In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain the profit margin because of its image and the performance of the Cayenne?
> 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.
> Is it true that a U.S. Treasury security is risk-free?
> If the firm was so successful at selling, why wouldn’t a bank or some other lender step in and provide it with the cash it needed to continue?
> Show that the NPV of a merger can be expressed as the value of the synergistic benefits, D V , less the merger premium.
> What is the impact of an increase in the volatility of the underlying stock’s return on an option’s value? Explain.
> A stock has a beta of 1.15, the expected return on the market is 11 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?
> What are the implications for bond investors of the lack of transparency in the bond market?
> In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain
> What do you suppose happens to the plane at the end of the lease period?
> An unfortunately common practice goes like this (Warning: Don’t try this at home): Suppose you are out of money in your checking account; however, your local grocery store will, as a convenience to you as a customer, cash a check for you. So, you cash a
> BlueSky lengthened its payables period to “control costs and optimize cash flow.” Exactly what is the cash benefit to BlueSky from this change? Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The
> In the context of capital budgeting, what is an opportunity cost?
> Do you think the company would have suffered the same fate if its product had been less popular? Why or why not?
> Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market?
> Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market?
> What factors influence a firm’s choice of external versus internal equity financing?
> Another option usually available is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?
> Referring back to the Bank of America example at the beginning of the chapter, note that we suggested that Bank of America’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?
> Suppose a firm enters a fixed for floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.
> Nina Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT?
> You own a stock portfolio invested 10 percent in Stock Q , 35 percent in Stock R , 20 percent in Stock S , and 35 percent in Stock T . The betas for these four stocks are .75, 1.90, 1.38, and 1.16, respectively. What is the portfolio beta?
> Looking back at the crossover bonds we discussed in the chapter, why do you think split ratings such as these occur?
> In the context of capital budgeting, what is an opportunity cost?
> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation as erosion?
> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation as erosion?
> Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
> If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is there any value in hedging your currency exposure?
> One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?
> Is it ethical for large firms to unilaterally lengthen their payables periods, particularly when dealing with smaller suppliers?
> What is the basic goal of financial management with regard to capital structure?
> What is the difference between internal financing and external financing?
> What is wrong with measuring the performance of a U.S. growth stock manager against a benchmark composed of British stocks?
> Could a company’s cash flow to stockholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?
> Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?
> What is the difference between the term structure of interest rates and the yield curve?
> Suppose that when TMCC offered the security for $24,099 the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price? Why?
> Is it unfair or unethical for corporations to create classes of stock with unequal voting rights?
> We discussed five international capital market relationships: Relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think would be most likely to be violated?
> Suppose a company in which you own stock has attracted two take over offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment affect your answer at all?
> If a company’s inventory carrying costs are $5 million per year and its fixed order costs are $8 million per year, do you think the firm keeps too much inventory on hand or too little? Why?
> No More Pencils, Inc., disburses checks every two weeks that average $58,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .015 percent per day for
> It is sometimes argued that excess cash held by a firm can aggravate agency problems and, more generally, reduce incentives for shareholder wealth maximization. How would you describe the issue here?
> What impact did the announcement have on BlueSky’s suppliers?
> As you increase the length of time involved, what happens to future values? What happens to present values?
> A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuously compounded rate of interest?
> Explain why the after tax borrowing rate is the appropriate discount rate to use in lease evaluation. Refer to the following example for Questions 10–12. In May 2011, Air Lease Corporation (ALC) announced that it had signed lease agreements for 29 aircra
> Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword rather than a shield.” Is this an ethical tactic?
> What is homemade leverage?
> Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why?
> You own a callable, convertible bond with a conversion ratio of 24.25. The stock is currently selling for $48 per share. The issuer of the bond has announced a call at a call price of 110. What are your options here? What should you do?
> Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.
> What are the three factors that determine a company’s price−earnings ratio?
> Suppose the current exchange rate for the Polish zloty is Z 3.14. The expected exchange rate in three years is Z 3.23. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rat
> If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity (ROE)?
> Why does the value of a share of stock depend on dividends?
> What impact did this change in payables policy have on BlueSky’s operating cycle? Its cash cycle?
