A 6.25 percent coupon bond with 22 years left to maturity is priced to offer a 5.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.0 percent. If this occurs, what would be the total return of the bond in dollars and percent? (Assume interest payments are semiannual.)
> You own stock in Make-UP-Artists, Inc. which has just made a bid of $30 million to purchase MHM Corporation. MHM Corp. currently has total cash flows of $2.5 million that are expected to grow by 2 percent annually for the next 5 years. Managers estimate
> A survey of a national market has provided the following average cost data: Jackson County Construction (JCC) has assets of $2.55 million and an average cost of 30 percent. Arkansas Architects (AA) has assets of $1.7 million and an average cost of 25 per
> Describe the three dimensions of revenue synergies that may be achieved in a merger.
> A survey of a local market has provided the following average cost data: Johnson Construction Corp. (JCC) has assets of $3 million and an average cost of 20 percent. Anderson Architects (AA) has assets of $4 million and an average cost of 30 percent. Col
> The Altman’s Z-score model has several weaknesses. What are they?
> A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is es
> What is synergy and how does it apply to mergers?
> Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
> The Justice Department has been asked to review a merger request for a market with the following four firms. Firm Assets A……………..$12 million B……………..25 million
> Jenny’s Day Care is considering a merger with Lionel’s Diaper Manufacturers. Jenny’s total operating costs of producing services are $595,000 for sales volume (SJ) of $2.4 million. Lionel’s total operating costs of producing services are $340,000 for a s
> George’s Dry Cleaning is considering a merger with Weezzie’s Laundry Supply Stores. George’s total operating costs of producing services are $550,000 for sales volume (SG) of $4.5 million. Weezzie’s total operating costs of producing services are $185,00
> A linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the equity multiplier and the total asset turnover ratio. Based on past bankruptcy experience, the linear probability model is es
> Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin. Based on past bankruptcy experience, the linear probability model is estimated as:
> Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = Net working capital/Total assets = 0.27, X2 = Retained earnings/Total assets = 0.37, X3 = Earnings before interest and taxes/Total assets = 0.44, X4 = Market
> Suppose that the financial ratios of a potential borrowing firm take the following values: X1 = Net working capital/Total assets = 0.10, X2 = Retained earnings/Total assets = 0.20, X3 = Earnings before interest and taxes/Total assets = 0.22, X4 = Market
> Consider a market that has three firms with the following market shares: Firm A = 35% Firm B = 41% Firm C = 24% Suppose firm A wants to acquire firm C so that the post-acquisition market would exhibit the following shares: A + C = 76% B = 24% Calculat
> Consider a market that has three firms with the following market shares: Firm A = 35% Firm B = 41% Firm C = 24% Suppose firm B wants to acquire firm C so that the post-acquisition market would exhibit the following shares: B + C = 65% A = 35% Calculate
> Cindy’s Computer Corp. is considering a merger with Bobby’s Hard Drive, Inc. Cindy’s total operating costs of producing services are $3.4 million for a sales volume (SC) of $16 million. Bobby’s total operating costs of producing services are $2.5 million
> Classify each of the following as a horizontal merger, a vertical merger, a market extension merger, a conglomerate merger, or a product extension merger.
> What are the risks of foreign direct investment into the United States? What does new FDI into the United States mean for firms already operating in that industry in the United States?
> Peter’s TV Supplies is considering a merger with Jan’s Radio Supply Stores. Peter’s total operating costs of producing services are $250,000 for a sales volume (SP) of $4.5 million. Jan’s total operating costs of producing services are $50,000 for a sale
> The current spot rate between the U.S. dollar and the Netherland Antilles guilder is $1 = 1.7915 guilder. If the inflation rate in the United States is three percent and in the Netherland Antilles is seven percent, then what is the expected spot rate in
> The current spot rate between the U.S. dollar and the Swedish krona is $1 = 6.5228 krona. If the inflation rate in the United States is four percent and in Sweden is 2 percent, then what is the expected spot rate in one year?
> The spot rate between the U.S. dollar and the Taiwan dollar is $1 = TWD29.905. If the interest rate in the United States is five percent and in Taiwan is three percent, then what should be the 1-month forward exchange rate?
> The spot rate between the U.S. dollar and the New Zealand dollar is $1 = NZD1.1867. If the interest rate in the United States is 5 percent and in New Zealand is four percent, then what should be the 3- month forward exchange rate?
> The Russian financial crisis of 1998 caused its currency to be dramatically devalued. What is the percentage change in value of a $100 million investment in Russia when the exchange rate changes from $1 = 6 rubles to $1 = 21 rubles?
> In 1997, many East Asian currencies suddenly and dramatically devalued. What is the percentage change in value of a $50 million investment in Indonesia when the exchange rate changes from $1 = 2,000 rupiah to $1 = 10,000 rupiah?
> Given these two exchange rates, $1 = 0.9952 Australian dollars and $1 = £0.6476, compute the cross rate between the Australian dollars and the pound. State this exchange rate in Australian dollars and in pounds.
> Given these two exchange rates, $1 = 12.268 Mexican pesos and $1 = €0.7624, compute the cross rate between the Mexican peso and the euro. State this exchange rate in pesos and in euros.
> Use the following financial statements for Garners’ Platoon Mental Health Care, Inc., to calculate and interpret the Altman’s Z-score for this firm. / / /
> Imagine that you are a financial manager of a multinational corporation, like Starbucks Coffee, in charge of determining the impact of exchange rate changes on the firm. Changes in currency exchange affect both the balance sheet and the income statement.
> Explain how a country’s import trade limitations and tariffs influence MNC’s foreign direct investment.
> Describe the various sources of capital funding available to new and small firms.
> What is a shelf registration? Why would a public firm want to issue securities using a shelf registration?
> What is the difference between a prospectus and a red herring prospectus?
> Why would an investment bank use a syndicate to assist in underwriting debt or equity securities?
> What are the net proceeds, gross proceeds, and underwriter’s spread? How does each affect the funds received by a public firm when debt or equity securities are issued?
> How does a public offering of debt or equity securities issued by a public firm differ from a private placement?
> How does a competitive sale of corporate bonds differ from a negotiated sale? Which type of underwriting would you prefer? Why might you still choose the alternative?
> How does a best efforts underwriting differ from a firm commitment underwriting? If you operated a company issuing stock for the first time, which type of underwriting would you prefer? Why might you still choose the alternative?
> What is a credit-scoring model?
> Disaster Airlines is a firm in severe financial distress. The firm can no longer pay its bills on time and it is far behind on payments to its banks and long-term debt holders. The firm has decided to ether be purchased by another air carrier or liquidat
> Stubborn Motors, Inc. is asking a price of $75 million to be purchased by Rubber Tire Motor Corp. Stubborn Motors currently has total cash flows of $2 million that are expected to grow by 1 percent annually for the next 4 years. Managers estimate that be
> The Justice Department has been asked to review a merger request for a market with the following four firms. Firm Assets A…………….…..$
> Describe the similarities and the differences of exchange rate/cross rate arbitrage and spot rate/forwardrate arbitrage.
> Describe the difference between a merger and an acquisition.
> A 2.50 percent coupon municipal bond has 12 years left to maturity and has a price quote of 98.45. The bond can be called in four years. The call premium is one year of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, tax
> A 7.5 percent coupon bond with 13 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.0 percent. If this occurs, what would be the total return of the bond in dollars a
> Compute the expected return given these three economic states, their likelihoods, and the potential returns: Economic Probability Return State Fast growth Slow growth 0.2 35% 0.6 10 Recession 0.2 -30
> Reconsider the 2.25 percent TIPS discussed in problem 7-20. It was issued with CPI reference of 187.2. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.1. For the interest payment in the middle of the
> Reconsider the 3.5 percent TIPS discussed in problem 7-19. It was issued with CPI reference of 185.6. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 193.5. For the interest payment in the middle of the y
> A 6.5 percent coupon bond with 14 years left to maturity is priced to offer a 7.2 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.8 percent. What is the change in price the bond will experience in dollars?
> A 5.75 percent coupon bond with ten years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.0 percent. What is the change in price the bond will experience in dollars?
> A corporate bond with a 6.75 percent coupon has ten years left to maturity. It has had a credit rating of BB and a yield to maturity of 8.2 percent. The firm has recently become more financially stable and the rating agency is upgrading the bonds to BBB.
> Rank the following bonds in order from lowest credit risk to highest risk, all with the same time to maturity, by their yield to maturity: Treasury bond with yield of 4.65 percent, United Airline bond with yield of 9.07 percent, Bank of America bond with
> Consider a firm that had been priced using a 10 percent growth rate and a 12 percent required return. The firm recently paid a $1.20 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 10.5 percent rate. Ho
> Rank from highest credit risk to lowest risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55 percent, IBM bond with yield of 7.49 percent, Trump Casino bond with yield of 8.76 percent, an
> What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 2.9 percent for an investor in the 28 percent marginal tax bracket?
> What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 3.5 percent for an investor in the 33 percent marginal tax bracket?
> Compute the expected return and standard deviation given these four economic states, their likelihoods, and the potential returns: Economic Probability Return State Fast growth Slow growth Recession 0.25 50% 0.55 11 0.15 -15 Depression 0.05 -50
> What’s the current yield of a 5.2 percent coupon corporate bond quoted at a price of 96.78?
> What’s the current yield of a 3.8 percent coupon corporate bond quoted at a price of 102.08?
> Calculate the price of a zero coupon bond that matures in 15 years if the market interest rate is 5.75 percent.
> Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 3.8 percent.
> Consider the following three bond quotes; a Treasury bond quoted at 106.438, a corporate bond quoted at 96.55, and a municipal bond quoted at 100.95. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par valu
> Consider the following three bond quotes; a Treasury note quoted at 97.844, and a corporate bond quoted at 103.25, and a municipal bond quoted at 101.90. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par valu
> Suppose that Papa Bell, Inc.’s, equity is currently selling for $55 per share, with 4 million shares outstanding. If the firm also has 17 thousand bonds outstanding, which are selling at 94 percent of par, what are the firm’s current capital structure we
> A 3 1/8 percent TIPS has an original reference CPI of 180.5. If the current CPI is 206.8, what is the current interest payment and par value of the TIPS?
> A 2 ¾ percent TIPS has an original reference CPI of 185.4. If the current CPI is 210.7, what is the current interest payment and par value of the TIPS?
> A 5.5 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?
> A 6 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?
> Compute the expected return and standard deviation given these four economic states, their likelihoods, and the potential returns: Economic Probability Return State Fast growth Slow growth 0.30 60% 0.50 13 Recession 0.15 -15 Depression 0.05 -45
> A bond issued by IBM on December 1, 1996 is scheduled to mature on December 1, 2096. If today is December 2, 2015, what is this bond’s time to maturity?
> A bond issued by Ford on May 15, 1997 is scheduled to mature on May 15, 2097. If today is November 16, 2014, what is this bond’s time to maturity?
> Determine the interest payment for the following three bonds: 4 ½ percent coupon corporate bond (paid semiannually), 5.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)
> Determine the interest payment for the following three bonds: 3 ½ percent coupon corporate bond (paid semiannually), 4.25 percent coupon Treasury note, and a corporate zero coupon bond maturing in ten years. (Assume a $1,000 par value.)
> Under what conditions would the constant growth rate model not be appropriate?
> A firm recently paid a $0.60 annual dividend. The dividend is expected to increase by 12 percent in each of the next four years. In the fourth year, the stock price is expected to be $110. If the required return for this stock is 14.5 percent, what is
> Explain how it is possible for the DJIA to increase one day while the Nasdaq Composite decreases during the same day.
> Describe how being a residual claimant can be very valuable.
> What’s the relationship between the P/E ratio and a firm’s growth rate?
> Differentiate the characteristics of growth stocks and value stocks?
> How is a firm’s changing P/E ratio reflected in the stock price? Give examples.
> Daddi Mac, Inc., doesn’t face any taxes and has $290 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let’s a
> Why might a firm’s investors wish to delay receiving cash from the firm?
> Explain why using the P/E relative value approach may be useful for companies that do not pay dividends.
> Can the variable growth rate model be used to value a firm that has a negative growth rate in Stage 1 and a stable and positive growth rate in Stage 2? Explain.
> Describe, in words, how to use the variable growth rate technique to value a stock.
> A firm recently paid a $0.45 annual dividend. The dividend is expected to increase by 10 percent in each of the next four years. In the fourth year, the stock price is expected to be $80. If the required return for this stock is 13.5 percent, what is its
> The expected return derived from the constant growth rate model relies on dividend yield and capital gain. Where do these two parts of the return come from?
> How important is growth to a stock’s value? Illustrate with examples.
> What are the differences between common stock and preferred stock?
> Describe the difference in the timing of trade execution and the certainty of trade price between market orders and limit orders.
> Illustrate through examples how trading commission costs impact an investor’s return.
> Which is higher, the ask quote or the bid quote? Why?
> Why might the Standard & Poor’s 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the DJIA more popular than the S&P 500?
> HiLo, Inc., doesn’t face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is equal to market value of equity. Also, let’s assume
> Get the trading statistics for the three main U.S. stock exchanges. Compare the trading activity to that of Table 8.1.
> HotFoot Shoes would like to maintain their cash account at a minimum level of $25,000, but expect the standard deviation in net daily cash flows to be $2,000, the effective annual rate on marketable securities to be 3.5 percent per year, and the trading
> JohnBoy Industries has a cash balance of $45,000, accounts payable of $125,000, inventory of $175,000, accounts receivable of $210,000, notes payable of $120,000, and accrued wages and taxes of $37,000. How much net working capital does the firm need to
