Question: What are the two major sources of

> 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.

> How can the firm use currency options to hedge foreign-currency exposures resulting from international transactions?

> What is an option? Define calls and puts. What role, if any, do call and put options play in the fund-raising activities of the firm?

> What is the general relationship between the theoretical and market values of a warrant? In what circumstances are these values quite close? What is a warrant premium?

> The yields for Treasuries with differing maturities on a recent day were as shown in the table below. a. Use the information to plot a yield curve for this date. b. If the expectations hypothesis is true, approximately what rate of return do investors

> What is the implied price of a warrant? How is it estimated? To be effective, how should it be related to the estimated market value of a warrant?

> Differentiate between a hybrid security and a derivative security.

> How do firms use commercial paper to raise short-term funds? Who can issue commercial paper? Who buys commercial paper?

> What is a revolving credit agreement? How does this arrangement differ from the line-of-credit agreement? What is a commitment fee?

> What is a line of credit? Describe each of the following features that are often included in these agreements: (a) operating-change restrictions, (b) compensating balance, and (c) annual cleanup.

> What are the basic terms and characteristics of a single-payment note? How is the effective annual rate on such a note found?

> How does the effective annual rate differ between a loan requiring interest payments at maturity and another, similar loan requiring interest in advance?

> How is the prime rate of interest relevant to the cost of short-term bank borrowing? What is a floating-rate loan?

> What is “stretching accounts payable”? What effect does this action have on the cost of giving up a discount?

> Is there a cost associated with taking an early payment discount? Is there any cost associated with giving up a discount? How do borrowing costs affect the decision to take or forego an early payment discount?

> The nominal, risk-free rate on T-bills is 1.23%. If the real rate of interest is 0.80%, what is the expected inflation rate?

> Describe and compare the basic features of the following methods of using accounts receivable to obtain short-term financing: (a) pledging accounts receivable and (b) factoring accounts receivable. Be sure to mention the institutions that offer each of t

> In general, what interest rates and fees are levied on secured short-term loans? Why are these rates generally higher than the rates on unsecured short-term loans?

> Are secured short-term loans viewed as more risky or less risky than unsecured short-term loans? Why?

> What is the important difference between international and domestic transactions? How is a letter of credit used in financing international trade transactions? How is “netting” used in transactions between subsidiaries?

> Briefly describe the following techniques for managing inventory: (1) ABC system, economic order quantity (EOQ) model, (2) just-in time (JIT) system, and (3) three computerized systems for resource control, MRP, MRP II, and ERP.

> What are likely to be the viewpoints of each of the following managers about the levels of the various types of inventory: finance, marketing, manufacturing, and purchasing? Why is inventory an investment?

> Why is it important for a firm to minimize the length of its cash conversion cycle?

> Why is it helpful to divide the funding needs of a seasonal business into its permanent and seasonal funding requirements when developing a funding strategy?

> Ann and Jack have been partners for several years. Their firm, A & J Tax Preparation, has been very successful, as the pair agree on most business-related questions. One disagreement, however, concerns the legal form of their business. For the past 2 yea

> What is the difference between the firm’s operating cycle and its cash conversion cycle?

> Why does an increase in the ratio of current assets to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to total assets affect profitability and risk?

> What is the relationship between the predictability of a firm’s cash inflows and its required level of net working capital? How are net working capital, liquidity, and risk of insolvency related?

> Why are the risks involved in international credit management more complex than those associated with purely domestic credit sales?

> What are the basic tradeoffs in a tightening of credit standards?

> Explain why credit scoring is typically applied to consumer credit decisions rather than to mercantile credit decisions.

> What is the role of the five C’s of credit in the credit selection activity?

> What factors make managing inventory more difficult for exporters and multinational companies?

> Why is working capital management one of the most important and time-consuming activities of the financial manager? What is net working capital?

> What five factors do firms consider in establishing dividend policy? Briefly describe each of them.

> Jack and Jill have just had their first child. If they expect that college will cost $150,000 per year in 18 years, how much should the couple begin depositing annually at the end of each of the next 18 years to accumulate enough funds to pay 1 year of t

> Contrast the basic arguments about dividend policy advanced by Miller and Modigliani and by Gordon and Lintner.

> Does following the residual theory of dividends lead to a stable dividend? Is this approach consistent with dividend relevance?

> What benefit is available to participants in a dividend reinvestment plan? How might the firm benefit from such a plan?

> What effect did the Jobs and Growth Tax Relief Reconciliation Act of 2003 have on the taxation of corporate dividends? On corporate dividend payouts?

> Who are holders of record? When does a stock sell ex dividend?

> The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom?

> How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?

> What is a bond’s yield to maturity (YTM)? Briefly describe the use of a financial calculator and the use of an Excel spreadsheet for finding YTM. Why is the YTM a good measure of the required return on a bond?

> Why do rapidly growing firms generally pay no dividends?

> As a risk-averse investor, would you prefer bonds with short or long periods until maturity? Why?

> Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and is looking for a bank in which to deposit the funds. Partners’ Savings Bank offers an account with an annual inter

> If the required return on a bond differs from its coupon rate, describe the behavior of the bond price over time as the bond moves toward maturity.

> What relationship between the required return and the coupon rate will cause a bond to sell at a discount? At a premium? At its par value?

> What procedure is used to value a bond that pays annual interest? Semiannual interest?

> What important factors in addition to quantitative factors should a firm consider when it is making a capital structure decision?

> Why do maximizing EPS and maximizing value not necessarily lead to the same conclusion about the optimal capital structure?

> Explain the EBIT–EPS approach to capital structure. Include in your explanation a graph indicating the financial breakeven point; label the axes. Is this approach consistent with maximization of the owners’ wealth?

> Compare a stock split with a stock dividend.

> Why do firms issue stock dividends? Comment on the following statement: “I have a stock that promises to pay a 20% stock dividend every year, and therefore it guarantees that I will break even in 5 years.”

> Describe a constant-payout-ratio dividend policy, a regular dividend policy, and a low-regular-and-extra dividend policy. What are the effects of these policies?

> What two ways can firms distribute cash to shareholders?

> Your firm has the option of making an investment in new software that will cost $130,000 today but will save the company money over several years. You estimate that the software will provide the savings shown in the following table over its 5-year life.

> What are business risk and financial risk? How does each influence the firm’s capital structure decisions?

> What is the major benefit of debt financing? How does it affect the firm’s cost of debt?

> In what ways are the capital structures of U.S. firms and non–U.S. firms different? How are they similar?

> What is a firm’s capital structure? What ratios assess the degree of financial leverage in a firm’s capital structure?

> What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or why not?

> What is financial leverage? What causes it? How do you measure the degree of financial leverage (DFL)?

> What is operating leverage? What causes it? How do you measure the degree of operating leverage (DOL)?

> What is the operating breakeven point? How do changes in fixed operating costs, the sale price per unit, and the variable operating cost per unit affect it?

> How do the cost of debt, the cost of equity, and the weighted average cost of capital (WACC) behave as the firm’s financial leverage increases from zero? Where is the optimal capital structure? What is its relationship to the firm’s value at that point?

> How does asymmetric information affect the firm’s capital structure decisions? How do the firm’s financing actions give investors signals that reflect management’s view of stock value?

> Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a lump sum of $1.3 million now, or she can elect to receive $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments,

> Briefly describe the agency problem that exists between owners and lenders. How do lenders cause firms to incur agency costs to resolve this problem?

> What does the term leverage mean? How are operating leverage, financial leverage, and total leverage related to the income statement?