Tom Baldwin can invest $6,300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $30 per share. Its warrants, which provide for the purchase of two shares of common stock at $28 per share, are currently selling for $7. The stock is expected to rise to a market price of $32 within the next year, so the expected theoretical value of a warrant over the next year is $8. The expiration date of the warrant is 1 year from the present. a. If Mr. Baldwin purchases the stock, holds it for 1 year, and then sells it for $32, what is his total gain? (Ignore brokerage fees and taxes.) b. If Mr. Baldwin purchases the warrants and converts them to common stock in 1 year, what is his total gain if the market price of common shares is actually $32? (Ignore brokerage fees and taxes.) c. Repeat parts a and b, assuming that the market price of the stock in 1 year is (1) $30 and (2) $28. d. Discuss the two alternatives and the tradeoffs associated with them.
> Conrad Air Inc. reported net income of $1,365,000 for the year ended December 31, 2020. Show how Conrad’s balance sheet would change from 2019 to 2020 depending on how Conrad “spent” those earnings as
> Samantha Fong sold her home in San Francisco in 2017 for $1.5 million, which was the median home price for that city. Samantha had lived in that house for 17 years, having purchased it from Michael Shoven in 2000 for $545,000. What average annual rate of
> Mia Salto wishes to determine how long it will take to repay a $14,000 loan given that the lender requires her to make annual end-of year installment payments of $2,450. a. If the interest rate on the loan is 12%, how long will it take her to repay the l
> In each of the following cases, determine the number of years that the given ordinary annuity cash flows must continue to provide the desired rate of return given the cost of the annuity. Case Cost of annuity Annuity payment Desired rate of return $
> Stacker Weight Loss currently pays an annual year-end dividend of $1.20 per share. It plans to increase this dividend by 5% next year and maintain it at the new level for the foreseeable future. If the required return on this firm’s stock is 8%, what is
> Manuel Rios wishes to determine how long it will take an initial deposit of $10,000 to double. a. If Manuel earns 10% annual interest on the deposit, how long will it take for him to double his money? b. How long will it take if he earns only 7% annual
> For each of the following cases, determine the number of years it will take for the initial deposit to grow to equal the future amount at the given interest rate. Case Initial deposit Future amount Interest rate $ 300 $ 1,000 A 7% В 12,000 15,000 5
> John Flemming has been shopping for a loan to finance the purchase of a used car. He has found three possibilities that seem attractive and wishes to select the one with the lowest interest rate. The information available with respect to each of the thre
> Anna Waldheim was seriously injured in an industrial accident. She sued the responsible parties and was awarded a judgment of $2,000,000. Today, she and her attorney are attending a settlement conference with the defendants. The defendants have made an i
> Raina Herzig wishes to choose the best of four annuities available to her. In each case, in exchange for paying a lump sum today, she will receive equal, end-of-year cash payments for a specified number of years. She considers the annuities equally risky
> What is the rate of return on an investment of $10,606 if the investor will receive $2,000 each year for the next 10 years?
> Clare Jaccard has $5,000 to invest. Because she is only 25 years old, she is not concerned about the length of the investment’s life. What she is sensitive to is the rate of return she will earn on the investment. With the h
> Rishi Singh has $1,500 to invest. His investment counselor suggests that Rishi should buy an investment that pays no interest but will be worth $2,000 after 3 years. a. What average annual rate of return will Rishi earn with this investment? b. Rishi is
> Jamie El-Erian is a savvy investor. On January 1, 2010, she bought shares of stock in Amazon, Chipotle Mexican Grill, and Netflix. The table below shows the price she paid for each stock, the price she received when she eventually sold her sh
> Monthly loan payments Tim Smith is shopping for a used luxury car. He has found one priced at $30,000. The dealer has told Tim that if he can come up with a down payment of $5,000, the dealer will finance the balance of the price at a 6% annual rate ove
> Today the common stock of Gresham Technology closed at $24.60 per share, down $0.35 from yesterday. If the company has 4.6 million shares outstanding and annual earnings of $11.2 million, what is its P/E ratio today? What was its P/E ratio yesterday?
> Liz Rogers just closed a $10,000 business loan that she must repay in three equal, end-of-year payments. The interest rate on the loan is 13%. As part of her firm’s detailed financial planning, Liz wishes to determine the annual interest deduction attrib
> Joan Messineo borrowed $45,000 at a 4% annual rate of interest that she must repay over 3 years. The loan is amortized into three equal, end-of-year payments. a. Calculate the end-of-year loan payment. b. Prepare a loan amortization schedule showing the
> Â Determine the equal, end-of-year payment required each year over the life of the loans shown in the following table to repay them fully during the stated term of the loan. Loan Principal Interest rate Term of loan (ycars) A $12,000 8% 3
> While vacationing in Florida, John Kelley saw the vacation home of his dreams. It was listed with a sale price of $200,000. The only catch is that John is 40 years old and plans to continue working until he is 65. John believes that prices generally incr
> A retirement home at Deer Trail Estates now costs $185,000. Inflation is expected to increase this price by 6% per year over the 20 years before C. L. Donovan retires. If Donovan earns 10% on his investments, how large must an equal, end-of-year deposit
> To supplement your retirement, you estimate that you need to accumulate $220,000 exactly 42 years from today. You plan to make equal, end-of-year deposits into an account paying 8% annual interest. a. How large must the annual deposits be to create the $
> For each case shown in the following table, determine the amount of the equal, end-of-year deposits necessary to accumulate the given sum at the end of the specified period, assuming the stated annual interest rate. Sum to be Accumulation Interest C
> Janet Boyle intends to deposit $300 per year in a credit union for the next 10 years, and the credit union pays an annual interest rate of 8%. a. Determine the future value that Janet will have in 10 years, given that end-of period deposits are made and
> You plan to invest $2,000 in an individual retirement account (IRA) today at a nominal annual rate of 8%, which is expected to apply to all future years. a. How much will you have in the account after 10 years if interest is compounded (1) annually, (2)
> For each of the cases in the following table, find the future value at the end of the deposit period, assuming that interest is compounded continuously at the given nominal annual rate. Nominal annual rate, r Deposit period (ycars), n Amount of Case
> Figurate Industries has 750,000 shares of cumulative preferred stock outstanding. It has passed the last three quarterly dividends of $2.50 per share and now (at the end of the current quarter) wishes to distribute a total of $12 million to its sharehold
> For each of the cases in the table below: a. Calculate the future value at the end of the specified deposit period. b. Determine the effective annual rate, EAR. c. Compare the nominal annual rate, r, to the effective annual rate, EAR. What relationship e
> Using annual, semiannual, and quarterly compounding periods for each of the following, (1) calculate the future value if $5,000 is deposited initially, and (2) determine the effective annual rate (EAR). a. At 12% annual interest for 5 years. b. At 16% an
> The table below shows a mixed cash flow stream starting in 1 year, except that the cash flow for year 3 is missing. Suppose you somehow know that the present value of the entire stream is $32,911.03 and that the discount rate is 4%. What is the amount
> Using the information in the accompanying table, answer the questions that follow. a. Determine the present value of the mixed stream of cash flows, using a 5% discount rate. b. Suppose you had a lump sum equal to your answer in part a on hand today. I
> Herr Mining Company plans to open a new coal mine. Developing the mine will cost $10 million right away, but cash flows of $4 million will arrive starting in 1 year and then continuing for the next 4 years (i.e., years 2 through 5). After that, no coal w
> Harte Systems Inc., a maker of electronic surveillance equipment, is considering selling the rights to market its home security system to a well-known hardware chain. The proposed deal calls for the hardware chain to pay Harte $30,000 and $25,000 at the
> Consider the mixed streams of cash flows shown in the following table. a. Find the present value of each stream using a 5% discount rate. b. Compare the calculated present values and discuss them in light of the undiscounted cash flows totaling $50,000
> Find the present value of the streams of cash flows shown in the following table. Assume that the opportunity cost is 12%. A B C Year Cash flow Year Cash flow Year Cash flow 1 -$2,000 1 $10,000 1-5 $10,000/yr 2 3,000 2-5 5,000/yr 6-10 8,000/yr 4,000
> Cash flow projections are a central component to the analysis of new investment ideas. In most firms, the person responsible for making these projections is not the same person who generated the investment idea in the first place. Why?
> Holliday Manufacturing is considering the replacement of an existing machine. The new machine costs $1,200,000 and requires installation costs of $150,000. The existing machine can be sold currently for $185,000 before taxes. It is 2 years old, cost $800
> Angina Inc. has 5 million shares outstanding. The firm is considering issuing an additional 1 million shares. After selling these shares at their $20 per share offering price and netting 95% of the sale proceeds, the firm is obligated by an earlier agree
> Wells Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.2 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1 million 10 years
> “Information asymmetry lies at the heart of the ethical dilemma that managers, stockholders, and bondholders confront when companies initiate management buyouts or swap debt for equity.” Comment on this statement. What steps might a board of directors t
> Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales, has made the following three sales estimates, with their probabilities noted. The firm wishes to analyze five possible capital structures:
> The board of directors of Morales Publishing Inc. has commissioned a capital structure study. The company has total assets of $40,000,000. It has earnings before interest and taxes of $8,000,000 and is taxed at a rate of 40%. a. Create a spreadsheet like
> Nelson Corporation has made the following forecast of sales, with the associated probabilities of occurrence noted. The company has fixed operating costs of $100,000 per year, and variable operating costs represent 40% of sales. The existing capital st
> Medallion Cooling Systems Inc. has total assets of $10,000,000, EBIT of $2,000,000, and preferred dividends of $200,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of deb
> A hedge fund charged with managing part of Harvard University’s endowment purchased more than 1 million put options on Enron stock not long before the company went bankrupt, making tens of millions of dollars in the process. Some members of the universit
> Ed Martin, the pension fund manager for Stark Corporation, is considering purchase of a put option in anticipation of a price decline in the stock of Carlisle Inc. The option to sell 100 shares of Carlisle at any time during the next 90 days at a strike
> Carol Krebs is considering buying 100 shares of Sooner Products Inc. at $62 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the price of Sooner to increase to $70 per share. As an alt
> For each of the 100-share options shown in the following table, use the underlying stock price at expiration and other information to determine the amount of profit or loss an investor would have had, ignoring brokerage fees. Туре of option Cost of
> A balance sheet balances assets with their sources of debt and equity financing. If a corporation has assets equal to $5.2 million and a debt ratio of 75.0%, how much debt does the corporation have on its books?
> Susan Michaels is evaluating the Burton Tool Company’s common stock and warrants to choose the better investment. The firm’s stock is currently selling for $16 per share; its warrants to purchase three shares of common stock at $15 per share are selling
> Why might employees and suppliers support management in a Chapter 11 bankruptcy declaration if they will have to wait to be paid and may never get paid? How can a CEO act ethically toward these two groups of stakeholders in the time before, during, and a
> Jon Morgan is in a financial position where he owes more than he earns each month. Due to his lack of financial planning and a heavy debt load, Jon started missing payments and saw his credit rating plunge. Unless corrective action is taken, personal ban
> Jacobi Supply Company recently ran into certain financial difficulties that have resulted in the initiation of voluntary settlement procedures. The firm currently has $150,000 in outstanding debts and approximately $75,000 in liquidatable short-term asse
> For a firm with outstanding debt of $125,000, classify each of the following voluntary settlements as an extension, a composition, or a combination of the two. a. Paying a group of creditors in full in four periodic installments and paying the remaining
> Classify each of the following voluntary settlements as an extension, a composition, or a combination of the two. a. Paying all creditors 30¢ on the dollar in exchange for complete discharge of the debt. b. Paying all creditors in full in three periodic
> Scully Corporation holds enough stock in company A and company B to give it voting control of both firms. Consider the accompanying simplified balance sheets for these companies. a. What percentage of the total assets controlled by Scully Corporation d
> Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging with Mayer by swapping 1.25 shares of its stock for each share of Mayer stock. Henry Company expects its stock to sell at the same price/earn
> Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2016 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an annual rate of 7%. RCN had 2016 earnings of $800,000, has 200,
> You have two assets and must calculate their values today based on their payment streams and required returns. Asset 1 has a required return of 9% and will produce a stream of $300 starting in 1 year and continuing indefinitely. Asset 2 has a required re
> Calculate the ratio of exchange (1) of shares and (2) in market price for each of the cases shown in the following table. What does each ratio signify? Explain. Current market price per share Price per share offered Acquiring Target Case company com
> Cleveland Corporation is interested in acquiring Lewis Tool Company by swapping 0.4 share of its stock for each share of Lewis stock. Certain financial data on these companies are given in the following table. Cleveland has sufficient authorized but un
> Marla’s Cafe is attempting to acquire the Victory Club. Certain financial data on these corporations are summarized in the following table. Marla’s Cafe has sufficient authorized but unissued shares to carry out the
> Is there a conflict between maximizing shareholder wealth and never paying bribes when doing business abroad? If so, how might you explain the firm’s position to shareholders who are asking why the company does not pay bribes when its foreign competitors
> A U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each
> The economies of the world tend to rise and fall in cycles that offset each other. International stocks can provide possible diversification for a portfolio heavy on U.S. equities. Because research on foreign companies is usually difficult for individual
> Fred Nappa is planning to take a wine-tasting tour through Italy this summer. The tour will cost 2,750 euros (€) and includes transportation, hotels, and a guide. Fred estimates that round-trip airfare from his home in North Carolina to Rome, Italy, will
> A U.S.-based MNC has a subsidiary in France (local currency, euro, €). The balance sheet and income statement of the subsidiary follow. Assume that on December 31, 2019, the exchange rate is US$1.20/€. Assume that the lo
> A U.S.-based MNC has a foreign subsidiary that earns $250,000 before local taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of a 33% foreign income tax rate, a foreign dividend withh
> Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of directors. Merit’s business had been brisk for the past 2 years, and the company’s CEO was pushing fo
> Calculate the risk premium for each of the following rating classes of long-term securities, assuming that the yield to maturity (YTM) for comparable Treasuries is 4.51%. Rating class Nominal interest rate AAA 5.12% ВВВ 5.78 7.82
> Carry Trade Inc. borrows yen when the yen is trading at ¥110/US$. If the nominal annual interest rate of the loan is 3% and at the end of the year the yen trades at ¥120/US$, what is the effective annual interest rate of the loan?
> Briefly describe each of the following takeover defenses against a hostile merger: (a) white knight, (b) poison pill, (c) greenmail, (d) leveraged recapitalization, (e) golden parachutes, and (f) shark repellents.
> What role do investment bankers often play in the merger negotiation process? What is a tender offer? When and how is it used?
> What is the ratio of exchange? Is it based on the current market prices of the shares of the acquiring and target firms? Why may a long-run view of the merged firm’s earnings per share change a merger decision?
> Describe the procedures typically used by an acquirer to value a target company, whether it is being acquired for its assets or as a going concern.
> What is an operating unit? What is a divestiture? What are four common methods used by firms to divest themselves of operating units? What is breakup value?
> What is a leveraged buyout (LBO)? What are the three key attributes of an attractive candidate for acquisition via an LBO?
> Briefly describe each of the following types of mergers: (a) horizontal, (b) vertical, (c) congeneric, and (d) conglomerate.
> Briefly describe each of the following motives for merging: (a) growth or diversification, (b) synergy, (c) fund raising, (d) increased managerial skill or technology, (e) tax considerations, (f) increased ownership liquidity, and (g) defense against tak
> Indicate in which order the following claims would be settled when distributing the proceeds from liquidating a bankrupt firm: (a) claims of preferred stockholders; (b) claims of secured creditors; (c) expenses of administering the bankruptcy; (d) claims
> What is the concern of Chapter 7 of the Bankruptcy Reform Act of 1978? Under which conditions is a firm liquidated in bankruptcy? Describe the procedures (including the role of the trustee) involved in liquidating the bankrupt firm.
> Assume that the rate of inflation expected over the coming year is 3.3%. Explain how a 1-year T-bill could earn a negative real rate of return over the next year. How could it have a zero real rate of return? What minimum rate of return must the T-bill e
> What is the concern of Chapter 11 of the Bankruptcy Reform Act of 1978? How is the debtor in possession (DIP) involved in (1) the valuation of the firm, (2) the recapitalization of the firm, and (3) the exchange of obligations using the priority rule?
> Define an extension and a composition, and explain how they might be combined to form a voluntary settlement plan to sustain the firm. How is a voluntary settlement resulting in liquidation handled?
> What are the three types of business failure? What is the difference between insolvency and bankruptcy? What are the major causes of business failure?
> Discuss the differences in merger practices between U.S. companies and companies in other countries. What changes are occurring in international merger activity, particularly in Western Europe and Japan?
> What key advantages and disadvantages are associated with holding companies? What is pyramiding, and what are its consequences?
> Define and differentiate among the members of each of the following sets of terms: (a) mergers, consolidations, and holding companies; (b) acquiring company and target company; (c) friendly merger and hostile merger; and (d) strategic merger and financia
> What are stock purchase warrants? What are the similarities and key differences between the effects of warrants and those of convertibles on the firm’s capital structure and its ability to raise new capital?
> Define the straight bond value, conversion (or stock) value, market value, and market premium associated with a convertible bond, and describe the general relationships among them.
> When the market price of the stock rises above the conversion price, why may a convertible security not be converted? How can the call feature be used to force conversion in this situation? What is an overhanging issue?
> What is the conversion feature? What is a conversion ratio? How do convertibles and other contingent securities affect EPS? Briefly describe the motives for convertible financing.
> The YTMs for Treasuries with differing maturities (with each rate expressed as an annual rate) on a recent day were as shown in the following table. The real rate of interest is 0.8% per year. Use the information in the preceding table to calculate the
> List and discuss the commonly cited advantages and disadvantages that should be considered when deciding whether to lease or purchase.
> What type of lease must be treated as a capitalized lease on the balance sheet? How does the financial manager capitalize a lease?
> Describe the four basic steps involved in the lease-versus-purchase decision process. How are capital budgeting methods applied in this process?
> What is leasing? Define, compare, and contrast operating leases and financial (or capital) leases. How does the Financial Accounting Standards Board’s Statement No. 13 define a financial (or capital) lease? Describe three methods used by lessors to acqui
> Why should a firm actively monitor the accounts receivable of its credit customers? How are the average collection period and an aging schedule used for credit monitoring?
> Why do a firm’s regular credit terms typically conform to those of its industry?
> For the following methods of using inventory as short-term loan collateral, describe the basic features of each, and compare their use: (a) floating lien, (b) trust receipt loan, and (c) warehouse receipt loan.
