Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier $10,000 with terms of 2/10 Net 40, so the supplier will give them a 2% discount if they pay today (when the discount period expires). Alternatively, they can pay the full $10,000 in one month when the invoice is due. H2M is considering three options: Alternative A: Forgo the discount on its trade credit agreement, wait and pay the full $10,000 in one month. Alternative B: Borrow the money needed to pay its supplier today from Bank A, which has offered a one-month loan at an APR of 12%. The bank will require a (no- interest) compensating balance of 5% of the face value of the loan and will charge a $100 loan origination fee. Because H2M has no cash, it will need to borrow the funds to cover these additional amounts as well. Alternative C: Borrow the money needed to pay its supplier today from Bank B, which has offered a one-month loan at an APR of 15%. The loan has a 1% loan origination fee, which again H2M will need to borrow to cover. Which alternative is the cheapest source of financing for Hand-to-Mouth?
> Suppose Starbucks consumes 100 million pounds of coffee beans per year. As the price of coffee rises, Starbucks expects to pass along 60% of the cost to its customers through higher prices per cup of coffee. To hedge its profits from fluctuations in coff
> Your utility company will need to buy 100,000 barrels of oil in 10 days’ time, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1000 barrels of oil, at the current futures price of $60 per barr
> BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a production cost of $0.90 per pound. a. What will be BHP’s operating profit from copper next year if the price of copper is $1.25, $1.50,
> Your firm faces a 9% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of this loss to 4%, but these new policies have an upfront cost of $100,000. Suppose the beta of the loss is 0, and t
> Your firm imports manufactured goods from China. You are worried that U.S.–China trade negotiations could break down next year, leading to a moratorium on imports. In the event of a moratorium, your firm expects its operating profits to decline substanti
> Genentech’s main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $450 million in the event of a major earthquake that disrupted its operations. The chance of such an earthquake is 2% per year, with a b
> Your firm needs to raise $100 million in funds. You can borrow short term at a spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year Treasuries, which currently yield 7.60%. Current 10-year inte
> The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $44.8 million. The duration of this portfolio of bonds is 13.5 years. The fund has borrowed to purchase these bonds, and the current value of its liabiliti
> You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars): When you analyze the duration of loans, you find that the duration of the auto loans is two yea
> Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? b. What is
> Assume each of the following securities has the same yield-to-maturity: a five-year, zero-coupon bond; a nine-year, zero-coupon bond; a five-year annuity; and a nine-year annuity. Rank these securities from lowest to highest duration.
> Suppose the current exchange rate is $1.80/£, the interest rate in the United States is 5.25%, the interest rate in the United Kingdom is 4%, and the volatility of the $/£ exchange rate is 10%. Use the Black-Scholes formula to determine the price of a si
> The William Companies (WMB) owns and operates natural gas pipelines that deliver 12% of the natural gas consumed in the United States. WMB is concerned that a major hurricane could disrupt its Gulfstream pipeline, which runs 691 miles through the Gulf of
> What are the advantages and disadvantages of increasing the options granted to CEOs?
> What is a whistle-blower?
> How are lenders part of corporate governance?
> What role do security analysts play in monitoring?
> How does a board become captured by a CEO?
> What is the role of the board of directors in corporate governance?
> What are the advantages and disadvantages of the corporate organizational structure?
> An Exchange-Traded Fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of Hewlett-Packard (HPQ), one share of Sears (SHLD), and three shares of General Elect
> How can a controlling family use a pyramidal control structure to benefit itself at the expense of other shareholders?
> What are some examples of agency problems?
> Are the rights of shareholders better protected in the United States or in France?
> How do the laws on insider trading differ for merger- versus non-merger-related trading?
> What are the costs and benefits of prohibiting insider trading?
> The Dodd-Frank Act requires that firms disclose whether employees and directors are permitted to hedge against declines in the firm’s stock price. Why might this matter for corporate governance?
> Many of the provisions of the Sarbanes-Oxley Act of 2002 were aimed at auditors. How does this affect corporate governance?
> What is the essential trade-off faced by government in designing regulation of public firms?
> What are a board’s options when confronted with dissident shareholders?
> What is a say-on-pay vote?
> The promised cash flows of three securities are listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid. Security Cash Flow Today ($) C
> How can proxy contests be used to overcome a captured board?
> Is it necessarily true that increasing managerial ownership stakes will improve firm performance?
> What inherent characteristic of corporations creates the need for a system of checks on manager behavior?
> Diversification is good for shareholders. So why shouldn’t managers acquire firms in different industries to diversify a company?
> How do the carry forward and carryback provisions of the U.S. tax code affect the benefits of merging to capture operating losses?
> Do you agree that the European Union should be able to block mergers between two U.S.based firms? Why or why not?
> If you are planning an acquisition that is motivated by trying to acquire expertise, you are basically seeking to gain intellectual capital. What concerns would you have in structuring the deal and the post-merger integration that would be different from
> Why do you think shareholders from target companies enjoy an average gain when acquired, while acquiring shareholders on average often do not gain anything?
> What are some reasons why a horizontal merger might create value for shareholders?
> Why do you think mergers cluster in time, causing merger waves?
> An American Depositary Receipt (ADR) is security issued by a U.S. bank and traded on a U.S. stock exchange that represents a specific number of shares of a foreign stock. For example, Nokia Corporation trades as an ADR with symbol NOK on the NYSE. Each A
> How does a toehold help overcome the free rider problem?
> Loki, Inc., and Thor, Inc., have entered into a stock swap merger agreement whereby Loki will pay a 40% premium over Thor’s premerger price. If Thor’s premerger price per share was $40 and Loki’s was $50, what exchange ratio will Loki need to offer?
> What are the two primary mechanisms under which ownership and control of a public corporation can change?
> Which of the following one-year $1000 bank loans offers the lowest effective annual rate? a. A loan with an APR of 6%, compounded monthly b. A loan with an APR of 6%, compounded annually, that also has a compensating balance requirement of 10% (on which
> What is the difference between evergreen credit and a revolving line of credit?
> Consider two loans with a 1-year maturity and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate? Why?
> Why might a company choose to finance permanent working capital with short-term debt?
> Quarterly working capital levels for your firm for the next year are included in the following table. What are the permanent working capital needs of your company? What are the temporary needs? Quarter ($000) 1 2 3 4 Cash $100 $100 $100 $100 Accoun
> What is the difference between permanent working capital and temporary working capital?
> Throughout the 1990s, interest rates in Japan were lower than interest rates in the United States. As a result, many Japanese investors were tempted to borrow in Japan and invest the proceeds in the United States. Explain why this strategy does not repre
> Discuss the three different arrangements under which a firm may use inventory to secure a loan.
> What is the difference between direct paper and dealer paper?
> Which of the following companies are likely to have high short-term financing needs? Why? a. A clothing retailer b. A professional sports team c. An electric utility d. A company that operates toll roads e. A restaurant chain
> What are the three steps involved in establishing a credit policy?
> The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system would decrease its collection float by as much as five days.
> The Greek Connection had sales of $32 million in 2015, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below: a. Calculate The Greek Connection’s net working capital in 2015. b. Calculate the c
> Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash poorly?
> Which of the following short-term securities would you expect to offer the highest before tax return: Treasury bills, certificates of deposit, short-term tax exempts, or commercial paper? Why?
> Ohio Valley Homecare Suppliers, Inc. (OVHS) had $20 million in sales in 2015. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000. a. Calculate the average number of inventory days outstanding for OVHS. b. The average
> Use the financial statements supplied on the next page for International Motor Corporation (IMC) to answer the following questions. a. Calculate the cash conversion cycle for IMC for both 2015 and 2016. What change has occurred, if any? All else being eq
> Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans. a. What arbitrage opportunity is available? b. Which bank would experience a surge in the
> What is meant by “stretching the accounts payable”?
> Answer the following questions: a. What is the difference between a firm’s cash cycle and its operating cycle? b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal? c. How will a firm’s cash cycle be affect
> Suppose Procter and Gamble (P&G) is considering purchasing $15 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it on a straight-line basis over the five years, after which the equipment will be worthless. It will
> Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of 7% and a tax rate of 35%, and the system will be obsol
> Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $5
> Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the fabricator for $130,000 per year for seven years. Craxton’s tax
> Your firm is considering leasing a $50,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9% APR with monthly compounding. Classify each lease below as a capital lease or operating lease, and ex
> Acme Distribution currently has the following items on its balance sheet: Under current FASB accounting standards (that is, prior to 2019), how will Acme’s balance sheet change if it enters into an $80 million capital lease for new wa
> Consider a five-year lease for a $400,000 bottling machine, with a residual market value of $150,000 at the end of the five years. If the risk-free interest rate is 6% APR with monthly compounding, compute the monthly lease payment in a perfect market fo
> Suppose the risk-free interest rate is 5% APR with monthly compounding. If a $2 million MRI machine can be leased for seven years for $22,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk?
> Your computer manufacturing firm must purchase 10,000 keyboards from a supplier. One supplier demands a payment of $100,000 today plus $10 per keyboard payable in one year. Another supplier will charge $21 per keyboard, also payable in one year. The risk
> Use EDGAR to find Qualcomm’s 10K filing for 2015. From the balance sheet, answer the following questions: a. How much did Qualcomm have in cash, cash equivalents, and marketable securities (short- and long-term)? b. What were Qualcomm’s total accounts re
> Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $225 million or lease it for $25 million per year. If it purchases the airplane, its seating can be optimize
> Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based computing. In total, it will purchase $48 million in new equipment. This equipment will qualify for acce
> Suppose an H1200 supercomputer has a cost of $200,000 and will have a residual market value of $60,000 in five years. The risk-free interest rate is 5% APR with monthly compounding. a. What is the risk-free monthly lease rate for a five-year lease in a p
> What is the distinguishing feature of how municipal bonds are taxed?
> Describe what prepayment risk in a GNMA is.
> On January 15, 2020, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 6%. On the date of issue, the CPI was 400. By January 15, 2030, the CPI had decreased to 300. What principal and coupon payment was made on January 15, 2030?
> Suppose on January 15, 2013, the U.S. Treasury issued a five-year inflation-indexed note with a coupon of 3%. On the date of issue, the consumer price index (CPI) was 250. By January 15, 2018, the CPI had increased to 300. What principal and coupon payme
> Describe the kinds of securities the U.S. government uses to finance the federal debt.
> What is the difference between a foreign bond and a Eurobond?
> Explain the difference between a secured corporate bond and an unsecured corporate bond.
> Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose onl
> Why do bonds with lower seniority have higher yields than equivalent bonds with higher seniority?
> Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature.
> General Electric has just issued a callable 10-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $102. What is the bond’s yield to maturity and yi
> Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond issue.
> Explain some of the differences between a public debt offering and a private debt offering.
> What are the main advantages and disadvantages of going public?
> Bit Box has raised $10 million in a Series A round with $40 million post-money value and a 1.5x liquidation preference, and $25 million in a Series B round with a $75 million post-money value and a 3x liquidation preference plus seniority over Series A.
> Beru.com recently raised $5 million with a pre-money value of $9 million. They are seeking to raise another $6 million. What is the largest fraction of the firm they can offer and avoid a down round?
> Your robotic automation start-up, Kela Controls, has raised capital as follows: a. How much did Kela raise in each round? b. Assuming no other securities were issued, what fraction of the firm’s shares were held by common shareholders
> Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB wil
> In early-2015, Abercrombie & Fitch (ANF) had a book equity of $1390 million, a price per share of $25.52, and 69.35 million shares outstanding. At the same time, The Gap (GPS) had a book equity of $2983 million, a share price of $41.19, and 421 million s
> What are the advantages and the disadvantages to a private company of raising money from a corporate investor?
> What are the advantages to a company of selling stock in an SEO using a cash offer? What are the advantages of a rights offer?
