Question: In the previous problem, construct the balance

> In recent years, large financial institutions such as mutual funds and pension funds have become the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this tr

> Some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign trade imbalances. For each of the following scenarios, evaluate the impact the announcement would have on an Ame

> Suppose the exchange rate for the Swiss franc is quoted as SF 1.09 in the spot market and SF 1.11 in the 90-day forward market. a. Is the dollar selling at a premium or a discount relative to the franc? b. Does the financial market expect the franc to st

> 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?

> The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here: Flannery’s shareholders will receive one share of Stultz stock for every three shares they h

> What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive tactics of their management team? How are the target firm shareholders ha

> The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 6 days past due. If annual credit sales are $9.3 million, what is the company’s balance sheet amount in accounts receivable?

> It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce

> For each of the short-term marketable securities given here, provide an example of the potential disadvantages the investment has for meeting a corporation’s cash management goals: a. U.S. Treasury bills. b. Ordinary preferred stock. c. Negotiable certif

> Suppose the real rate is 2.4 percent and the inflation rate is 3.1 percent. What rate would you expect to see on a Treasury bill?

> U.S. Treasury bonds are not rated. Why? Often, junk bonds are not rated. Why?

> B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.2 million. By g

> An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $7,100,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 35 percent, what is the aftertax salva

> When the Beacon Computer Company filed for bankruptcy under Chapter 7 of the U.S. bankruptcy code, it had the following balance sheet information: Assuming there are no legal fees associated with the bankruptcy, as a trustee, what distribution of liqu

> “When evaluating projects, we’re only concerned with the relevant incremental aftertax cash flows. Therefore, because depreciation is a noncash expense, we should ignore its effects when evaluating projects.” Critically evaluate this statement.

> Suppose the following two independent investment opportunities are available to Greenplain, Inc. The appropriate discount rate is 10 percent. a. Compute the profitability index for each of the two projects. b. Which project(s) should Greenplain accept

> The investment in Project A is $1 million, and the investment in Project B is $2 million. Both projects have a unique internal rate of return of 20 percent. Is the following statement true or false? For any discount rate from 0 percent to 20 percent, Pro

> Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkies under the Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price of $1,10

> Would you be willing to pay $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise to repay?

> The most recent financial statements for Bradley, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next year’s sales are projected to be $7,28

> The 2011 balance sheet of Anna’s Tennis Shop, Inc., showed long-term debt of $1.45 million, and the 2012 balance sheet showed longterm debt of $1.52 million. The 2012 income statement showed an interest expense of $127,000. What was the firm’s cash flow

> Could a company’s change in net working capital be negative in a given year? Explain how this might come about. What about net capital spending?

> Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most o

> The treasurer of a major U.S. firm has $30 million to invest for three months. The annual interest rate in the United States is .21 percent per month. The interest rate in Great Britain is .57 percent per month. The spot exchange rate is £ .64, and the t

> Explain the purchase accounting method for mergers. What is the effect on cash flows? On EPS?

> Are the following statements true or false? Explain why. a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound to appreciate relative to the dollar. b. Suppose you are a German machine tool

> What are DIP loans? Where do DIP loans fall in the APR?

> Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flow by $1.1 million indefinitely. The current market value of Teller is $45 million,

> Essence of Skunk Fragrances, Ltd., sells 4,900 units of its perfume collection each year at a price per unit of $495. All sales are on credit with terms of 1/10, net 40. The discount is taken by 40 percent of the customers. What is the total amount of th

> What are the different inventory types? How do the types differ? Why are some types said to have dependent demand, whereas other types are said to have independent demand?

> Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following: The total collection time will be reduced by three days if the lockbox system is adopted. a. What is the PV of adopting the s

> Gruber Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next 12 years and will then cease paying dividends forever. If the required return on this stock is 10 percent, what is the current share price?

> If Treasury bills are currently paying 4.5 percent and the inflation rate is 2.1 percent, what is the approximate real rate of interest? The exact real rate?

> The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 50 percent chance of success. For $175,000 the manager can conduct a focus group that will increase the product’s chance of succ

> The Mango Republic has just liberalized its markets and is now permitting foreign investors. Tesla Manufacturing has analyzed starting a project in the country and has determined that the project has a negative NPV. Why might the company go ahead with th

> You place an order for 500 units of inventory at a unit price of $135. The supplier offers terms of 1/10, net 30. a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit? b. What is the discoun

> Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $40,000. The sausage s

> When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain.

> Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $385,000, to be paid immediately. Bill expects aftertax cash inflows of $84,000 annually for seven years, after which he plans to scrap the equipment and re

> Are the capital budgeting criteria we discussed applicable to not-for-profit corporations? How should such entities make capital budgeting decisions? What about the U.S. government? Should it evaluate spending proposals using these techniques?

> Imprudential, Inc., has an unfunded pension liability of $630 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 7.1 per

> TMCC has the right to buy back the securities on the anniversary date at a price established when the securities were issued (this feature is a term of this particular deal). What impact does this feature have on the desirability of this security as an i

> Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover 5 2.20 Profit margin 5 7.4% Equity multiplier 5 1.40 Payout ratio 5 40%

> The following table presents the long-term liabilities and stockholders’ equity of Information Control Corp. one year ago: Long-term debt………………………….………….……………… $ 65,000,000 Preferred stock……………………….…………………….…………… 4,000,000 Common stock ($1 par value)………

> Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company’s management immediately begins fig

> Use Figure 31.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.9 percent. What must the six-month risk-free rate be in Great Britain? In Japan? In Switzerland? Fig

> Describe each of the following: a. Sight draft. b. Time draft. c. Banker’s acceptance. d. Promissory note. e. Trade acceptance.

> Given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their domestic currency?

> What is the absolute priority rule?

> Describe the advantages and disadvantages of a taxable merger as opposed to a tax-free exchange. What is the basic determinant of tax status in a merger? Would an LBO be taxable or nontaxable? Explain.

> In each of the following pairings, indicate which firm would probably have a longer credit period and explain your reasoning. a. Firm A sells a miracle cure for baldness; Firm B sells toupees. b. Firm A specializes in products for landlords; Firm B speci

> A mail-order firm processes 5,700 checks per month. Of these, 60 percent are for $55 and 40 percent are for $80. The $55 checks are delayed two days on average; the $80 checks are delayed three days on average. a. What is the average daily collection flo

> Suppose you know that a company’s stock currently sells for $72 per share and the required return on the stock is 11.5 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s

> Based on the dividend growth model, what are the two components of the total return on a share of stock? Which do you think is typically larger?

> A Japanese company has a bond outstanding that sells for 92 percent of its ¥100,000 par value. The bond has a coupon rate of 2.8 percent paid annually and matures in 21 years. What is the yield to maturity of this bond?

> Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?

> In a typical month, the Jeremy Corporation receives 140 checks totaling $124,000. These are delayed four days on average. What is the average daily float?

> Bishop, Inc., has current assets of $5,700, net fixed assets of $27,000, current liabilities of $4,400, and long-term debt of $12,900. What is the value of the shareholders’ equity account for this firm? How much is net working capital?

> McLemore Industries has a zero coupon bond issue that matures in two years with a face value of $50,000. The current value of the company’s assets is $29,000, and the standard deviation of the return on assets is 60 percent per year. a. Assume the risk-f

> An investor is said to take a position in a “collar” if she buys the asset, buys an out-of-the-money put option on the asset, and sells an out-of-the-money call option on the asset. The two options should have the same time to expiration. Suppose Marie w

> Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $1,530 per ounce, the firm would go bankrupt. The current price of gold is $1,450

> Rob wishes to buy a European put option on BioLabs, Inc., a non-dividend–paying common stock, with a strike price of $40 and six months until expiration. BioLabs’ common stock is currently selling for $30 per share, and Rob expects that the stock price w

> Ken is interested in buying a European call option written on Southeastern Airlines, Inc., a non-dividend–paying common stock, with a strike price of $75 and one year until expiration. Currently, Southeastern’s stock sells for $78 per share. In one year

> T-bills currently yield 4.8 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year. a. What is the value of a call option with a $60 exercise p

> A company has a single zero coupon bond outstanding that matures in 10 years with a face value of $15 million. The current value of the company’s assets is $13.4 million, and the standard deviation of the return on the firm’s assets is 39 percent per yea

> In the previous problem, assume the risk-free rate is only 5 percent. What is the risk-neutral value of the option now? What happens to the risk-neutral probabilities of a stock price increase and a stock price decrease? Data from previous problem A stoc

> The sales budget for your company in the coming year is based on a quarterly growth rate of 10 percent with the first-quarter sales projection at $225 million. In addition to this basic trend, the seasonal adjustments for the four quarters are 0, 2$16, 2

> What is the duration of a bond with two years to maturity if the bond has a coupon rate of 7 percent paid semiannually, and the market interest rate is 5 percent?

> Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy? You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high-t

> What are the key differences between leasing and borrowing? Are they perfect substitutes?

> You purchase one call and sell one put with the same strike price and expiration date. What is the delta of your portfolio? Why?

> Suppose Sunburn Sunscreen and Frostbite Thermalwear in the previous problems have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 29 percent per year. a. What is the

> A stock is currently priced at $50. The stock will never pay a dividend. The risk-free rate is 12 percent per year, compounded continuously, and the standard deviation of the stock’s return is 60 percent. A European call option on the stock has a strike

> Use the Black–Scholes model for pricing a call, put–call parity, and the previous question to show that the Black–Scholes model for directly pricing a put can be written as follows: P = E × e–Rt ×N(–d2) – S × N(–d1)

> Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83. a. Are the call options in the money? What is the intrinsic value of an RWJ Corp. call option? b. Are the put options in the money?

> In the chapter we noted that the delta for a put option is N( d 1 ) − 1. Is this the same thing as −N(− d 1 )?

> The put–call parity condition is altered when dividends are paid. The dividend-adjusted put–call parity formula is: S × e−dt − P = E × e−Rt + C where d is again the continuously compounded dividend yield. a. What effect do you think the dividend yield wi

> In addition to the five factors discussed in the chapter, dividends also affect the price of an option. The Black–Scholes option pricing model with dividends is: C = S × e–dt × N(d1) – E × e–Rt × N(d2) d1 = [ln(S/E) + (R – d + σ2/2) × t]/(σ × √t ) d2 = d

> Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $280 million, but if the project is a failure, the firm will be worth

> If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk? Would it buy or sell yen futures? Does the way the exchange rate is quoted in the futures contract matter?

> Insurance, whether purchased by a corporation or an individual, is in essence an option. What type of option is an insurance policy?

> Brozik Corp. has a zero coupon bond that matures in five years with a face value of $60,000. The current value of the company’s assets is $57,000, and the standard deviation of its return on assets is 50 percent per year. The risk-free rate is 6 percent

> Survivor, Inc., an all-equity firm, has eight shares of stock outstanding. Yesterday, the firm ’ s assets consisted of nine ounces of platinum, currently worth $1,750 per ounce. Today, the company issued Ms. Wu a warrant for its fair value of $1,750. The

> What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to the company? Required information The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil explorati

> Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt–equity ratio of .40, but the industry target debt–equity ratio is .35. The industry average beta is 1.2. The market risk

> High electricity costs have made Farmer Corporation’s chicken plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. The lease payments wi

> Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $30,000 that matures in one year. The current market value of the firm’s assets is $36,400. The standard deviation of the return on the firm’s assets is 53 percent per ye

> Lone Star Industries just issued $235,000 of perpetual 8 percent debt and used the proceeds to repurchase stock. The company expects to generate $118,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as div

> A put and a call have the same maturity and strike price. If they have the same price, which one is in the money? Prove your answer and provide an intuitive explanation.

> Return to the case of the diagnostic scanner discussed in Problems 1 through 6. Suppose the entire $5,200,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan will be repaid in equal installments. Create a lease-

> Mojito Mint Company has a debt–equity ratio of .35. The required return on the company’s unlevered equity is 13 percent, and the pretax cost of the firm’s debt is 7 percent. Sales revenue for the company is expected to remain stable indefinitely at last

> Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available contracts. What does your answer tell you about the general relationship between

> A company has a large bond issue maturing in one year. When it matures, the company will float a new issue. Current interest rates are attractive, and the company is concerned that rates next year will be higher. What are some hedging strategies that the

> Kevin Nomura is a Japanese student who is planning a one year stay in the United States. He expects to arrive in the United States in eight months. He is worried about depreciation of the yen relative to the dollar over the next eight months and wishes t

> Omega Airline ’ s capital structure consists of 2.7 million shares of common stock and zero coupon bonds with a face value of $18 million that mature in six months. The firm just announced that it will issue warrants with an exercise price of $95 and six

> National Electric Company (NEC) is considering a $45 million project in its power systems division. Tom Edison, the company’s chief financial officer, has evaluated the project and determined that the project’s unlevered cash flows will be $3.1 million p

> You find a put and a call with the same exercise price and maturity. What do you know about the relative prices of the put and call? Prove your answer and provide an intuitive explanation.

> Automobiles are often leased, and there are several terms unique to auto leases. Suppose you are considering leasing a car. The price you and the dealer agree on for the car is $36,000. This is the base capitalized cost. Other costs that may be added to

> Seger, Inc., is an unlevered firm with expected annual earnings before taxes of $21 million in perpetuity. The current required return on the firm’s equity is 16 percent, and the firm distributes all of its earnings as dividends at the end of each year.

> Suppose the firm in the previous problem is considering two mutually exclusive investments. Project A has an NPV of $1,200, and Project B has an NPV of $1,600. As a result of taking Project A, the standard deviation of the return on the firm’s assets wil