Question: Define the following types of hybrids: income

> What are the steps involved in estimating a firm’s WACC?

> Why is the weighted average cost of capital (WACC) so important?

> Why do we say that equity holders bear the brunt of the effects of leverage?

> Distinguish between operating and financial leverage.

> Explain four of the most important factors influencing capital structure decisions as indicated in the survey results and how they relate to the conceptual discussion of an optimal capital structure.

> Summarize the main factors you need to consider if the CFO of your firm asks you to evaluate your firm’s capital structure.

> What is the pecking order according to Myers’ argument?

> Explain how the static trade‐off model can be used to find an optimal capital structure.

> What are special purpose vehicles (SPVs)? What is the main advantage of SPVs? List a few forms of credit enhancement that are critical to SPVs.

> In order for the M&M irrelevance theorem to hold, what key assumptions must be met?

> State the two rules of financial leverage.

> What is the market price and market‐to‐book ratio, assuming the firm’s stock is a perpetuity and all earnings are paid out as cash dividends (i.e., the retention rate is zero)?

> What is the cost of equity (K e ) given RF 3%, beta ( ) 1.4, expected market return ( ERM) 10%?

> Why does the MCC suddenly jump up and become expensive?

> Explain the importance of using the WACC as a hurdle rate for making investment decisions.

> Explain why beta estimates are “period specific” and outline the potential problems that may arise. Allude to problems with recent beta estimates.

> Explain how we can use the CAPM to estimate the cost of common equity.

> 1. Which of the following statements is false? a. Financing total assets is called the financial structure decision. b. Capital structure is how invested capital is financed. c. The financial structure is $34,000 if the total assets are $34,000. d. The i

> Why would you want a cumulative feature when purchasing preferred shares?

> a. Calculate the effective annual cost of forgoing the discount from credit terms of 2/15 net 60. The selling price is $800. b. Another supplier offers $820 on credit terms of net 90. If you could finance the purchase by using loans at an effective annua

> Briefly describe the following types of preferred shares: straight, retractable, and floating rate.

> Define and explain how to determine the following for a convertible: conversion price, conversion value, straight bond value, floor value, and convertible premium.

> Explain why issuing debt or preferred shares with warrants attached or issuing convertible bonds or convertible preferred shares, may represent attractive sources of financing for higher-risk firms.

> Why is dividend income preferred by both corporations and individual investors?

> Why do voting rights affect the prices of some common shares and not others?

> What are the basic rights associated with equity securities? How do these differ across different categories or classes of equities?

> Why are preferred shares sometimes called hybrid securities?

> A firm has just issued convertible preferred shares with a call feature that permits the firm to repurchase the shares at par value (or, in effect, force the conversion into common shares). Usually, the common stock will be trading at least 20 percent ab

> A firm has just issued convertible preferred shares with a $100 par value. The conversion price for these shares is $20 (per common share). What is the conversion ratio?

> Montreal Brewers is going to issue $100 million of 90‐day commercial paper for net proceeds of $99 million. Montreal Brewers must maintain a $100 million credit line, on which it must pay a standby fee of 0.15 percent. What is the commercial paper’s effe

> Straight preferred shares issued by a firm have a discount rate of 8 percent per year, whereas these shares are yielding 4 percent on the $25 par value. The conversion value of these shares is calculated to be $15. Determine the straight preferred value

> A firm’s common shares currently trade at $20 per share. The firm has warrants outstanding that entitle the holder to purchase two shares at an exercise price of $18 per share. The expiry date is two years from today. a. Calculate the minimum value (floo

> Orion’s Belt Mining Co. has 12 million common shares outstanding, which are currently trading for $5. In addition, the company has issued two million share purchase warrants with a strike price of $4.25 that are just about to expire. a. Determine the equ

> Calculate the payoff of fully exercising warrants given the following: 950,000 existing shares are outstanding; 150,000 warrants are outstanding and are exercisable at $10. The firm is valued at $10 million before the warrants are exercised. Calculate th

> In December 2015, Collingwood Corp. decided to issue 100,000 convertible bonds, maturing in December 2025. The bonds have a face value of $1,000 and promise an annual coupon payment of 5.75 percent. The conversion ratio of these bonds is 25.32, and it is

> Jack and Jill Inc. very nearly tumbled into bankruptcy last year. To refinance the firm, the firm issued $30 million worth of 30‐year income bonds. These bonds have an 8‐percent coupon that is payable only if the firm achieves earnings before interest an

> Calculate the conversion price and conversion value of the convertible bonds given the following: selling price $102; each bond is convertible into 5 common shares; current common share price $18. Will the convertible bonds be converted?

> What are the differences between call options and warrants?

> The common shares of a firm are currently trading at $15, while its preferred shares trade at par (see Practice Problem 13). Calculate the conversion premium on the preferred shares. What does this premium mean?

> Collingwood Corp. has decided to invest some of its excess cash in straight preferred shares issued by other companies. It will earn a yield of 4.5 percent on the $10‐million investment. How much net income will Collingwood earn if its corporate tax rate

> Explain how commercial paper differs from bankers’ acceptances.

> A firm has 50 million common shares outstanding, on which it pays a quarterly dividend of $0.25 per share. The firm ’ s capital structure also includes two million cumulative preferred shares with a $50 par value that yield 8 percent per year (or 2 perce

> When a firm needed to raise capital to expand, the founder was concerned about losing control of the firm if he sold too many shares. The solution devised by his investment banker was to create two different classes of shares. The founding member would r

> With the savings from your summer job you were able to buy 500 shares of a hot new Internet company last year. A few months after your purchase, the company was low on cash and needed to raise more equity capital. The company’s charter provided a pre‐emp

> A firm has just filed for bankruptcy and is likely to be liquidated. The creditors, such as equipment suppliers and employees, are owed $1.5 million. a. Determine how much the equity holders will receive if, when liquidated, if the firm ’ s assets are wo

> Discuss three reasons why firms issue preferred shares.

> 1. Which of the following does not appear in the share structure of a firm? a. Preferred shares b. Common shares c. Limited voting shares d. None of the above 2. Which of the following statements about preferred shares is false? a. Retractable preferred

> State the three basic rights of common shareholders.

> Relate the costs of various financing options to their equity-like characteristics.

> Name and discuss the four criteria used by DBRS to classify a security as debt versus equity.

> Describe the four inventory management approaches.

> Explain the relationship among ROE, retention rates, and firm growth.

> Explain how we can use the constant growth DDM to estimate the cost of firms’ internal common equity, as well as the cost of new common share issues.

> A firm wishes to raise funds in the following proportions: 20‐percent debt, 20‐percent P/S, and 60‐percent CE (common equity). Assume the cost of internally generated funds is 15 percent. Annual after‐tax cost of debt is 5.86 percent. Cost of preferred e

> a. Kitchener Consumer Products plans to issue 25‐year bonds with an 7‐percent coupon rate, with coupons paid semi‐annually and a par value of $1,000. After tax flotation costs (issuing and underwriting costs) amount to 3.5 percent of par value. The firm’

> A company can issue new 20‐year bonds at par that pay 6‐percent annual coupons. The net proceeds to the firm (after taxes) will be 96 percent of par value. They estimate that new preferred shares providing a $2 annual dividend could be issued to investor

> A firm has the following balance sheet items: The before‐tax interest cost on new 15‐year debt would be 7 percent, and each $1,000 bond would net the firm $972 after issuing costs. Common shares could be sold to net th

> A firm has the following capital structure based on market values: equity 60 percent and debt 40 percent. The current yield on government T‐bills is 3 percent, the expected return on the market portfolio is 10 percent, and the firm’s beta is approximated

> Explain how to estimate the cost of debt and preferred equity for a firm.

> How do flotation costs affect the cost of capital sources for a firm?

> Describe the Fed model and how it may be used to estimate the required rate of return of the market as a whole.

> What are some of the disadvantages of carrying inventories?

> How can we relate the existence of multiple growth stages to four commonly used firm classifications?

> How are the ROE and Ke related to a firm’s growth opportunities and its M/B ratio?

> Why is the earnings yield not usually an adequate measure of the investor’s required return on equity?

> Suppose a firm uses a constant WACC to calculate the NPV of all of its capital budgeting projects, rather than adjusting for the risk of the individual projects. What errors will the firm make in its capital budgeting decisions?

> Montreal Brokers, a small brokerage firm and PEI tronics, a software development company, are both separately considering developing and marketing a new software package. Neither party is aware that the other is considering this project, and it is not at

> A firm is going to finance a new project 100 percent with debt, through a new bond issue. Since the firm is using only debt to finance the project, the NPV of the project should be calculated using the cost of debt as the discount rate. Is this statement

> What is Altman’s Z score and what does it measure?

> Explain how ratios may be used to assess a company’s ability to assume more debt.

> Explain the static trade-off theory.

> Why can the firm’s debt be viewed as the exercise price to the shareholders’ option to purchase the firm?

> What are some of the advantages of carrying inventories?

> Explain the impact of financial distress and agency costs on M&M’s conclusions regarding capital structure.

> Describe how we determine the ROE and EPS indifference points for a firm based on various financing alternatives, and explain why this analysis provides the firm with useful information.

> What are the three rules of leverage?

> How does financial leverage affect the relationship between ROI and ROE?

> Define business risk and financial risk.

> Your cousin has just started his MBA and is confused. He understands that without taxes, capital structure is irrelevant. He also understands that with taxes, firms should use 100‐percent debt. However, his professor is saying that with taxes, there are

> Gus Fitzgerald, a local shipping tycoon, is very confused. He has issued stock to finance a positive NPV investment. He expected the stock price to rise, as positive NPV projects are supposed to increase shareholder value. However, the stock price fell!

> Describe the relationship between the debt ratio and firm value when we consider the existence of bankruptcy costs. How do you view the agency costs when bankruptcy occurs?

> State the two possible ways bankruptcy can occur. What is the role of a monitor appointed by the court under the Companies’ Creditors Arrangement Act ( CCAA )? Compare the difference of recognizing firm bankruptcy under CCAA and the Business Insolvency A

> Describe the factors that can affect a firm ’ s capital structure in practice.

> What are captive finance companies?

> What important issues does the static trade‐off model ignore?

> In the M&M tax world, calculate the value of the unlevered firm (U) and the identical risk-levered firm (L). Corporate tax rate = 30%; perpetual EBIT for U and L = $3 million; cost of capital of U = 16%; L’s outstanding debt = $5 million; pre-tax cost of

> In the M&M tax world, what is the value of levered firm (V L ) in Practice Problem 25 if the tax rate is 30 percent? What is the cost of levered equity? What is the market risk premium (MRP) given U 1 2 . and RF 3%?

> With reference to the M&M irrelevance theorem, calculate the market value of an unlevered firm (U) and an identical risk‐levered firm (L). The expected EBIT of U $2.1 million, which will remain constant indefinitely. The cost of capital is 15 percent. If

> In the M&M no‐tax world, calculate the value of the levered firm (V L ). Cost of unlevered equity (KU) = 16%; cost of debt (KD) = 8%; debt (D) = $500,000; and NI = $480,000. What is the cost of levered equity?

> Calculate the EPS indifference EBIT* level given the following information. The corporate tax rate is 20 percent. Under a 75‐percent D/E ratio, the number of common shares outstanding is 30,000; pre‐tax cost of debt is 10 percent; and outstanding debt is

> Explain the elements of Altman’s Z score as used in Practice Problem 22. Problem 22. Calculate Altman’s Z score for Home Depot in fiscal year 2011 (as of January 29, 2012) and then compare it with Moody â€&#

> Calculate Altman’ s Z score for Home Depot in fiscal year 2011 (as of January 29, 2012) and then compare it with Moody ’ s rating chart. Is this company an IG or non‐ IG? All numbers are in millions.

> Calculate the fixed burden coverage and cashflow- to-debt ratio given the following: EBIT = $680,000; depreciation and amortization = $66,000; preferred dividend = $40,000; sinking fund payments = $15,000; tax rate = 30%; debt = $220,000. Why do analysts

> Use two different methods to calculate ROI given the following information for Brandon Corp. Sales = $400,000 ; Cost of goods sold = $120,000; Interest cost = $20,000; TC = 25%. The firm ’ s debt (B = $250,000) accounts for 25 percent of the invested cap

> State four main motives firms have to hold cash.

> Identify the costs and benefits of holding inventory.

> Marlee and Richard Snowdon bought a house next door to Hal and Carol Dickinson. Carol had owned the house for 30 years; Hal had moved in 10 to 15 years later when he and Carol married. Hal had no ownership interest in the property. The Snowdons decide

> Eighty-five-year-old Francis Gagnon and his wife lived on a farm in Shelburne, Massachusetts. They also owned land in Hillsborough, New Hampshire. They had two children: Joan Coombs, who lived 20 miles from Shelburne, and Frank Gagnon who lived in a tr

> Bright Tunes Music Corp. (Bright Tunes) owned the copyright to the song “He’s So Fine.” The company sued George Harrison, a Beatle, alleging that the Harrison composition “My Sweet Lord” copied “He’s So Fine.” At the time the suit was filed, Allen B. Kle

> Justin Kaiser and Germania became friends while working together at a Ralph Lauren Polo store. When Germania left the store, Kaiser allowed Germania to buy clothing using merchandise credits made out to fake people, and he also allowed her to use his emp