Question: When the market price of the stock

> 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?

> 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 curre

> 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.

> 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?

> What are the two major sources of spontaneous short-term financing for a firm? How do their balances behave relative to the firm’s sales?

> 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?