Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an over emphasis on short-term profits at the expense of long-term profit.
> What are the implications of the efficient market hypothesis for investors who buy and sell stocks in an attempt to “beat the market”?
> What is the relationship between the one-factor model and the CAPM?
> Why is it not necessarily bad for the cash flow from assets to be negative for a particular period?
> If the risk of a stock increases, what is likely to happen to the price of call options on the stock? To the price of put options? Why?
> Evan, Inc., has offered $340 million cash for all of the common stock in Tanner Corporation. Based on recent market information, Tanner is worth $317 million as an independent operation. If the merger makes economic sense for Evan, what is the minimum es
> Why would TMCC be willing to accept such a small amount today ($24,099) in exchange for a promise to repay about four times that amount ($100,000) in the future?
> Miller Manufacturing has a target debt–equity ratio of .55. Its cost of equity is 14 percent, and its cost of debt is 7 percent. If the tax rate is 35 percent, what is Miller’s WACC?
> Bell Tolls, Inc., has an average collection period of 36 days. Its average daily investment in receivables is $58,300. What are annual credit sales? What is the receivables turnover?
> Which would a firm prefer: A net collection float or a net disbursement float? Why?
> What is wrong with the simple view that it is cheaper to issue a bond with a warrant or a convertible feature because the required coupon is lower?
> A stock is currently selling for $38 per share. A call option with an exercise price of $40 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option
> If a market is semi strong form efficient, is it also weak form efficient? Explain.
> On subsidized Stafford loans, a common source of financial aid for college students, interest does not begin to accrue until repayment begins. Who receives a bigger subsidy, a freshman or a senior? Explain. Use the following information to answer the nex
> You notice that shares of stock in the Patel Corporation are going for $50 per share. Call options with an exercise price of $35 per share are selling for $10. What’s wrong here? Describe how you can take advantage of this mispricing if the option expire
> Is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amounts of cash?
> Would the goal of maximizing the value of the stock differ for financial management in a foreign country? Why or why not?
> At one point, Duracell International confirmed that it was planning to open battery manufacturing plants in China and India. Manufacturing in these countries allows Duracell to avoid import duties of between 30 and 35 percent that have made alkaline batt
> What is the difference between liquidation and reorganization?
> Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?
> Why is a preferred stock with a dividend tied to short-term interest rates an attractive short-term investment for corporations with excess cash?
> Your company owns a vacant lot in a suburban area. What is the advantage of waiting to develop the lot?
> A stock market analyst is able to identify mispriced stocks by comparing the average price for the last 10 days to the average price for the last 60 days. If this is true, what do you know about the market?
> Mullineaux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Mullineaux’s WACC?
> What are the differences between a k -factor model and the market model?
> If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta?
> What are some of the characteristics of a firm with a long operating cycle?
> Look at Table 10.1 and Figure 10.7 in the text. When were T-bill rates at their highest over the period from 1926 through 2011? Why do you think they were so high during this period? What relationship underlies your answer? Table 10.1 Figure 10.7 Larg
> Suppose a company has a preferred stock issue and a common stock issue. Both have just paid a $2 dividend. Which do you think will have a higher price, a share of the preferred or a share of the common?
> Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?
> What is the intrinsic value of a call option? Of a put option? How do we interpret these values?
> Treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.
> Critically evaluate the following statement: Playing the stock market is like gambling. Such speculative investing has no social value, other than the pleasure people get from this form of gambling.
> Are exchange rate changes necessarily good or bad for a particular company?
> Why doesn’t financial distress always cause firms to die?
> Tidwell, Inc., has weekly credit sales of $27,500, and the average collection period is 27 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable figure?
> What is the primary difference between a warrant and a traded call option?
> What is the difference between cash management and liquidity management?
> Assets Grohl Manufacturing, Inc., has recently installed a justin- time (JIT) inventory system. Describe the effect this is likely to have on the company’s carrying costs, shortage costs, and operating cycle.
> You are determining whether your company should undertake a new project and have calculated the NPV of the project using the WACC method when the CFO, a former accountant, notices that you did not use the interest payments in calculating the cash flows o
> What is the quirk in the tax code that makes a levered firm more valuable than an otherwise identical unlevered firm?
> True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.
> Looking at the accounting statement of cash flows, what does the bottom line number mean? How useful is this number for analyzing a company?
> You own a portfolio that is 25 percent invested in Stock X , 40 percent in Stock Y , and 35 percent in Stock Z . The expected returns on these three stocks are 11 percent, 17 percent, and 14 percent, respectively. What is the expected return on the portf
> With regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?
> Suppose two athletes sign 10-year contracts for $80 million. In one case, we’re told that the $80 million will be paid in 10 equal installments. In the other case, we’re told that the $80 million will be paid in 10 installments, but the installments will
> Why do companies issue options to executives if they cost the company more than they are worth to the executive? Why not just give cash and split the difference? Wouldn’t that make both the company and the executive better off?
> What is prepackaged bankruptcy? What is the main benefit of prepackaged bankruptcy?
> What costs are associated with carrying receivables? What costs are associated with not granting credit? What do we call the sum of the costs for different levels of receivables?
> Are stockholders and creditors likely to agree on how much cash a firm should keep on hand?
> Suppose you are evaluating a callable, convertible bond. If the stock price volatility increases, how will this affect the price of the bond?
> Why does a strict NPV calculation typically understate the value of a company or project?
> What is the main difference between the FTE approach and the other two approaches?
> If you use the stock beta and the security market line to compute the discount rate for a project, what assumptions are you implicitly making?
> If you use the stock beta and the security market line to compute the discount rate for a project, what assumptions are you implicitly making?
> If a portfolio has a positive investment in every asset, can the expected return on the portfolio be greater than that on every asset in the portfolio? Can it be less than that on every asset in the portfolio? If you answer yes to one or both of these qu
> How is the APV of a project calculated?
> We have seen that over long periods stock investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding their investments entirely in bonds. Are such investors irr
> So-called “same-store sales” are a very important measure for companies as diverse as McDonald’s and Sears. As the name suggests, examining same-store sales means comparing revenues from the same stores or restaurants at two different points in time. Why
> A convertible bond has a conversion price of $61.50. What is the conversion ratio of the bond?
> Which has greater interest rate risk, a 30-year Treasury bond or a 30-year BB corporate bond?
> What happens to the future value of an annuity if you increase the rate r? What happens to the present value?
> Classify the following events as mostly systematic or mostly unsystematic. Is the distinction clear in every case? a. Short-term interest rates increase unexpectedly. b. The interest rate a company pays on its short-term debt borrowing is increased by it
> Suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S. inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso versus dollar exchange rate? What relationship are you
> What are some benefits of financial distress?
> The Paden Corporation has annual sales of $34 million. The average collection period is 33 days. What is the average investment in accounts receivable as shown on the balance sheet?
> The Dybvig Corporation’s common stock has a beta of 1.21. If the risk-free rate is 3.5 percent and the expected return on the market is 11 percent, what is Dybvig’s cost of equity capital?
> In what form is trade credit most commonly offered? What is the credit instrument in this case?
> What options are available to a firm if it believes it has too much cash? How about too little?
> What are some of the characteristics of a firm with a long cash cycle?
> What are the two options that many businesses have?
> What are the cash flows from the lease from the lessor’s viewpoint? Assume a 35 percent tax bracket.
> Taxes are an important consideration in the leasing decision. Which is more likely to lease: A profitable corporation in a high tax bracket or a less profitable one in a low tax bracket? Why?
> What is the main difference between the WACC and APV methods?
> Why do we use an after tax figure for cost of debt but not for cost of equity?
> Why do we use an after tax figure for cost of debt but not for cost of equity?
> Consider the following statement: For the APT to be useful, the number of systematic risk factors must be small. Do you agree or disagree with this statement? Why?
> If you can borrow all the money you need for a project at 6 percent, doesn’t it follow that 6 percent is your cost of capital for the project?
> True or false: All assets are liquid at some price. Explain.
> A convertible bond has a conversion ratio of 24.6. What is the conversion price?
> Some people argue that the efficient market hypothesis cannot explain the 1987 market crash or the high price-to-earnings ratios of Internet stocks during the late 1990s. What alternative hypothesis is currently used for these two phenomena?
> In the previous problem, what is the probability that the return is less than 2100 percent? (Think.) What are the implications for the distribution of returns?
> Assume that markets are efficient. During a trading day American Golf Inc. announces that it has lost a contract for a large golfing project that, prior to the news, it was widely believed to have secured. If the market is efficient, how should the stock
> The efficient market hypothesis implies that all mutual funds should obtain the same expected risk-adjusted returns. Therefore, we can simply pick mutual funds at random. Is this statement true or false? Explain.
> For 2012, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.
> Draw up an income statement and balance sheet for this company for 2011 and 2012.
> A famous economist just announced in The Wall Street Journal his findings that the recession is over and the economy is again entering an expansion. Assume market efficiency. Can you profit from investing in the stock market after you read this announcem
> Your broker commented that well-managed firms are better investments than poorly managed firms. As evidence your broker cited a recent study examining 100 small manufacturing firms that eight years earlier had been listed in an industry magazine as the b
> Using information from the previous chapter about capital market history, determine the return on a portfolio that is equally invested in large company stocks and long-term government bonds. What is the return on a portfolio that is equally invested in s
> A stock is currently priced at $35. A call option with an expiration of one year has an exercise price of $50. The risk-free rate is 7 percent per year, compounded continuously, and the standard deviation of the stock’s return is infinitely large. What i
> A researcher has determined that a two-factor model is appropriate to determine the return on a stock. The factors are the percentage change in GNP and an interest rate. GNP is expected to grow by 3.6 percent, and the interest rate is expected to be 3.1
> A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent
> One thing put–call parity tells us is that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three. For example, how can we replicate a share of stock using a call, a put, and a T-bill?
> A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded continuously. If the exercise price is $0, what is the pr
> What are some actions a small company like The Grandmother Calendar Company can take (besides expansion of capacity) if it finds itself in a situation in which growth in sales outstrips production?
> A stock has an expected return of 13.1 percent, a beta of 1.28, and the expected return on the market is 11 percent. What must the risk-free rate be?
> Which was the biggest culprit here: Too many orders, too little cash, or too little production capacity?
> Sysco Corporation, the distributor of food and food-related products (not to be confused with Cisco Systems), announced it had signed an interest rate swap. The interest rate swap effectively converted the company’s $100 million, 4.6 percent interest rat
> A stock has an expected return of 13.4 percent, its beta is 1.60, and the risk-free rate is 5.5 percent. What must the expected return on the market be?
> A controversy erupted regarding bond-rating agencies when some agencies began to provide unsolicited bond ratings. Why do you think this is controversial?
> If financial markets are perfectly competitive and the Eurodollar rate is above that offered in the U.S. loan market, you would immediately want to borrow money in the United States and invest it in Eurodollars. True or false? Explain.
