Question: List the factors that affect the value

> Why is interest expense said to cost the firm substantially less than the actual expense, while dividends cost it 100 percent of the outlay?

> When does insider trading occur? What government agency is responsible for protecting against the unethical practice of insider trading?

> Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?

> Why are institutional investors important in today's business world?

> What issue does agency theory examine? Why is it important in a public corporation rather than in a private corporation?

> Why is trend analysis helpful in analyzing ratios?

> Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity.

> What form of partnership allows some of the investors to limit their liability? Explain briefly.

> If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, in which ratios would each group be most interested, and for what reasons?

> What procedure(s) would you recommend for a multinational company in studying exposure to political risk? What actual strategies can be used to guard against such risk?

> Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent inte

> What factors influence a U.S. business firm to go overseas?

> What is meant by translation exposure in terms of foreign exchange risk?

> Explain how exports and imports tend to influence the value of a currency.

> What allegations are sometimes made against foreign affiliates of multinational firms and against the multinational firms themselves?

> Comment on any dilemmas that multinational firms and their foreign affiliates may face in regard to debt ratio limits and dividend payouts.

> What is LIBOR? How does it compare to the U.S. prime rate?

> What are the differences between a parallel loan and a fronting loan?

> Explain the functions of the following agencies.

> Suggest some ways in which firms have tried to avoid being part of a target takeover.

> The Office Automation Corporation is considering a foreign investment. The initial cash outlay will be $10 million. The current foreign exchange rate is 2 ugans = $1. Thus the investment in foreign currency will be 20 million ugans. The assets have a use

> It is possible for the post merger P/E ratio to move in a direction opposite to that of the immediate post merger earnings per share. Explain why this could happen.

> If a firm wishes to achieve immediate appreciation in earnings per share as a result of a merger, how can this be best accomplished in terms of exchange variables? What is a possible drawback to this approach in terms of long-range considerations?

> What is synergy? What might cause this result? Is there a tendency for management to over- or underestimate the potential synergistic benefits of a merger?

> Explain how convertible bonds and warrants are similar and different.

> How can a company force conversion of a convertible bond?

> The price of Haltom Corporation 5¼ 2019 convertible bonds is $1,380. For the Williams Corporation, the 6⅛ 2018 convertible bonds are selling at $725.

> Why are investors willing to pay a premium over the theoretical value (pure bond value or conversion value)?

> You buy a stock option with an exercise price of $50. The cost of the option is $4. If the stock ends up at $56, indicate whether you have a profit or loss with a call option? With a put option?

> Suggest two areas where the use of futures contracts is most common. What percent of the value of the underlying security is typical as a down payment in a futures contract?

> Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?

> The Good smith Charitable Foundation, which is tax-exempt, issued debt last year at 9 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 25 percent higher—that is, firms that paid 11 percent for debt last year

> Solar Energy Corp. has $4 million in earnings with four million shares outstanding. Investment bankers think the stock can justify a P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

> Arrange the following income statement items so they are in the proper order of an income statement:

> Telecom Systems can issue debt yielding 9 percent. The company is in a 30 percent bracket. What is its after tax cost of debt?

> Swank Clothiers earned $640 million last year and had a 30 percent payout ratio. How much did the firm add to its retained earnings?

> Dome Metals had credit sales of $180,000 yearly. Dome offered a 3 percent discount for payment in 18 days. What would the average receivables balance be?

> Suppose a Polish zloty is selling for $0.3414 and a British pound is selling for 1.4973. What is the exchange rate (cross rate) of the Polish zloty to the British pound? That is, how many Polish zlotys are equal to a British pound?

> Plunkett Gym Equipment Inc. has a $1,000 par value convertible bond outstanding that can be converted into 25 shares of common stock. The common stock is currently selling for $34.75 a share, and the convertible bond is selling for $960. a. What is the c

> What are the basic advantages to the corporation of issuing convertible securities?

> The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are shown. a. Compute the difference between

> Ralston Gourmet Foods Inc. earned $360 million last year and retained $252 million. What is the payout ratio?

> Time Watch Co. has $46 million in earnings and is considering paying $6.45 million in interest to bondholders and $4.35 million to preferred stockholders in dividends. a. What are the bondholders’ contractual claims to payment? b. What are the preferred

> Robbins Petroleum Company is four years in arrears on cumulative preferred stock dividends. There are 690,000 preferred shares outstanding, and the annual dividend is $6.50 per share. The vice president of finance sees no real hope of paying the dividend

> Peabody Mining Company’s common stock is selling for $50 the day before the stock goes ex-dividend. The annual dividend yield is 5.6 percent, and dividends are distributed quarterly. Based solely on the impact of the cash dividend, by how much should the

> Moon and Sons Inc. earned $120 million last year and retained $72 million. What is the payout ratio?

> You buy an 8 percent, 25-year, $1,000-par-value floating rate bond in 1999. By the year 2004, rates on bonds of similar risk are up to 11 percent. What is your one best guess as to the value of the bond?

> King’s Department Store is contemplating the purchase of a new machine at a cost of $22,802. The machine will provide $3,500 per year in cash flow for nine years. King’s has a cost of capital of 10 percent. Using the internal rate of return method, evalu

> Front Beam Lighting Company has the following ratios compared to its industry for last year. Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared to the industry. No numbers are necessary; a one-sent

> Classify the following balance sheet items as current or noncurrent: Retained earnings………………………………………Bonds payable Accounts payable……………………………Accrued wages payable Prepaid expenses………………………………..Accounts receivable Plant and equipment………………………Capital in

> KeySpan Corp. is planning to issue debt that will mature in 2035. In many respects, the issue is similar to the currently outstanding debt of the corporation. a. Using Table 11-3, identify the yield to maturity on similarly outstanding debt for the firm

> Why might a stock dividend or a stock split be of limited value to an investor?

> The shares of the Dyer Drilling Co. sell for $60. The firm has a P/E ratio of 15. Forty percent of earnings is paid out in dividends. What is the firm’s dividend yield?

> The stock of Pills Berry Company is currently selling at $60 per share. The firm pays a dividend of $1.80 per share. a. What is the annual dividend yield? b. If the firm has a payout rate of 50 percent, what is the firm’s P/E ratio?

> Assume you are risk-averse and have the following three choices. Which project will you select? Compute the coefficient of variation for each.

> What effect did the recession of 2007–2009 have on government regulation?

> What factors beyond the normal domestic analysis go into a financial feasibility study for a multinational firm?

> Differentiate between the spot exchange rate and the forward exchange rate.

> What are ADRs?

> What is the danger or concern in floating a Eurobond issue?

> What is a letter of credit?

> What risks does a foreign affiliate of a multinational firm face in today’s business world?

> How is a stock split (versus a stock dividend) treated on the financial statements of a corporation?

> How is goodwill now treated in a merger?

> What is the difference between horizontal integration and vertical integration? How does antitrust policy affect the nature of mergers?

> Why might the portfolio effect of a merger provide a higher valuation for the participating firms?

> What is the difference between a merger and a consolidation?

> What is the purpose(s) of the two-step buyout from the viewpoint of the acquiring company?

> Why do management and stockholders often have divergent viewpoints about the desirability of a takeover?

> What is a typical merger premium paid in a merger or acquisition? What effect does this premium have on the market value of the merger candidate and when is most of this movement likely to take place?

> Name three industries in which mergers have been prominent.

> Explain why warrants are issued. (Why are they used in corporate finance?)

> Explain the difference between basic earnings per share and diluted earnings per share.

> Explain the relationship between a company’s growth possibilities and its dividend policy.

> What is meant by a step-up in the conversion price?

> Why is it said that convertible securities have a floor price?

> What are the differences between a call option and a put option?

> What are the reasons that warrants often sell above their intrinsic value?

> If you buy stock on the ex-dividend date, will you receive the upcoming quarterly dividend?

> Discuss how desire for control may influence a firm’s willingness to pay dividends.

> Since initial contributed capital theoretically belongs to the stockholders, why are there legal restrictions on paying out the funds to the stockholders?

> How does the marginal principle of retained earnings relate to the returns that a stockholder may make in other investments?

> What is the most likely explanation for the use of preferred stock from a corporate viewpoint?

> How does the preemptive right protect stockholders from dilution?

> How does the stockholder, in general, feel about the relevance of dividends?

> What is the purpose of cumulative voting? Are there any disadvantages to management?

> Why might a corporation use a special category such as founders’ stock in issuing common stock?

> What is an advantage of floating rate preferred stock for the risk-averse investor?

> Why has corporate management become increasingly sensitive to the desires of large institutional investors?

> What is the purpose of serial repayments and sinking funds?

> What method of “bond repayment” reduces debt and increases the amount of common stock outstanding?

> Take the following list of securities and arrange them in order of their priority of claims: Preferred stock………………………..Senior debenture Subordinated debenture………..Senior secured debt Common stock………………………Junior secured debt

> Discuss the relationship between the coupon rate (original interest rate at time of issue) on a bond and its security provisions.

> Explain the close parallel between a finance lease and the borrow-purchase decision from the viewpoint of both the balance sheet and the income statement.

> What are some specific features of bond agreements?

> Discuss the difference between a passive and an active dividend policy.

> What do we mean by capitalizing lease payments?

> What is a Eurobond?

> Explain how floating rate bonds can save the investor from potential embarrassments in portfolio valuations.

> What cost of capital is generally used in evaluating a bond refunding decision? Why?