Question: A&P Grocery Stores decided to sell

> Ronald Masulis analyzed the stock price impact of exchange offers of debt for equity or vice versa.35 In an exchange offer, the firm offers to trade freshly issued securities for seasoned securities in the hands of investors. Thus, a firm that wanted to

> “I was amazed to find that the announcement of a stock issue drives down the value of the issuing firm by 30%, on average, of the proceeds of the issue. That issue cost dwarfs the underwriter’s spread and the administrative costs of the issue. It makes c

> he Salad Oil Storage (SOS) Company 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. Explain: a. Why SOS stockholders could lose by investing in a positive-NP

> a. Who benefits from the fine print in bond contracts when the firm gets into financial trouble? Give a one-sentence answer. b. Who benefits from the fine print when the bonds are issued? Suppose the firm is offered the choice of issuing (1) a bond with

> Reevaluate the NPV of the proposed polyzone project under each of the following assumptions. What’s the right management decision in each case? a. Spread in year 4 holds at $1.20 per pound. b. The U.S. chemical company can start up polyzone production at

> Let us go back to Circular File’s market value balance sheet:
Who gains and who loses from the following maneuvers? a. Circular scrapes up $5 in cash and pays a cash dividend. b. Circular halts operations, sells its fixed assets, and converts net work

> In Section 18-3, we briefly referred to three games: playing for time, cash in and run, and bait and switch. For each game, construct a simple numerical example (like the example for the risk-shifting game) showing how shareholders can gain at the expens

> Look back at the Johnson & Johnson example in Section 18-1. Suppose Johnson & Johnson increases its long-term debt to $30 billion. It uses the additional debt to repurchase shares. Reconstruct Table 18.4B with the new capital structure. How much

> “The trouble with MM’s argument is that it ignores the fact that individuals cannot deduct interest for personal income tax.” Show why this is not an objection if personal tax rates on interest and equity income are the same.

> Suppose that Congress sets the top personal tax rate on interest and dividends at 35% and the top rate on realized capital gains at 15%. The corporate tax rate stays at 35%. Compute the difference between the total corporate plus personal taxes paid on d

> Compute the present value of interest tax shields generated by these three debt issues. Consider corporate taxes only. The marginal tax rate is Tc = .35. a. A $1,000, one-year loan at 8%. b. A five-year loan of $1,000 at 8%. Assume no principal is repaid

> Why does asymmetric information push companies to raise external funds by borrowing rather than by issuing common stock?

> The trade-off theory relies on the threat of financial distress. But why should a public corporation ever have to land in financial distress? According to the theory, the firm should operate at the top of the curve in Figure 18.2. Of course market moveme

> For what kinds of companies is financial slack most valuable? Are there situations in which financial slack should be reduced by borrowing and paying out the proceeds to the stockholders? Explain.

> Fill in the blanks: According to the pecking-order theory, a. The firm’s debt ratio is determined by ________. b. Debt ratios depend on past profitability, because ______.

> How would your answer to Problem 10 change if technological improvements reduce the cost of new BG production facilities by 3% per year? Thus a new plant built in year 1 would cost only 25 (1 – .03) = $24.25 million; a plant built in year 2 would cost $2

> Rajan and Zingales identified four variables that seemed to explain differences in debt ratios in several countries. What are the four variables?

> The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields against the possible costs of financial distress due to borrowing. What does this theory predict about the relationship between book profitabil

> On February 29, 2015, when PDQ Computers announced bankruptcy, its share price fell from $3.00 to $.50 per share. There were 10 million shares outstanding. Does that imply bankruptcy costs of 10 × (3.00 – .50) = $25 million? Explain.

> “The firm can’t use interest tax shields unless it has (taxable) income to shield.” What does this statement imply for debt policy? Explain briefly.

> What is the relative tax advantage of corporate debt if the corporate tax rate is Tc = .35, the personal tax rate is Tp = .35, but all equity income is received as capital gains and escapes tax entirely (TpE = 0)? How does the relative tax advantage chan

> Here are book and market value balance sheets of the United Frypan Company (UF): Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a. How much of the firm’s v

> The present value of interest tax shields is often written as TcD, where D is the amount of debt and Tc is the marginal corporate tax rate. Under what assumptions is this present value correct?

> Can you invent any new kinds of debt that might be attractive to investors? Why do you think they have not been issued?

> Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market-value capital structure:
Use MM’s proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate o

> People often convey the idea behind MM’s proposition 1 by various supermarket analogies, for example, “The value of a pie should not depend on how it is sliced,” or, “The cost of a whole chicken should equal the cost of assembling one by buying two drums

> Who monitors the top management of public U.S. corporations? (We have mentioned several types of monitoring in this chapter.)

> True or false? a. U.S. CEOs are paid much more than CEOs in other countries. b. A large fraction of compensation for U.S. CEOs comes from stock-option grants. c. Stock-option grants give the manager a certain number of shares delivered at annual interval

> What is the Federal Register? What role does it play in rulemaking? What is the difference between the Federal Register and the Code of Federal Regulations?

> New York City’s charter authorized the New York City Board of Health to adopt a health code that it declared to have the force and effect of law. The board adopted a code that provided for the fluoridation of the public water supply. A suit was brought t

> Santa Monica adopted a rent control ordinance authorizing the Rent Control Board to set the amount of rents that could be charged. At a hearing before it, the board determined that McHugh was charging his tenants a rent higher than the maximum allowed. M

> Congress adopted a law to provide insurance to protect wheat farmers. The agency in charge of the program adopted regulations to govern applications for this insurance. These regulations were published in the Federal Register. Merrill applied for insuran

> The Banco Central administered a humanitarian plan for the government of Ecuador. Fernando Banderas and his wife presented false claims that the bank paid. After the fraud was discovered, the bank sued Banderas and his wife for damages for fraud and treb

> Dr. Doyle E. Campbell, an ophthalmologist, established his practice in southern Ohio in 1971. Many of Dr. Campbell’s patients are elderly people who qualify for federal Medicare benefits and state Medicaid benefits. Under the existing financing system, a

> The FDA was challenged by tobacco companies for its new rules that required the tobacco companies to put one of the FDA ’ s 12 picture labels on its pack- aging. The tobacco companies argued that their First Amendment rights were violated by the rules, f

> Gardner-Denver is the largest manufacturer of ratchet wrenches and their replacement parts in the United States. Gardner-Denver had two different lists of prices for its wrenches and parts. Its blue list had parts that, if purchased in quantities of five

> The Quickie brand wheelchair is the most popular customized wheelchair on the market. Its market share is 90 percent. Other manufacturers produce special-use wheelchairs that fold, that are made of mesh and lighter frames, and that are easily trans- port

> Public Interest Corporation (PIC) owned and operated television station WTMV-TV in Lakeland, Florida. MCA Television Ltd. (MCA) owns and licenses syndicated television programs. In 1990, the two companies entered into a licensing contract for several fir

> BRG of Georgia, Inc. (BRG), and Harcourt Brace Jovanovich Legal and Professional Publications (HJB) are the nation’s two largest providers of bar review materials and lectures. HJB began offering a Georgia bar review course on a limited basis in 1976 and

> Department 56 is a company that manufactures and sells collectible Christmas village houses and other replica items to allow collectors to create the whimsical “Snow Village” town or “Dickens Christmas.” Department 56 has only authorized dealers. Sam’s C

> The Aspen ski area consisted of four mountain areas. Aspen Highlands, which owned three of those areas, and Aspen Skiing, which owned the fourth, had cooperated for years in issuing a joint, multiple-day, all-area ski ticket. After repeatedly and unsucce

> Favorite Foods Corp. sold its food to stores and distributors. It established a quantity discount scale that was publicly published and made available to all buyers. The top of the scale gave the highest dis- count to buyers purchasing more than 100 frei

> Dr. Edwin G. Hyde, a board-certified anesthesiologist, applied for permission to practice at East Jefferson Hospital in Louisiana. An approval was recommended for his hiring, but the hospital’s board denied him employment on grounds that the hospital had

> Moore ran a bakery in Santa Rosa, New Mexico. His business was wholly intrastate. Meads Fine Bread Co., his competitor, engaged in an interstate business. Meads cut the price of bread in half in Santa Rosa but made no price cut in any other place in New

> Hines Cosmetic Co. sold beauty preparations nationally to beauty shops at a standard or fixed- price schedule. Some of the shops were also supplied with a free demonstrator and free advertising materials. The shops that were not supplied with them claime

> During the 1980s, the NCAA, a voluntary unincorporated association of approximately 1,100 educational institutions, became concerned over the steadily rising costs of maintaining competitive athletic programs. As a way of containing those costs, the asso

> David Ungar holds a Dunkin’ Donuts franchise. The terms of his franchise agreement require him to use only those ingredients furnished by Dunkin’ Donuts. He is also required to buy its napkins, cups, and so on, with the Dunkin’ Donuts trademark on them.

> Penny Stafford, the owner of Belvi Coffee and Tea Exchange, located in Bellevue, Washington, brought an antitrust suit against Starbucks. She alleged that through its exclusive leases, Starbucks bans other coffee shops from competing. Starbucks has a 73

> American Crystal Sugar Co. was one of several refiners of beet sugar in northern California, and it distributed its product in interstate commerce. American Crystal and the other refiners had a monopoly on the seed supply and were the only practical mark

> New Hampshire adopted a tax law that in effect taxed the income of nonresidents working in New Hampshire only. Austin, a nonresident who worked in New Hampshire, claimed that the tax law was invalid. Was he correct? Explain. [ Austin v. New Hampshire, 42

> The Federal Food Stamp Act provided for the distribution of food stamps to needy households. In 1971, section 3(e) of the statute was amended to define households as limited to groups whose 70 PART 1: The Legal and Social Environment of Business members

> The University of Wisconsin requires all of its students to pay, as part of their tuition, a student activity fee. Those fees are used to support campus clubs and activities. Some students who objected to CHAPTER 4: The Constitution as the Foundation of

> Alfonso Lopez, Jr., a 12th-grade student at Edison High School in San Antonio, Texas, went to school carrying a concealed .38-caliber handgun and five bullets. School officials, acting on an anonymous tip, confronted Lopez. Lopez admitted that he had the

> Ellis was employed by the city of Lakewood. By the terms of his contract, he could be discharged only for cause. After working for six years, he was told that he was going to be discharged because of his inability to generate safety and self-insurance pr

> Ollie’s Barbecue is a family-owned restaurant in Birmingham, Alabama, specializing in barbecued meats and homemade pies, with a seating capacity of 220 customers. It is located on a state highway 11 blocks from an interstate highway and a somewhat greate

> Montana imposed a severance tax on every ton of coal mined within the state. The tax varied depending on the value of the coal and the cost of production. It could be as high as 30 percent of the price at which the coal was sold. Montana mine operators a

> In 2002, the Williamson family, riding in their 1993 Mazda minivan, was struck head-on by another vehicle. Thanh Williamson was sitting in a rear aisle seat, wearing a lap belt; she died in the accident. Delbert and Alexa Williamson were wearing lap- and

> The Crafts’ home was supplied with gas by the city gas company. Because of some misunderstanding, the gas company believed that the Crafts were delinquent in paying their gas bill. The gas company had an informal complaint procedure for discussing such m

> J.C. Penney, a retail merchandiser, has its principal place of business in Plano, Texas. It operates retail stores in all 50 states, including 10 stores in Massachusetts, and a direct mail catalog business. The catalogs illustrated merchandise available

> Federal law requires most interstate truckers to obtain a permit that reflects compliance with certain federal requirements. The 1965 version of the law authorized states to require proof that a truck operator had such a permit. By 1991, 39 states had d

> California passed a law that prohibited the sale or rental of “violent video games.” The act defined violent video games as games “in which the range of options available to a player includes killing, maiming, dismembering, or sexually assaulting an imag

> The president and athletic director at the University of California at Los Angeles (UCLA) fired the school’s basketball coach because an expense form he had submitted for reimbursement had the names of two students he said had joined him for a recruiting

> The state of Arizona mandates emissions testing for cars before drivers can obtain updated registrations. The state hires a contractor to conduct the emissions tests in the various emissions-testing facilities around the state. In October 1999, the Arizo

> Marty Mankamyer, the president of the United States Olympic Committee (USOC), resigned in early February 2003 following reports in The Denver Post that indicated she had demanded a commission from a fellow real estate broker in the Colorado Springs area,

> Heinz Ketchup holds 54 percent of the ketchup market in the United States. Nine of every 10 restaurants feature Heinz ketchup. However, Heinz has learned that many restaurant owners are simply refilling Heinz Ketchup bottles with other ketchup to capture

> Piper High School in Piper, Kansas, and a town located about 20 miles west of Kansas City, experienced national attention because of questions about students and their term papers for a botany class. Christine Pelton, a high school science teacher, had w

> Former Enron Chief Financial Officer Andrew Fastow, in his testimony against his former bosses at their criminal trial for fraud, said, “I thought I was being a hero for Enron. At the time, I thought I was helping myself and helping Enron to make its num

> David A. Vise, a Pulitzer Prize winner and a reporter for the Washington Post, wrote the book The Bureau and the Mole. When the book hit the market, Mr. Vise purchased 20,000 copies via Barnes & Noble.com, taking advantage of both free shipping offered b

> When some runners in the New York City Marathon hit the Queensboro Bridge, temptation sets in and, rather than finishing the last 10 miles through Harlem and the Bronx, they hop a ride on the subway and head toward the finish line at Central Park. A tota

> “I was very upset that there’s that many dishonest people,” said Andrea Reuland, the owner of Trigs Shell Station in Minocqua, Wisconsin. She lost $3 per gallon on 586 gallons of gas sold during a 45-minute period when local residents phoned others to co

> A new phenomenon for admissions to MBA programs is hiring consultants to help applicants hone their applications. About 20 percent of those who apply to the top MBA programs have hired consultants at a cost of $150 to $200 per hour to help them say and d

> Adam Smith wrote the following in The Theory of Moral Sentiments: “In the practice of the other virtues, our conduct should rather be directed by a certain idea of propriety, by a certain taste for a particular tenor of conduct, than by any regard to a

> A Dillard’s customer brought in a pair of moderately expensive dress shoes, expressing a desire to return them because they just weren’t quite right. As the manager processed the order she checked inside the box to be sure that the shoes in the box were

> Alan Gellen is the facilities manager for the city of Milwaukee and makes all final decisions on purchasing items such as chairs, lights, and other supplies and materials. Alan also makes the final decisions for the award of contracts to food vendors at

> Fred Sanguine is a New York City produce broker .Ned Santini is a 19-year-old college student who works for Sanguine from 4:00A.M. until 7:00A.M.each weekday before he attends classes at Pace University. Fred has instructed Ned on the proper packing of p

> During the inauguration for President Obama in January 2013, Beyoncé was scheduled to sing the national anthem. The question arose: Did she lip sync during her performance? No answer was forth coming from the singer’s representatives, but it was clear fr

> Martha Simms is the plaintiff in a contract suit she has brought against Floral Supply, Inc., for its failure to deliver the green sponge Martha needed in building the floral designs she sells to exclusive home decorators. Martha had to obtain the sponge

> Indicate whether the following courts are courts of original, general, limited, or appellate jurisdiction: a. Small claims court b. Federal bankruptcy court c. Federal district court d. U.S. Supreme Court e. Municipal court f. Probate court g. Federal co

> John Watson invested $5,000,000 in SmartRead, Inc., a company that was developing an electronic reading device. Within a few months, the$5,000,000 was spent but SmartRead never developed the reading device. John filed suit against the directors of SmartR

> Jerry Lewinsky was called for jury duty. When voirdire began, Jerry realized that the case involved his supervisor at work. Can Jerry remain as a juror onthe case? Why or why not?

> Ralph Dewey has been charged with a violation of the Electronic Espionage Act, a federal statute that prohibits the transfer, by computer or disk or otherelectronic means, of a company’s proprietary data and information. Ralph is curious. What type ofcou

> Two doctors had a dispute over who was doing how much work at their clinic. Their dispute was submitted to arbitration and the arbitrator held in favor of the less experienced doctor. The senior doctor wants the arbitration set aside. Is it possible for

> Winona Ryder was arrested for shoplifting from SaksFifth Avenue in California. One of the members of the jury panel for her trial was Peter Guber, a Hollywood executive in charge of the production of three films in which Ms. Ryder starred, including Bram

> Caesar Wright was a longshoreman in Charleston, South Carolina, and a member of the International Longshoremen’s Association (AFL-CIO). Wrightused the union hiring hall. The collective bargaining agreement (CBA) of Wright’s union provides forarbitration

> Mostek Corp., a Texas corporation, made a contract to sell computer-related products to North American Foreign Trading Corp., a New York corporation. North American used its own purchase order form, on which appeared the statement that any dispute arisin

> The Nursing Home Pension Fund filed suit against Oracle Corporation alleging that Larry Ellison, the company’s CEO, misled investors in 2001 about the true financial condition of the company. During the time of the alleged misrepresentation, Mr. Ellison

> Larketta Randolph purchased a mobile home fromBetter Cents Home Builders, Inc., and financed herpurchase through Green Tree Financial Corporation.Ms. Randolph signed a standard form contract that required her to buy Vendor’s Single Interest insurance, wh

> Carolyn, Elwood, and Isabella are involved in a real estate development. The development is a failure, and Carolyn, Elwood, and Isabella want to have their rights determined. They could bring a lawsuit, but they are afraid the case is so complicated that

> Explain why a business person would want to use alternative dispute resolution methods. Discuss the advantages. What disadvantages have you learned?

> List the steps in a lawsuit. Begin with the filing of the complaint, and explain the points at which there can be a final determination of the parties’ rights in the case.

> Saint Claire Adams was hired by Circuit City as a sales counselor. When he was hired he signed an employment contract that included a mandatory arbitration clause. Two years later he filed a suit against Circuit City for discrimination in the work-place.

> Janice Dempsey has just started her own tax preparation firm. She has leased office space in a building, and she is incorporating her business as a Subchapter S corporation under the Internal Revenue Code. She has purchased desks, chairs, computers, and

> During the 2001 baseball season, San FranciscoGiants player Barry Bonds hit 73 home runs, a newrecord that broke the one set by Mark McGwire in2000 (72 home runs). When Mr. Bonds hit his record-breaking home run, the ball went into theso-called cheap sea

> Explain how Twitter, Facebook, and LinkedIn have resulted in the development of new laws and precedent.

> What is the principle of stare decisis?

> Give examples of areas covered by federal laws. Give examples of areas covered by city ordinances. What are the limitations on these two sources of laws? What could the laws at these two levels not do?

> The Eminem ad for Chrysler that ran during the Super Bowl in February 2011 was rated as one of the best ads for the game. In May 2011, Audi ran an adat a German auto show that had the“feel”of theEminem Chrysler“Lose Yourself”ad. Subsequently,the German a

> What is the difference between a statute and an administrative regulation?

> Under what circumstances would a court disregard precedent?

> Professor Lucas Phelps sent the following e-mail to Professor Marlin Jones: “I recently read the opinionpiece you wrote for the Sacramento Bee on affirmative action. Your opinion is incorrect, your reasoning and analysis are poor, and I am embarrassed th