The Findlay Company has debentures outstanding (par value ¼ $1,000) that are convertible into common stock at a price of $50 per share. The convertible bonds have a coupon interest rate of 9 percent and mature in 18 years. The convertible bonds are callable at 103 percent of par value. The company has a marginal tax rate of 40 percent. a. Calculate the conversion value of the bonds if Findlay’s common stock is selling for $45 per share. b. Calculate the straight-bond value, assuming that straight debt of equivalent risk and maturity is yielding 12 percent. c. Determine the conversion premium if the market value of the bonds is $935. d. Determine the conversion value of the bonds if the company’s common stock price increases to $65 per share. e. Given the information in part d, what is a realistic estimate of the market price of the convertible bond issue? (No calculations are required for this part of the problem.)
> How can ethics be taught?
> Briefly describe the financial scandals at Enron, WorldCom, Vivendi, and Parmalat; what other scandals have happened in recent years or months?
> How does corporate social responsibility contribute to successful business operations?
> Why is the ethical character of people so important to business and society?
> What do you consider the key characteristics of a person of integrity?
> Is sustainable business and economic development the answer to the globalization controversy?
> What are some steps countries can take to better enforce intellectual property rights in their jurisdictions?
> Criminal laws vary widely throughout the world. What may be a “crime” in one country, may represent permissible conduct in another locale. Why do you think there are such vast global differences in this regard?
> What are some arguments in favor of permitting at least some level of “corruption” in the conduct of business throughout the world?
> Are there any places in the world, today, where “pure”, “free market” capitalism exists? If so, what is it about these locations that permits this ideological approach to thrive?
> What is the difference between management accounting and financial accounting?
> Do you think, overall, that countries in the world are becoming more democratic, or less democratic, in nature? Why?
> 1. Why do you think the democracy of Ghana continues to permit local towns or regions to have tribal chiefs, kings, and the like? Do you think this tradition will continue into the future? 2. Would you have made the same decision as King Peggielene Barte
> While domestic institutions play an important role in the globalization process, what are some of the fundamental policy measures that those countries need to promote in order to benefit from globalization?
> Globalization can be facilitated only if national governments are willing to participate in that process. What roles can the three major international institutions play to be a part of this facilitation process?
> How can companies competitively set international prices while avoiding allegations of dumping?
> How should a business organization choose a location for its production facilities?
> Argue why some companies should pursue global production and other companies should not.
> List the factors that a firm should consider when making an outsourcing decision.
> Briefly describe the main sources of finance for international trade and investment. Distinguish between short-term and long-term finance sources.
> What derivative securities can be used to hedge the effects of fluctuations in currency values on the cash flows of firms and investors?
> 1. How would you decide what defines an American car and an American car company? 2. What is the impact of global operations and supply-chain management on the “nationality” of goods and services?
> What are the primary sources of information about the creditworthiness of credit applicants?
> Describe the three steps involved in evaluating credit applicants.
> Describe the marginal costs and benefits associated with each of the following changes in a firm’s credit and collection policies: a. Increasing the credit period from 7 to 30 days b. Increasing the cash discount from 1 to 2 percent c. Offering a seas
> Discuss at least two reasons why a firm might want to offer seasonal datings to its customers.
> Define the following terms: a. Average collection period b. Bad-debt loss ratio c. Aging of accounts
> What are the major credit policy variables a firm can use to control its level of receivables investment?
> Under what conditions would a firm prefer the following? a. A “fixed-rate” term loan from a bank b. A “floating-rate” term loan, with the rate tied to the bank’s prime rate
> Define the following: a. A conditional sales contract b. A chattel mortgage
> What institutions are the primary suppliers of business term loans?
> Define the following and give an example of each: a. Affirmative covenants b. Negative covenants c. Restrictive covenants
> What are the differences between the purchase method and the pooling of interests method of accounting for mergers?
> What are the major factors that influence the effective cost of a term loan?
> Discuss the advantages and disadvantages of the following types of term loans: a. Those that require equal periodic payments b. Those that require equal periodic reductions in outstanding principal c. Balloon loans d. Bullet loans
> Under what circumstances might a firm prefer intermediate-term borrowing to either long- or short-term borrowing?
> Why do you think it is easier for firms with weak credit positions to obtain lease financing than bank loan financing?
> It has been argued that leasing is almost always more expensive than borrowing and owning. Do you think this is true? Why or why not? Under what circumstances is leasing likely to be more desirable than direct ownership?
> What effect does leasing have on the stability of a firm’s reported earnings?
> How can leasing allow a firm to effectively “depreciate” land?
> One advantage that has often been claimed of lease financing is that it creates “off balance sheet” financing. Evaluate this benefit in light of FASB Standard No. 13.
> From a tax perspective, what primary requirements in a lease transaction must be met in order for the IRS to consider the transaction a genuine lease? Why is a favorable IRS ruling regarding the tax status of a lease important to both the lessor and the
> How does a leveraged lease differ from a non-leveraged financial lease? What type of firm or organization is most likely to take advantage of the leveraged lease financing option? What type of individual or financial institution is most likely to act as
> Explain what happens to the post-merger earnings-per-share figure when a company with a relatively high P/E ratio acquires a company with a lower P/E ratio, assuming that the exchange ratio is based on current stock market prices and no synergy exists.
> What are the primary differences between operating leases and financial leases?
> What are the marginal returns and costs associated with a more liberal extension of credit to a firm’s customers?
> Nullcom Inc. has debentures (face value ¼ $1,000) outstanding that are convertible into common stock at a price of $40 per share. The debentures pay an interest rate of 9 percent per annum and have a remaining life of 10 years. Nonconvertible debentures
> Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a $100 million issue of bonds at a coupon interest rate of 12 percent. Each bond came with 30 detachable warrants. Each warrant entitled the holder to purchase one sh
> The Wolverine Corporation has a convertible preferred stock outstanding. The par value of this preferred stock is $100, and it pays a $10 dividend. The preferred stock is callable at 103 percent of par value. It has 10 years remaining until maturity and
> The Monroeville Company has warrants outstanding that expire in five years. Each warrant entitles the holder to purchase 0.5 shares of common stock at an exercise price of $32 per share. Determine the formula value and premium over the formula value if t
> The Oil City Company plans to sell an additional 1 million shares of common stock through a rights offering. The company currently has 12 million shares outstanding. Each shareholder will receive one right for each share currently held. Therefore, each r
> Oswego Manufacturing Company has decided to sell additional common stock through a rights offering. The company has 50 million shares outstanding and plans to sell an additional 5 million shares through the rights offering. Each shareholder will receive
> Calculate the after-tax component cost of capital, kc, for a 7.5 percent convertible debenture sold at par and due to mature in 25 years. The conversion ratio is 25, and conversion is expected to occur at the end of 10 years, when the common stock price
> What methods do financial analysts use to value merger candidates? What are the limitations of each method?
> You own 10 Bitterroot Industries Inc. 8 percent convertible debentures maturing in 2030. The conversion ratio of the debentures is 30, and the debentures are callable at $1,070 each. You bought the debentures when they were originally issued in 2000 for
> The capital structure of Whitefield Mills Inc. is as follows: Long-term debt………………………………………..……………$250 Million Common stock, $1 par………..………………..25 million Contributed capital in excess of par value…….….150 million Retained earnings………………………….……………..350
> Shaw Products Company, whose present balance sheet is summarized here, is considering issuing $100 million of 6 percent subordinated debentures (par value = $1,000), which are convertible into common stock at a price of $40. a. Show the pro forma balan
> Horizon Corporation has warrants to purchase common stock outstanding. Each warrant entitles the holder to purchase one share of the company’s common stock at an exercise price of $20 a share. Suppose the warrants expire on September 1, 2020. One year pr
> The Manchester Corporation has warrants presently outstanding, and each warrant entitles the holder to purchase one share of the company’s common stock at an exercise price of $20 a share. If the market price of the warrants is $8 and the common stock pr
> Automatic Data Processing issued $150 million of 6½ percent convertible debentures maturing in 2020. The debentures are convertible into common stock at $83.45 a share. The company’s common stock was trading at about $67 a share when the convertibles wer
> The LeMonde Corporation has debentures outstanding (par value ¼ $1,000) that are convertible into the company’s common stock at a price of $25 per share. The convertibles have a coupon interest rate of 6 percent and mature 20 years from now. In addition,
> The BWS Corporation stock is selling at $50 a share today. a. Calculate the value of a BWS put option if its exercise price is $40 and it expires today. b. What can you say about the value of a BWS put option if its exercise price is $40 and it expires
> The BWS Corporation stock is selling at $50 a share today. a. Calculate the value of a BWS call option if its exercise price is $40 and it expires today. b. What can you say about the value of a BWS call option if its exercise price is $40 and it expir
> Why would a firm use an interest rate swap as part of its financing strategy?
> What are some of the reasons why firms merge with other firms?
> What is the preemptive right of common stockholders? In what type of company is the preemptive right important? Unimportant?
> How can a company effectively force conversion of a convertible security?
> What is the relationship between conversion value, bond value, and market value for a convertible security?
> Why do companies issue convertible securities?
> In what ways are convertible securities and warrants similar? Dissimilar?
> How does a stock’s expected price volatility affect the value of a call option on it?
> Will call option values generally be higher at a time when interest rates are relatively high, compared with a time when interest rates are relatively low, all other things being equal?
> Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth. One segment of the food business in which Ad
> NPR MedTech Corporation is considering acquiring IV Pumps Inc. a relatively small company that manufactures intravenous pumps for use by hospitals. NPR MedTech believes it can grow IV Pumps’ sales by 30 percent per year for the first 5 years after it acq
> In Problem 11, assume Frank’s Superior Carworks has $1.5 million in debt and 500,000 shares outstanding. Based on your answer to Problem 11, how much would Jeff’s Powerwash be willing to pay for each share of Frank’s Superior Carworks?
> What variables are important in determining call option prices?
> Jeff’s Powerwash Inc. which operates in Texas, is considering acquiring Frank’s Superior Carworks chain of car washes in Maryland. The expected net cash flows from the acquisition for the first 3 years of the postmerge
> A financial analyst with MTC International has estimated the annual after-tax net cash flow from a proposed merger to be $1.5 million. This cash flow is expected to continue for 10 years. For the following 5 years, the net cash flow is estimated to be $0
> Consider Problem 8 again. Assume that there are immediate synergistic benefits of $4 million if Apex and Pinnacle merge. Answer Parts a, b, and c of Problem 8 under these conditions.
> Apex Corporation is considering the purchase of Pinnacle Company in a stockfor-stock exchange. Selected data on the two companies are shown in the following table: Assume that there are no synergistic benefits as the result of the merger. Determine EPS
> Wilson Industries is considering the acquisition of the Blanchard Company in a stock-for-stock exchange. Selected financial data for the two companies are shown next. An immediate synergistic earnings benefit of $1 million is expected in this merger, due
> Go-for-Broke Company is being liquidated under Chapter 7 of the bankruptcy code. When it filed for bankruptcy, its balance sheet was as follows: *All accrued wages must be paid out of the liquidation proceeds. **The bank loan is unsecured. ***Mortgag
> Consider Failures Galore Inc. (Tables 23.11 and 23.12). a. If total liquidation proceeds are $5.95 million, what is the distribution of these proceeds among the various creditors of Failures Galore? b. If total liquidation proceeds are $7.65 million, w
> Looking back at Tables 23.5 and 23.6, assume that Diversified Industries acquires High-Tech Products in a stock-for-stock transaction and no immediate synergistic benefits are expected. How long will it take the expected EPS of the combined companies to
> Ball Industries is considering acquiring the Keyes Corporation in a stock-for-stock exchange. Selected financial data on the two companies follow: Assume that no synergistic benefits are expected. a. What is the maximum exchange ratio Ball should agr
> The McPherson Company is considering acquiring the McAlester Company. Selected financial data for the two companies are shown here: Both companies have 40 percent marginal tax rates. Assume that no synergistic benefits are expected. a. Calculate the
> What are the similarities and differences between options and warrants?
> The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger. The Grey Plastics stockholders will receive 0.75 shares of Blue for each share of Grey held. Assume that no synergistic benefits are expected. a. Complete the following tabl
> A $10 million principal amount, 3-year, term loan carries an interest rate of 10 percent. All interest payments (which would normally be due at the end of each year) are deferred until the end of 3 years. The unpaid interest amount compounds at a 10 perc
> U.S. Fax has been granted a loan from a commercial finance company for $1 million at a stated interest rate of 10 percent. The loan requires that interest payments be made at the end of each of the next 5 years. At the end of 5 years, the entire loan bal
> A $1 million loan requires five end-of-year equal payments of $284,333. a. Calculate the effective interest rate on this loan. b. How much interest (in dollars) is paid over the life of this loan?
> The James Company has been offered a 4-year loan from its bank in the amount of $100,000 at a stated interest rate of 10 percent per year. The loan will require four equal end-of-year payments of principal and interest plus a $30,000 balloon payment at t
> Huskie Bank has provided the Mucklup Manufacturing Company with a 2-year term loan for $200,000 at a stated annual rate of interest of 10 percent. Interest for the entire 2-year period must be prepaid; that is, the loan’s total interest payments must be
> A $10 million, 5-year loan bears an interest rate of 7 percent. The loan repayment plan calls for five annual end-of-year payments. Each payment is to include an equal amount of principal repayment ($2 million per year) plus accrued interest. Set up the
> A firm receives a $1 million, 5-year loan at a 10 percent interest rate. The loan requires annual payments of $125,000 per year (at the end of each year) for years 1 to 4. a. What payment is required at the end of year 5? b. What would you call this ty
> Set up the amortization schedule for a 5-year, $1 million, 9 percent bullet loan. How is the principal repaid in this type of loan? What is the effective interest cost of this loan?
> Set up the amortization schedule for a 5-year, $1 million, 9 percent loan that requires equal annual end-of-year principal payments plus interest on the unamortized loan balance. What is the effective interest cost of this loan?
> Define the following terms: a. Option b. Call c. Put d. Contingent claim
> Discuss the differences between the following types of mergers: a. Horizontal mergers b. Vertical mergers c. Conglomerate mergers
> Set up the amortization schedule for a 5-year, $1 million, 9 percent term loan that requires equal annual end-of-year payments. Be sure to distinguish between the interest and the principal portion of each payment. What is the effective interest cost of
