Question: Explain why the put-call parity relationship

> 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.

> Illustrate how to combine the four basic option positions to create a variety of net payoff positions.

> Briefly describe the main factors that affect a put or a call option’s value, and explain how they affect the value of each.

> Explain how to estimate the intrinsic value and time value for a put option.

> Contrast the payoff from a put option with that from a call option.

> Discuss any differences in the evaluation of a replacement decision versus the evaluation of an expansion decision.

> What is measured by each of the five Greeks discussed in this section?

> How can the Black-Scholes equation be used to price options?

> Define yield spreads and explain how they arise.

> When Collingwood Corp. issued its 60‐day commercial paper the promised yield was 10 percent, whereas the 60‐day T‐bill yield was 6 percent. There is a 1-percent chance that Collingwood will default on this debt. If investors were willing to pay the full

> Contrast treasury bills, commercial paper, and BAs in terms of who issues them, their basic structure and default risk, and the yields they provide.

> Explain how interest is received on most money market instruments.

> What is the difference between an acquisition and a merger?

> What limitations of scenario analysis does the real option valuation approach address?

> What insights can be gained by using sensitivity analysis, scenario analysis, and NPV break-even analysis?

> What is the majority of the minority rule?

> What is an amalgamation?

> When does EPS increase when using a share swap?

> What is free cash flow?

> Why do differing capital structures cause problems with using P/E multiples?

> Collingwood Corp. is able to issue its 60‐day commercial paper at par with a promised yield of 10 percent per year. The current T‐bill yield is 6 percent per year (or 1 percent for the 60‐day period). The expected return on the commercial paper is 1.5 pe

> What key multiples are used in valuing companies?

> What is fair market value?

> What is the difference between value and price?

> What three characteristics does the CRA look for to determine whether interest payments are tax deductible?

> Explain how to estimate the after-tax cost of debt.

> Distinguish debt from equity.

> Explain how to calculate comparisons in the lease-versus-buy decision when the lease in question is an operating lease.

> How do taxes affect the annual cash flows and terminal cash flows of an investment project?

> Explain why the valuation by components approach can save computational time and still lead to the correct answer.

> Why does the initial cash outlay often exceed the purchase price of an asset?

> Michael M. specializes in buying high‐risk commercial paper; his required return on these investments is 14 percent per year. He is considering buying some 60‐day paper from Collingwood Corp. with a promised yield of 10 percent per year. However, Michael

> How does the analysis change when the lease is a financial lease?

> Is the PI rule consistent with the NPV rule?

> What is the crossover rate?

> What are the reinvestment rate assumptions underlying NPV and IRR?

> Why do we sometimes get multiple IRRs for a project?

> What discount rate do we use to determine the NPV of a project and why?

> Why is the payback period a poor evaluation technique?

> When is it best to mount a hostile bid?

> What are some standard takeover defences?

> What is a shareholder rights plan?

> In Practice Problem 15, assuming that Nash Business School has an effective tax rate of 40 percent, should the shuttle buses be bought or leased?

> What is due diligence?

> What goes into a confidentiality agreement and why do people sign them?

> Why do we not deduct interest costs from the cash flows to be discounted?

> What are externalities and opportunity costs?

> What do we mean by incremental cash flows?

> How should we treat taxes and inflation when determining the present value of future cash flows?

> How can we compare two choices, one involving a wooden bridge lasting 10 years and another involving a steel bridge lasting 25 years that costs more?

> What is the difference between independent and mutually exclusive projects?

> Why might inflation affect cash inflows differently from the way it would affect cash outflows?