Briefly summarize the evidence regarding how well debt ratings work.
> You are evaluating a project for a small manufacturing firm. The firm has provided the following data: the initial cost of the project is $2,500; the CCA rate is 10 percent; the tax rate is 25 percent; and the cash flow in the first year is $700. Cash fl
> The analysis of a two‐division company (DV2) has indicated that the beta of the entire company is 1.35. The company is 100‐percent equity funded. The company has two divisions: Major League TV (MLTV) and Minor League Shipping (MLS), which have very diffe
> Calculate the NPV of the project described in Practice Problem 49, but assume that the discount rate has changed based on the following information: RF = 3.4%; project beta = 1.2; the market risk premium = 5.5%; and the firm is financed entirely by equit
> Repeat Practice Problem 48 assuming that the project would generate annual revenue of $70,000 and annual costs of $40,000 for six years. Also, the asset class will be closed at the end of six years.
> Repeat Practice Problem 48 assuming that the project would generate annual revenue of $70,000 and annual costs of $40,000 for six years. Also, assume the asset class will remain open.
> GG Inc. has a project that requires purchases of capital assets costing $60,000 and additional raw material inventory of $3,000. Shipping and installation costs are $1,800. GG Inc. estimated that the project would generate an annual operating after-tax c
> You have been hired as consultants to XrayGlasses Corporation (XGC). XGC is in the process of deciding whether to invest in a new production facility. The new facility will enable it to produce and sell X-ray machines to airports. The manufacturing and m
> Calculate the NPV in Practice Problem 45 assuming a best case of the following: project life = 10 years; project beta = 0.8; SVn = $100,000; Rev1 = $500,000.
> Brigid Co. has the following potential project: Machine price = $1,800,000; additional inventory requirement = $150,000. Cash flows will be generated at year end. Rev1 = $400,000 and grows at 5 percent each year for five years, while Cost1 = $125,000 and
> You are trying to decide whether to continue renting an apartment or to buy a house. In 20 years, you plan on leaving Canada and moving to a warm tropical island and would like to have as much money as possible. You have just won $25,000 in the lottery a
> Briefly discuss the possible motivation for firms to enter into IPOs, and relate these motivations to the five stages of firm development discussed by Myers (1999).
> You are trying to decide whether or not to go to graduate school. If you get a job right after you get your bachelor’s degree, you expect to earn $40,000 a year, and you expect your salary to increase by 5 percent a year for the next 40 years. If you go
> KRZ Company has hired you to help evaluate several projects. The firm’s tax rate is 40 percent and the appropriate discount rate is 15 percent. Each asset class is small and will be terminated at the end of each project. KRZ is not capital constrained. T
> KRZ Company has hired you to help evaluate several projects. The firm ’ s tax rate is 40 percent and the appropriate discount rate is 10 percent. Each asset class is small and will be terminated at the end of each project. KRZ is not capital constrained.
> Java Cafe’s tax rate is 40 percent and the appropriate discount rate is 12 percent. It is considering another project. Each asset class consists only of the project asset and will be terminated at the end of the project. Java Café is not capital constrai
> Java Cafe’s tax rate is 45 percent and the appropriate discount rate is 8 percent. It is considering another project. Each asset class consists only of the project asset and will be terminated at the end of the project. Java Café is not capital constrain
> Complete the following balance sheet for the post‐merger firm B‐T. The bidder acquired the target for $8,000 in cash. Target (Fair В-T Target (book Market value) (post- merger) Bidder Value) Current 25,000 4,500 4,
> Why do banks typically impose debt covenants on their borrowing customers?
> GG Inc. is now considering replacing some old equipment. The market price of the old equipment is $50,000 and the salvage value at the end of five years is $15,000. The new equipment will cost $100,000 and could be sold at the end of five years for $35,0
> Based on the cash flows given below, calculate the PI of a project that has a required rate of return of 15 percent. Also, indicate whether the project should be accepted. Year 0: −$90,000 Year 1: $20,000 Year 2: $40,000 Year 3: −$15,000 Year 4: $100,000
> The balance sheets of a bidder and target companies are as follows: The tax rate for both companies is 25 percent. The acquisition will be accounted for using the purchase method. Prior to the acquisition, the bidding firm had 10,000 shares outstanding,
> 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 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 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 o
> 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.
