collingwood will default on this debt. If investors were willing to pay the full
> Contrast treasury bills, commercial paper, and BAs in terms of who issues them, their basic structure and default risk, and the yields they provide.
> Explain how interest is received on most money market instruments.
> What is the difference between an acquisition and a merger?
> What limitations of scenario analysis does the real option valuation approach address?
> What insights can be gained by using sensitivity analysis, scenario analysis, and NPV break-even analysis?
> What is the majority of the minority rule?
> What is an amalgamation?
> When does EPS increase when using a share swap?
> What is free cash flow?
> Why do differing capital structures cause problems with using P/E multiples?
> Collingwood Corp. is able to issue its 60‐day commercial paper at par with a promised yield of 10 percent per year. The current T‐bill yield is 6 percent per year (or 1 percent for the 60‐day period). The expected return on the commercial paper is 1.5 pe
> What key multiples are used in valuing companies?
