The seller of an option can never make any money from a change in the value of the underlying asset; he or she can only hope that the option will not be exercised and that he or she will not lose any money. Given that this is the case, why do people sell options?
> If a firm increases its debt to a very high level, then the positive effect of debt in aligning the interests of management with those of stockholders tends to become negative? Explain why this occurs.
> What does the empirical evidence tell us about the two theories?
> Agency problems occur because the nonowner managers and stockholders of a firm have different interests. Propose a capital structure change that might help better align these different interests?
> Crossler Automobiles sells autos in a market where the standard auto comes with a 10-year/100,000-mile warranty on all parts and labor. Describe how an increased probability of bankruptcy could affect sales of autos by Crossler?
> The Modigliani and Miller propositions, when the no-tax assumption is relaxed, suggest that the firm should finance itself with as much debt as possible. Taking this suggestion to the extreme, is it even possible to finance a firm with 100 percent debt a
> Consider the WACC for a firm that pays taxes. Explain what a firm’s best course of action would be to minimize its WACC and thereby maximize the firm value. Use the WACC formula for your explanation?
> The Starlight, Inc. financial statements for the fiscal year ended June 30, 2017, are presented below. The firm’s sales are projected to grow at a rate of 20 percent next year, and all financial statement accounts will vary directly wit
> You are valuing two otherwise identical firms in the same industry. One firm has a corporate jet for every executive at the vice president level and above, while the other does not have a single corporate jet. More than likely, which firm has the greates
> You are offered jobs with identical responsibilities by two different firms in the same industry. One has no debt in its capital structure, and the other has 99 percent debt in its capital structure. Will you require a higher level of compensation from o
> Are taxes necessary for the cost of debt financing to be less than the cost of equity financing?
> Rockville Corporation is going to borrow $250,000 from its bank at an APR of 8.5 percent. The bank requires its customers to maintain a 10 percent compensating balance. What is the effective interest rate on this bank loan?
> By obtaining a lockbox, Nizam’s Manufacturing was able to reduce its total cash collection time by two days. The firm has annual sales of $570,000 and can earn 4.75 percent annual interest. Assuming that the lockbox costs $50 per year, calculate the savi
> What is the pecking order theory of capital structure?
> Below is a partial aging of accounts receivable for Bitar Roofing Services. Fill in the rest of the information and determine Bitar’s days’ sales outstanding. How does it compare to the industry average of 40 days?
> Merrifield Cosmetics calculates that its operating cycle for last year was 76 days. The company had $230,000 in its accounts receivable account and had sales of $1.92 million. Approximately how many days does it take from the time the raw materials are
> You are provided the following working capital information for the Blue Ridge Company: If all sales are made on credit, what are the firm’s operating and cash conversion cycles? Account Beginning Balance Ending Balance Inventory $
> Digital, Inc., an electronic games manufacturer, is planning to purchase flash memory from one of two sources. Kyoto, Inc., quotes a price of ¥6,800 per gigabyte. The current exchange rate is ¥102.30/$. Another Japanese manufacture offers to supply the s
> Your firm, which uses oil as an input to its production processes, hedges its exposure to changes in the price of oil by buying call options on oil at today’s price. If the price of oil goes down by the time the contract expires, what effect will that ha
> Your company is considering opening a new factory in Europe to serve the growing demand for your product there. What real options might you want to consider in your capital budgeting analysis of the factory?
> ADCAP International is a U.S.-based company which sells its products primarily in overseas markets. The company’s stock is currently trading at $50 per share. Depending on the outcome of U.S. trade negotiations with the countries to which ADCAP exports i
> The stock of Augusta Light and Power is currently selling at $12 per share. Over the next year the company is undertaking a new electricity production project. If the project is successful, the company’s stock is expected to rise to $24 per share. If the
> Use the financial statements from Problem 16.1 and the information from Problem 16.2 to calculate the company’s retention(plowback) ratio, external funds needed (EFN), internal growth rate (IGR) and sustainable growth rate (SGR)? Refer
> Use the financial information for Starlight from Problem 19.1. Assume now that equity accounts do not vary directly with sales but change when retained earning change or new equity is issued. The company pays 45 percent of its income as dividends every y
> What are agency costs, and how are they related to the use of debt financing?
> List the inputs that are used in calculating a Eurocredit price?
> Why is credit risk higher in international markets?
> Which currency is the preferred currency of exchange in global financial markets? Why?
> What is the difference between foreign bonds and Eurobonds?
> What difficulties do firms face in estimating cash flows from an overseas project?
> Why is the repatriation of cash flows from an overseas project considered critical to the project’s value?
> What is hedging?
> Refer to Exhibits 19.10 and 19.11 in the text. The EFN for several growth rates for Empire Enterprises are as follows: Growth Rate (%) ………….. EFN ($ millions) 0% ……………………………………….….. -$4.8 5 ……………………………………...……….. -2.3 9.6
> If a Dell Studio laptop sells for $999 in Austin, Texas and £689 in London, what is the implied exchange rate between the U.S. dollar and the euro?
> The market value of Whole Foods stock is currently $53.73 per share, and the annual risk-free rate is 3 percent. A three-month call option on the stock with a strike price of $55 sells for $2.15. What is the value of a put option on Whole Foods stock tha
> What does the payoff function for a typical manager look like?
> Rosemary Corporation has daily sales of $139,000. The financial manager at the firm has determined that a lockbox would reduce collection time by 2.2 days. Assuming the company can earn 5.5 percent interest per year, what are the potential annual savings
> The required rate of return on the assets of a firm is 12 percent, the firm has a debt-to-common-stock ratio of 40 percent, and the cost of debt is 6 percent. If the firm has no preferred stock and the three conditions specified by M&M hold, what is the
> Your boss at Box and Freight Company asks you how much additional debt the company would have to add through a capital restructuring in order to create $9 million in present value from the resulting interest tax shields. What would you tell him if the de
> A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment for 500,000 shares that would be priced to the public at $36 a share. The underwriter’s spread is 7 percent. What were the proceeds for the issuer
> What are six factors that cause international transactions to differ from domestic transactions?
> FAJ, Inc. has $500 million of debt outstanding at an interest rate of 9 percent. What is the present value of the tax shield on that debt if it has no maturity and if FAJ is subject to a 30 percent marginal tax rate?
> Briefly describe the IPO process?
> You finally decide to act on your brilliant idea and start an online textbook rental company. You develop a detailed business plan and calculate that you will need about $350,000 of initial funding to get the business going. Luckily for you, you have lin
> Devlin Construction Inc., reported the following balance sheet information for the last fiscal year. Devlin also reported net sales of $980,770 and days sales in inventory of 48.90 days. Devlin Construction Inc. Assets Cash and marketable securities
> What are the five variables that affect the value of an option, and how do changes in each of these variables affect the value of a call option?
> What do the payoff functions for stockholders and lenders look like?
> What is the payoff for a put option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?
> The payoff function for the holder of straight debt looks like that for the seller of a put option. Convertible debt is straight debt plus a call option on a firm’s stock. How does the addition of a call option to straight debt affect the concern that le
> Again assume that the price of Socrates Motors stock will either rise to $50 or fall to $35 in one month and that the risk-free rate for one month is 1.5 percent. How much is an option with a strike price of $40 worth if the current stock price is $45 in
> A callable bond is a bond that can be bought back by the bond issuer before maturity for some pre-specified price (normally a small amount above face value) at the discretion of the bond issuer. How would you go about finding the value of such a bond? Wo
> What is the difference between a financial option and a real option?
> You hold an American option to sell one share of Zyther Co. stock. The option expires tomorrow. The strike price of the option is $50, and the current stock price is $49. What is the value of exercising the option today? If you wanted to sell the option
> NetSpeed Technologies is a telecom component manufacturer. The firm typically has a collection period of 44 days and days’ sales in inventory of 29 days. What is the operating cycle for NetSpeed?
> Suppose you have an option to buy a share of ABC Corp. stock for $100. The option expires tomorrow, and the current price of ABC Corp. is $95. How much is your option worth?
> What is an option?
> Is it always possible to estimate the value of a real option? Why or why not?
> What are bankruptcy costs, and what are the two types of bankruptcy costs?
> Cattail Corporation’s financial statements for the fiscal year just ended are shown below: Cattail management expects sales to increase by 14 percent next year. Assume that the financial statement accounts vary directly with changes i
> Northwood, Inc., has revenue of $455,316, costs of $316,487, and a tax rate of 31 percent. If the firm pays out 45 percent of its earnings as dividends every year, how much earnings are retained and what is the firm’s retention ratio?
> The industry average receivables collection period: a. Increased from 2016 to 2017. b. Decreased from 2016 to 2017. c. Did not change from 2016 to 2017. d. Increased along with the increase in the industry accounts receivable turnover.
> Which of the companies has the lowest accounts receivable turnover in 2017? a. Company A. b. Company B. c. Company C. d. Company D.
> List the various elements of financial modeling?
> A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net 60 will likely experience: a. An increase in cash on hand. b. An increase in the average collection period. c. Higher net income. d. A higher level of uncollectible accoun
> Fantasy Travel Company has a return on equity of 17.5 percent, a total equity/total assets ratio of 65 percent, and a dividend payout ratio of 75 percent. What is the company’s internal growth rate?
> Given the information in Problem 19.26, what is the internal growth rate of Ellicott Textile Mills?
> Lilly Bakery distributes its products to more than 75 restaurants and delis. The company’s average collection period is 27 days, and it keeps its inventory for an average of four days. What is Lilly’s operating cycle?
> Using the pro forma financial statements for Tomey Supply Company developed in Problem 19.20, find the internal growth rate for Tomey?
> Why are the variables that affect the value of a put option the same as those that affect the value of a call option?
> What are the various steps in preparing a capital budget?
> According to the trade-off theory: a. The amount of debt a company has is irrelevant. b. Debt should be used only as a last resort. c. Debt will not be used if a company’s tax rate is high. d. Companies have an optimal level of debt.
> A firm sells $100,000 of its accounts receivable to factors at a 2 percent discount. The firm’s average collection period is one month. What is the dollar cost of the factoring service?
> According to the pecking order theory: a. New debt is preferable to new equity. b. New equity is preferable to internally generated funds. c. New debt is preferable to internally generated funds. d. New equity is always preferable to other sources of cap
> Consider two companies that operate in the same line of business and have the same degree of operating leverage: the Basic Company and the Grundlegend Company. The Basic Company has no debt in its capital structure, but the Grundlegend Company has a capi
> Identify two industries (other than airlines) that are capital intensive. Using online or other data sources, compute the capital intensity ratio for the largest firm in each of the chosen industries?
> If Newell Corp. has a ROE of 13.7 percent and a dividend payout ratio of 32 percent, what is its sustainable growth rate?
> McDonald Metal Works has been able to generate net sales of $13,445,196 on assets of $9,145,633. What is the firm’s capital intensity ratio?
> Tantrix Confectioners has total assets of $3,257,845 and net sales of $5,123,951. What is the firm’s capital intensity ratio?
> What are some viable exit strategies for investors in a start-up company?
> What are the limits on the value of a call option prior to its expiration date?
> Define capital intensity ratio, and explain its significance?
> The weighted average cost of capital for a firm, assuming all three Modigliani and Miller assumptions hold, is 10 percent. What is the current cost of equity capital for the firm if the cost of debt for the firm is 8 percent, and the firm is 80 percent f
> Under Modigliani and Miller’s Proposition 1, where all three of the assumptions remain in effect, explain how the value of the firm changes due to changes in the proportion of debt and equity utilized by the firm?
> Mikos Processed Foods is currently valued at $500 million. Mikos will be repurchasing $100 million of its equity by issuing a nonmaturing debt issue at a 10 percent annual interest rate. Mikos is subject to a 30 percent marginal tax rate. If all of the M
> An online medical advice company just completed an IPO with an investment bank on a firm-commitment basis. The firm issued five million shares of common stock, and the underwriting fees were $1.90 per share. The offering price was $26 per share. a. What
> Sliver Computing Inc., reported the following balance sheet information for the last fiscal year. Sliver Computing also reported cost of goods sold of $291,240 for the same period. Internal auditors state that the firm’s cash conversion
> Bellex Technologies agreed to complete its IPO on a best-effort basis. The company’s investment bank demanded a spread of 17 percent of the offer price, which was set at $30 per share. Three million shares were issued; however, the bank’s management was
> When Global Partners went public in September 2016, the offer price was $22.00 per share and the closing price at the end of the first day was $23.90. The firm issued 4.9 million shares. What was the loss to the company due to underpricing?
> The weighted average cost of capital for a firm (assuming all three Modigliani and Miller assumptions apply) is 15 percent. What is the current cost of equity capital for the firm if its cost of debt is 10 percent and the proportion of debt to total firm
> On August 19, 2004, Google completed its IPO of 19.6 million shares to the initial investors at $85.00 per share. The closing price of the stock that same day was $100.34. What was the dollar value of the underpricing associated with the Google IPO?
> What is a call option, and what do the payoff functions for the owner and seller of a call option look like?
> Northern Manufacturing Company management found that during the last year it took an average of 47 days to pay its suppliers, whereas it took 63 days to collect its receivables. The company’s days’ sales in inventory was 49 days. What was Northern’s cash
> Structural Corp. currently has an equity cost of capital equal to 15 percent. If the Modigliani and Miller Proposition 1 assumptions hold, with the exception of the assumption that there are no taxes, and the firm’s capital structure is made up of 50 per
> Cartco needs to borrow $5 million for an upgrade to its headquarters and manufacturing facility. Management has decided to borrow using a five-year term loan from its existing commercial bank. The prime rate is 3.25 percent, and Cartco’s current rating
> Now suppose that Firm B from Problem 15.16 decides to get a term loan for 10 years. How does this affect the company’s borrowing cost?
> Suppose two firms want to borrow money from a bank for a period of one year. Firm A has excellent credit, whereas Firm B’s credit standing is such that it would pay prime + 2 percent. The current prime rate is 6.75 percent, the 30-year Treasury bond yiel
> Springer Corp. has $250 million of debt outstanding at an interest rate of 11 percent. What is the present value of the debt tax shield if the debt has no maturity and if Springer is subject to a 40 percent marginal tax rate?
> Marx and Spender Corp. currently has a WACC of 21 percent. If the cost of debt capital for the firm is 12 percent and the firm is currently financed with 25 percent debt, then what is the current cost of equity capital for the firm? Assume that the assum
> Explain what is meant by economies of scale in issuing securities?
> Are the following statements true or false. a. Shelf registration allows firms to register an inventory of securities for an unlimited time. b. The securities can be taken off the shelf at any time within 2 years of such registration and sold to the publ
> What are the steps in a general cash offering? Explain each of them.
