Question: Osiris Inc. is considering the acquisition of

> Fiona Berling’s division of Mcsystems generates a net operating profit after tax, or NOPAT, of $1 million on an invested capital base of $1 million. The weighted average cost of capital of Ms Berling’s division is 20 percent. The division has been asked

> Below are the last three years’ financial statements of Sentec Inc., a distributor of electrical fixtures. a. Compute Sentec’s working capital requirement (WCR) on December 31, Year 1, Year 2, and Year 3. b. Prepare Se

> Suppose there are no government zero-coupon bonds. If investors demand default- free zeros, outline the process that would create these zeros using government coupon-paying bonds. Illustrate the method with the case of a four-year, 5 percent government z

> Equation 18.7 shows that market value added (MVA) of an investment project is the present value of the stream of the future economic value added (EVA) of the project. Because a firm can be viewed as a basket of investment projects, the MVA of a firm is s

> The Southern Communication Corporation (SCC) has $1 billion of capital invested in several telecommunication projects that are expected to generate a pre-tax operating profit of $170 million next year. SCC has an estimated pre-tax cost of capital of 15 p

> You want to test the speed with which stock market prices adjust to positive earnings’ announcements. Company A makes its earnings announcement on May 20 and Company B on June 16. You collected for each company daily share price returns

> The market portfolio has an expected return of 9 percent with a 10 percent volatility. The risk-free rate is 4 percent. A stock has a 20 percent volatility and a correlation coefficient of minus 0.10 with the market. a. What is the stock’s beta? What doe

> A project with a cash outlay now is followed by positive expected cash flows in the future and a positive net present value. What does this information tell you about the project’s discounted payback period, internal rate of return, profitability index,

> Following are the balance sheets at the end of year–1 and Year 0 followed by the Year 0 income statement of Sactor Inc. The annual report for Year 0 provides the following supplemental information: 1. The restructuring charge of $43 mil

> Identify at least three value drivers related to the management of operations and three strategic value drivers that directly affect economic value added (EVA). Show how these drivers might increase or decrease EVA.

> The Electronics Machines Corporation (EMC) is considering buying a $300,000 piece of equipment that could raise EMC’s sales revenues by $1 million the first year, $2 million the second year, and $1.8 million the third year. The cost of the piece of equip

> Explain why each of the following statements is generally incorrect: a. “The firm with the highest market value is the one that has created the most value for its shareholders.” b. “If a firm’s market value added (MVA) is positive, then its current retur

> Chateau Cheval Noir is one of the leading premium wine producers of France, with its 50-acre vineyard at St. Julien in the Bordeaux region. The owners have wanted to expand their production, but the scarcity and astronomical prices asked for vineyards ad

> Consider a two-year, 5 percent coupon bond selling at par. Answer the following questions. a. What is the bond’s yield to maturity? What assumption does the yield make regarding the first coupon payment? b. Assume that in a year the one-year market rate

> The Brankton Company, a US firm, considers investing in Spain. The investment will cost €125 million and is expected to generate, after taxes, €30 million a year during the next five years in real terms, that is, before inflation. The project would be li

> You are a currency arbitrager for a Japanese bank. The spot rate this morning is JPY/ USD 111.22, and early indications are that short-term interest rates in the United States (90-day rates) are about to rise from their current level of 3.125 percent. Th

> The finance manager of a US pharmaceutical company has $10 million to invest for six months. The annual interest rate in the United States is 3 percent. The annual interest rate in the United Kingdom is 1 percent. The spot rate of exchange is $1.60 per £

> As a trader, you can trade based on the following data: a. What is the return on one US-dollar deposit? b. What is the return in US dollars on a dollar-covered euro lending? c. Can the given information provide an arbitrage opportunity?

> How would you rank these three firms in decreasing order of expected debt ratios: a biotechnology firm, an auto-parts firm, and an electric utility firm? Explain.

> The Great Eastern Toys Company is evaluating a new product. The cash flows that are expected from this product over its five years’ expected life are shown below. Note that the final year’s cash flow includes $2,000 of

> Indicate in one sentence what the following parity relation says: a. Purchasing power parity relation b. International Fisher effect c. Interest-rate parity relation d. The relation between forward rates and future spot rate

> Refer to the data in Exhibit 3.12 to answer the following questions. a. What are the beta coefficients of the five stocks? b. What are the covariances and the correlation coefficients of the five stocks’ returns with those of the market portfolio? c. Sho

> Charles has a problem. His boss thinks that options are a form of gambling. The company he works for exports to European markets, which require euro invoicing. The market is cut-throat, and sales are made on the basis of competitive bidding. The average

> MPC imports computer equipment from Japan for sale in the US market. Monthly imports have averaged ¥250 million to ¥275 million over the past year. A similar volume is expected for the coming year. Because of the volatility of the exchange rate between t

> Thalin Inc. has decided to extend its current product line. To finance the project, the firm is considering issuing a ten-year, 10 percent coupon bond. The firm has made public that its target debt-to-equity ratio of 30 percent is not going to change in

> A major US clothes manufacturing and distributing company plans to expand in Asia. To reduce its transportation costs, it wants to set up its own manufacturing plant in Asia. Two countries are under consideration: China and Indonesia. The expected cash f

> A US-based multinational corporation has a wholly owned subsidiary in the Philippines that manufactures electronics products to be sold in the North American market. The equity of the Philippines subsidiary is 2,500 million Philippine peso (PHP) (from th

> The Pacific Food Company (PFC) has created a new concept restaurant that serves low-calorie healthy pizza at competitive prices. The restaurant costs $1.2 million to launch and is expected to generate a free-cash-flow stream with a present value of $1 mi

> The American Food Corporation (AFC) and the Canadian Mining Corporation (CMC) are considering a merger whose objective is to reduce the volatility of their combined assets. AFC assets are worth $100 million and have a 30 percent volatility; they are fund

> The board of the PQS Corporation has decided to give its employees 5 million of 4-year at-the-money call options on PQS stock. If the options are exercised, the company will issue new shares. There are 20 million PQS shares outstanding. PQS stock price i

> A 3-month European call option on VHQ shares trades at $5. Its exercise price is $50 and the stock price is currently $50.50. a. Using the put-call parity relationship, calculate the price of a put on VHQ shares with the same maturity and exercise price

> The Global Chemical Company (GCC) uses the following criteria to make capital investment decisions: 1. Effect on earnings per share (must be positive) 2. Payback period (must be less than six years) 3. Internal rate of return (must be at least 12 percent

> Lannion Co. is a manufacturing firm with no debt outstanding. It is considering bor- rowing $25 million at 8 percent and using the proceeds to buy back shares. Its equity market value is $100 million, and its profits are taxed at 35 percent. a. What woul

> Return to the WTM case in the chapter where it is said that WTM could hedge its exposure to the price risk of copper by purchasing a call option for $336 that would give it the right to buy one ton of copper in three months for $6,000. The spot price of

> You own a $1.5 million diversified portfolio of stocks that you will have to sell in three months’ time to finance the purchase of a house. Fearing that the stock market might go down significantly over the next three months, you would like to hedge your

> Motoran Inc. is contemplating the acquisition of a competitor, Tortoran Corp., for $25 million. Motoran’s market value is $40 million, whereas that of Tortoran is $20 million. Motoran expects that after the merger the administrative costs of the two comp

> You invest one-third of your wealth in each of three stocks. The expected return and standard deviation of each individual stock is 10 percent and 20 percent, respectively. Each stock has a pairwise correlation of 0.50 with the returns of the two other s

> Jack Blair, the treasurer of the Simpson Corporation (SC) will need to borrow $1 million for three months starting December 20. He would like to hedge the borrowing rate with interest futures contracts. Searching for the right contract, he found that the

> Show that the forward price given by equation 16.3 is consistent with the forward price given by the spot-forward parity equation 16.2.

> Autos for the Future (AFF) is considering a joint venture with Autos for Everyone (AFE) to build a new automobile. Each company will invest €250 million in the joint venture. The present value of the expected cash flows to AFE is €245 million. In order t

> ZHU share price is $50. The risk-free rate is 2 percent. Suppose you want to enter a forward contract for delivery of ZHU shares in one year. Assuming that ZHU won’t pay any dividend in the coming year: a. What are the forward price of the ZHU shares and

> HDM, a computer manufacturing company, holds computer parts in its inventory whose prices fall rapidly because suppliers can produce them faster, more efficiently, and in large quantities just a few months after they are first introduced on the market. H

> The General Construction Company (GCC) is expecting a cash flow from assets of €50 million next year that is expected to grow forever at 3 percent. Its cost of capital is 11 percent. The firm is exposed to the following three risks: • There is a 10 perce

> Lolastar Co. is evaluating two competing investment projects. They both require an investment of $25 million. The company cost of capital is 10 percent for projects of this type. The expected cash flows are as follows: a. Which of the two projects would

> What are the major issues that a firm risk policy must address? Indicate what a firm could do to resolve these issues.

> Albarval Co. expects its return on assets to be stable at 12 percent, assuming a target capital structure of 80 percent equity and 20 percent debt. Suppose that the firm’s borrowing rate is 8 percent, for a wide range of capital structures. a. Suppose th

> Consider a 6 percent coupon bond with a $1,000 face value maturing tomorrow. a. What would be the price at which the bond is quoted? b. According to bond conventions, what is the bond’s flat price? c. What is the accrued interest if the bond pays a coupo

> A firm has no financial investments, and all its activities are in the domestic market where it faces no foreign competition. It has a debt-to-equity ratio of 1 and is the subject of a 40 percent tax rate. Its beta coefficient is 1.20. a. What are the ri

> Explain the difference between the risks that make up the following pairs: a. Business risk versus financial risk b. Diversifiable risk versus undiversifiable risk c. Systematic risk versus unsystematic risk d. Insurable risk versus uninsurable risk e. P

> Stock A has an expected return of 8 percent and an 18 percent volatility. Stock B has an expected return of 16 percent and a 30 percent volatility. The correlation coefficient between the returns of stock A and stock B is 0.30. a. What is the expected re

> We wish to estimate the value of Portal Inc. under alternative assumptions about the firm’s performance. a. Using the discounted cash flow (DCF) approach to valuation and the following assumptions, provide an estimate of Portal’s value. • This year sales

> Refer to the data on AWC in Exhibit 11.17 to answer the following questions: a. What is the net present value of the 8 percent project? Explain its sign. b. What is the net present value of the 10 percent project? Explain its sign. c. What is the net pre

> Refer to the data on AWC in Exhibit 11.16. Suppose the board of AWC decides to retain $250 million of cash permanently and invest it in a perpetual government bond. a. What would be AWC’s share price in this case? Compare it to the share price if AWC pay

> Refer to the data on AWC in Exhibit 11.16. Suppose the board of AWC decides to invest the $250 million of cash in 1-year government bills yielding 4 percent and use the proceeds from the sale of the bills to pay a higher dividend next year. a. What would

> A company borrowed $10 million for five years from Atlantic Bank. The company pays Atlantic Bank a fixed annual rate of 8 percent and must pay back the $10 million loan at the end of the borrowing period. A year has passed since the loan was made and Atl

> The International Supplies Company (ISC) has convertible preferred stocks trading at $80 and serving an annual dividend of $2.40. The preferred is convertible into two shares of ISC common stocks. Shares of common stocks are currently trading at $32. a.

> The General Distribution Company (GDC) is a privately-held company in the whole- sale food distribution sector. You collected data on a sample of five listed companies in the same sector which are similar to GDC. Get five estimates of GDCâ€&#1

> Thorenberg Inc. is considering the purchase of a machine from Hydraulic Engineering Company (HECO) to make hard pressed-metal sheets. The machine will cost $100,000 and would replace the currently used one. Savings are expected to be $60,000 per year, an

> Micro-Electronics Corporation (MEC) has just announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $20. Before the announcement, MEC shares were trading at $26, and there were 50 million shares o

> Micro-Electronics Corporation (MEC) has just announced that it will issue 10 million shares of common stock through a rights issue at a subscription price of $20. Before the announcement, MEC shares were trading at $26, and there were 50 million shares o

> Murlow Company is a privately held firm. David Murlow, its owner-manager, has been approached by Murson Inc. for a possible acquisition. The firm has no debt. What is the minimum price David Murlow should ask, given the following information about his fi

> The Southern Appliance Company (SAC) has a current free cash flow of $10 million that is expected to grow in perpetuity at a constant annual rate of 5 percent. The firm has $40 million of cash and 10 million shares outstanding. SAC has no debt and its sh

> Briefly explain the distinction between the two items that make up each of the following pairs: a. Direct financing versus indirect financing b. Primary markets versus secondary markets c. Organized exchanges versus over-the-counter markets d. Domestic s

> Financial analysts expect Theron Co.’s earnings and dividends to grow at a rate of 16 percent during the next three years, 12 percent in the fourth and fifth years, and at a constant rate of 6 percent thereafter. Theron’s dividend, which has just been pa

> You borrowed $80,000 to finance the purchase of a property through a standard, 30-year fixed rate mortgage with an annual interest rate of 8 percent, compounded monthly. a. What is your monthly mortgage payment? b. How much interest and how much principa

> Therol Inc. has no debt. Its invested capital generates $5 of earnings per share, and all these earnings are paid out as dividends. a. Suppose that Therol’s shareholders require a return of 10 percent on their invest- ment in the firm. What is Therol’s s

> Hellenic Vultures is expected to generate $100,000 of net cash flows next year, $120,000 the year after, and $150,000 for the following three years. It is expected that the firm could be sold for $500,000 at the end of the fifth year. The owners of Helle

> A two-year corporate bond has a coupon rate of 4 percent. The 1-year spot rate is 3 percent and the forward rate is 5 percent. The bond’s credit spread is 1 percent for both the one-year and the two-year maturities. a. What is the price of the bond expre

> Five years ago, your favorite aunt won a $1million lottery. The prize money is paid out $50,000 per year for 20 years. Unfortunately, your aunt needs as much as $250,000 cash now to pay for medical bills that she and your uncle incurred as a result of an

> The municipal government has imposed a temporary, five-year tax increase on the value of property that will raise $80 million at the end of the first year. Property values are estimated to grow at a rate of 3 percent per year. a. What is the present valu

> Although he was initially satisfied by the apparent profitability of the new project, the Avon company’s chief executive officer (CEO) was troubled by some other aspects of the project that he thought the finance manager had left out of the analysis. Fir

> According to the Modified Accelerated Cost Recovery System (MACRS) of depreciation imposed by US tax law, autos and computers must be depreciated the following way for tax purposes: a. What is the present value of the interest tax shield from the purchas

> Reviewing the cash-flow forecasts of a new investment project that appear in the fol- lowing table, the Avon company’s finance manager noted that there was no mention of any effect of the investment on the firm’s accou

> The Great Eastern Toy Company management is considering an investment in a new product. It would require the acquisition of a piece of equipment for $16 million with a ten-year operational life, providing regular maintenance is carried out. Salvage value

> Assume that the Clampton Company in the previous question expects to pay income taxes of 40 percent and that a loss on the sale or disposal of equipment is treated as an ordinary deduction, resulting in a tax saving of 40 percent. The Clampton Company wa

> Mergecandor Corp. is considering the acquisition of Tenderon Inc. Mergecandor has two million shares outstanding selling at $30, or 7.5 times its earnings per share, and Tenderon has one million shares outstanding selling at $15, or five times its earnin

> The Clampton Company is considering the purchase of a new machine to perform operations currently being performed on different, less efficient equipment. The pur- chase price is $110,000, delivered and installed. A Clampton production engineer estimates

> The company’s financial manager and accountant were arguing over how to properly take account of inflation when analyzing capital investment projects. The accountant typically included estimates of price-level changes when estimating and projecting futur

> Maintainit Inc. is asked to submit a bid for watering and spraying trees in a housing development for the next five years. To provide this service, Maintainit would have to buy new equipment for $100,000 and invest $30,000 in its working capital requirem

> Suppose you have decided to set up a personal pension fund for your retirement. You have just turned 25. You expect to retire at age 65 and believe it is reasonable to count on living at least 20 years after retirement. Furthermore, you wish to have an a

> Your brother-in-law offers you the opportunity to invest $15,000 in a project that he promises will return $17,000 at the end of the year. Because you have only $3,000 in cash, you will have to borrow $12,000 from your bank. The bank charges interest at

> The Alpha Printer Company is considering the purchase of a $2 million printing machine. Its economic life is estimated at five years, and it will have no resale value after that time. The machine would generate an additional $200,000 of earnings after ta

> You are currently a member of a club whose annual membership fee is $2,000. The fee is expected to increase by 3 percent per year. a. Would you buy for $65,000 a lifelong family membership to the club that can be passed down to your descendants? You can

> You must choose between the two projects whose cash flows are shown below. The projects have the same risk. a. Compute the net present value (NPV) and the profitability index (PI) for the two projects. Assume a 10 percent discount rate. b. Which of the p

> Consider the three projects A, B, and C. The cost of capital is 12 percent, and the projects have the following expected cash flows: a. What is the internal rate of return of the three projects? b. What is the net present value of the three projects? c.

> Starline & Co. has no debt, and its cost of equity is 14 percent. It can borrow at 8 percent. The corporate tax rate is 40 percent. a. Calculate the cost of equity and the weighted average cost of capital (WACC) of Starline if it decides to borrow up to

> You expect that your daughter will go to college ten years from now. Taking account of inflation, you estimate that you will need $160,000 to support her during her years in college. Assume an interest rate of 4 percent on your saving accounts. How much

> You are buying a car. No Better Deals will give you $500 off the list price on a $10,000 car. a. You can get the same car from Best Deals if you pay $4,000 down and the rest at the end of two years. If the interest rate is 12 percent, where would you buy

> You can invest in a machine that costs $500,000. You can expect revenues net of any expense, except maintenance costs, of $150,000 at the end of each year for five years. You will subcontract the maintenance costs at a rate of $20,000 a year, to be paid

> A basketball player has just signed a $30 million contract to play for three years. She will receive $5 million as an immediate cash bonus, $5 million at the end of the first year, $8 million at the end of the second year, and the remaining $12 million a

> Rollon Inc. is comparing the operating costs of two types of equipment. The standard model costs $50,000 and will have a useful life of four years. Operating costs are expected to be $4,000 per year. The superior model costs $90,000 and will have a usefu

> Suppose you deposit $1,000 in one year, $2,000 in two years, and $4,000 in three years. Assume a 4 percent interest rate throughout. a. How much will you have in five years? b. Suppose you plan to withdraw $1,500 in four years and there is no penalty for

> You must choose between the two projects whose cash flows are shown below. The projects have the same risk. a. Compute the internal rate of return and the net present value for the two projects. Assume a 10 percent discount rate. b. Which of the projects

> Mars Electronics is a distributor for the Global Electric Company (GEC), a large manufacturer of electrical and electronics products for consumer and institutional markets. On the next page are the semi-annual financial statements of the company for the

> You have just read an advertisement stating, “Pay us $100 a year for the next ten years and we will pay you $100 a year thereafter in perpetuity.” If this is a fair deal, what is the implied rate of interest?

> Below are the last three years’ financial statements of Sentec Inc., a distributor of electrical fixtures. / / a. Compute Sentec Inc.’s working capital requirement (WCR) and prepare its mana- gerial balance sheets at Year-end 1, Year-end 2, and Year-end

> Below are summarized balance sheets and income statements of three US companies: // a. Compute the working capital requirement of the three firms and prepare their managerial balance sheets. b. Compute the three firms’ operating margin, invested capital

> Comment on the following statements: a. “Only synergistic mergers have the potential to create value.” b. “If a merger cannot generate synergistic gains through cost reductions, it will not create value.” c. “Conglomerate mergers can create value through

> Under what intuitive condition will an increase in debt (either short-term or long- term) relative to equity always increase a firm’s return on equity? Can the structure of return on equity relationship be used to determine a firm’s optimal debt-to-equit

> Cite two cases in which a bad decision (that is, a decision that negatively affects the market value of a firm) would increase its return on equity.