Question: An Exchange-Traded Fund (ETF) is a

> You currently have a four-year-old mortgage outstanding on your house. You make monthly payments of $1500. You have just made a payment. The mortgage has 26 years to go (i.e., it had an original term of 30 years). Show the timeline from your perspective.

> How would your answer to Problem 16 change if the machine takes one year to build? Data from Problem 16: Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufa

> Your buddy in mechanical engineering has invented a money machine. The main drawback of the machine is that it is slow. It takes one year to manufacture $100. However, once built, the machine will last forever and will require no maintenance. The machine

> Your firm has a risk-free investment opportunity where it can invest $160,000 today and receive $170,000 in one year. For what level of interest rates is this project attractive?

> You have an investment opportunity in Japan. It requires an investment of $1 million today and will produce a cash flow of ¥114 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4%, the risk-free interest rate

> Suppose the risk-free interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer, $200 today or $200 in one year? Does your an

> You have decided to take your daughter skiing in Utah. The best price you have been able to find for a round trip air ticket is $359. You notice that you have 20,000 frequent flier miles that are about to expire, but you need 25,000 miles to get her a fr

> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their balance sheet: a. How much cash did Costco have at the end of the fiscal year? b. What were

> Suppose the current market price of corn is $3.75 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $1.60 per bushel, at what market price of ethanol does conversion become attr

> Suppose the yield on a one-year, zero-coupon bond is 5%. The forward rate for year 2 is 4%, and the forward rate for year 3 is 3%. What is the yield to maturity of a zero-coupon bond that matures in three years?

> Suppose you wanted to lock in an interest rate for an investment that begins in one year and matures in five years. What rate would you obtain if there are no arbitrage opportunities?

> What is the forward rate for year 5 (the forward rate quoted today for an investment that begins in four years and matures in five years)?

> What is the forward rate for year 3 (the forward rate quoted today for an investment that begins in two years and matures in three years)? What can you conclude about forward rates when the yield curve is flat?

> What is the forward rate for year 2 (the forward rate quoted today for an investment that begins in one year and matures in two years)?

> You are thinking of making an investment in a new plant. The plant will generate revenues of $1 million per year for as long as you maintain it. You expect that the maintenance cost will start at $50,000 per year and will increase 5% per year thereafter.

> Your grandmother bought an annuity from Rock Solid Life Insurance Company for $200,000 when she retired. In exchange for the $200,000, Rock Solid will pay her $25,000 per year until she dies. The interest rate is 5%. How long must she live after the day

> Xia Corporation is a company whose sole assets are $100,000 in cash and three projects that it will undertake. The projects are risk-free and have the following cash flows: Xia plans to invest any unused cash today at the risk-free interest rate of 10%

> Consider a portfolio of two securities: one share of Johnson and Johnson (JNJ) stock and a bond that pays $100 in one year. Suppose this portfolio is currently trading with a bid price of $141.65 and an ask price of $142.25, and the bond is trading with

> Suppose Hewlett-Packard (HPQ) stock is currently trading on the NYSE with a bid price of $28.00 and an ask price of $28.10. At the same time, a NASDAQ dealer posts a bid price for HPQ of $27.85 and an ask price of $27.95. a. Is there an arbitrage opportu

> Suppose a risky security pays an expected cash flow of $80 in one year. The risk-free rate is 4%, and the expected return on the market index is 10%. a. If the returns of this security are high when the economy is strong and low when the economy is weak,

> You work for Innovation Partners and are considering creating a new security. This security would pay out $1000 in one year if the last digit in the closing value of the Dow Jones Industrial index in one year is an even number and zero if it is odd. The

> Suppose security C has a payoff of $600 when the economy is weak and $1800 when the economy is strong. The risk-free interest rate is 4%. a. Security C has the same payoffs as which portfolio of the securities A and B in Problem A.1? b. What is the no-ar

> The table here shows the no-arbitrage prices of securities A and B that we calculated. a. What are the payoffs of a portfolio of one share of security A and one share of security B? b. What is the market price of this portfolio? What expected return wi

> The dollar cost of debt for Coval Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen cost of debt because they are considering launching a new

> Maryland Light, a U.S. light fixtures manufacturer, is considering an investment in Japan. The dollar cost of equity for Maryland Light is 11%. You are in the corporate treasury department, and you need to know the comparable cost of equity in Japanese y

> Assume that in the original Ityesi example in Table 31.1, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping the cost of sales, operating expenses, capital expenditures and depreciation expe

> Tailor Johnson, the menswear company with a subsidiary in Ethiopia described in Problem 9, is considering the tax benefits resulting from deferring repatriation of the earnings from the subsidiary. Under U.S. tax law, the U.S. tax liability is not incurr

> Suppose a security with a risk-free cash flow of $150 in one year trades for $140 today. If there are no arbitrage opportunities, what is the current risk-free interest rate?

> Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $100,000 in three months’ time when the installation will occur. However, it insis

> Suppose Starbucks consumes 100 million pounds of coffee beans per year. As the price of coffee rises, Starbucks expects to pass along 60% of the cost to its customers through higher prices per cup of coffee. To hedge its profits from fluctuations in coff

> Your utility company will need to buy 100,000 barrels of oil in 10 days’ time, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1000 barrels of oil, at the current futures price of $60 per barr

> BHP Billiton is the world’s largest mining firm. BHP expects to produce 2 billion pounds of copper next year, with a production cost of $0.90 per pound. a. What will be BHP’s operating profit from copper next year if the price of copper is $1.25, $1.50,

> Your firm faces a 9% chance of a potential loss of $10 million next year. If your firm implements new policies, it can reduce the chance of this loss to 4%, but these new policies have an upfront cost of $100,000. Suppose the beta of the loss is 0, and t

> Your firm imports manufactured goods from China. You are worried that U.S.–China trade negotiations could break down next year, leading to a moratorium on imports. In the event of a moratorium, your firm expects its operating profits to decline substanti

> Genentech’s main facility is located in South San Francisco. Suppose that Genentech would experience a direct loss of $450 million in the event of a major earthquake that disrupted its operations. The chance of such an earthquake is 2% per year, with a b

> Your firm needs to raise $100 million in funds. You can borrow short term at a spread of 1% over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year Treasuries, which currently yield 7.60%. Current 10-year inte

> The Citrix Fund has invested in a portfolio of government bonds that has a current market value of $44.8 million. The duration of this portfolio of bonds is 13.5 years. The fund has borrowed to purchase these bonds, and the current value of its liabiliti

> You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn’s balance sheet is as follows (in millions of dollars): When you analyze the duration of loans, you find that the duration of the auto loans is two yea

> Consider two securities that pay risk-free cash flows over the next two years and that have the current market prices shown here: a. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years? b. What is

> Assume each of the following securities has the same yield-to-maturity: a five-year, zero-coupon bond; a nine-year, zero-coupon bond; a five-year annuity; and a nine-year annuity. Rank these securities from lowest to highest duration.

> Suppose the current exchange rate is $1.80/£, the interest rate in the United States is 5.25%, the interest rate in the United Kingdom is 4%, and the volatility of the $/£ exchange rate is 10%. Use the Black-Scholes formula to determine the price of a si

> The William Companies (WMB) owns and operates natural gas pipelines that deliver 12% of the natural gas consumed in the United States. WMB is concerned that a major hurricane could disrupt its Gulfstream pipeline, which runs 691 miles through the Gulf of

> What are the advantages and disadvantages of increasing the options granted to CEOs?

> What is a whistle-blower?

> How are lenders part of corporate governance?

> What role do security analysts play in monitoring?

> How does a board become captured by a CEO?

> What is the role of the board of directors in corporate governance?

> What are the advantages and disadvantages of the corporate organizational structure?

> How can a controlling family use a pyramidal control structure to benefit itself at the expense of other shareholders?

> What are some examples of agency problems?

> Are the rights of shareholders better protected in the United States or in France?

> How do the laws on insider trading differ for merger- versus non-merger-related trading?

> What are the costs and benefits of prohibiting insider trading?

> The Dodd-Frank Act requires that firms disclose whether employees and directors are permitted to hedge against declines in the firm’s stock price. Why might this matter for corporate governance?

> Many of the provisions of the Sarbanes-Oxley Act of 2002 were aimed at auditors. How does this affect corporate governance?

> What is the essential trade-off faced by government in designing regulation of public firms?

> What are a board’s options when confronted with dissident shareholders?

> What is a say-on-pay vote?

> The promised cash flows of three securities are listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid. Security Cash Flow Today ($) C

> How can proxy contests be used to overcome a captured board?

> Is it necessarily true that increasing managerial ownership stakes will improve firm performance?

> What inherent characteristic of corporations creates the need for a system of checks on manager behavior?

> Diversification is good for shareholders. So why shouldn’t managers acquire firms in different industries to diversify a company?

> How do the carry forward and carryback provisions of the U.S. tax code affect the benefits of merging to capture operating losses?

> Do you agree that the European Union should be able to block mergers between two U.S.based firms? Why or why not?

> If you are planning an acquisition that is motivated by trying to acquire expertise, you are basically seeking to gain intellectual capital. What concerns would you have in structuring the deal and the post-merger integration that would be different from

> Why do you think shareholders from target companies enjoy an average gain when acquired, while acquiring shareholders on average often do not gain anything?

> What are some reasons why a horizontal merger might create value for shareholders?

> Why do you think mergers cluster in time, causing merger waves?

> An American Depositary Receipt (ADR) is security issued by a U.S. bank and traded on a U.S. stock exchange that represents a specific number of shares of a foreign stock. For example, Nokia Corporation trades as an ADR with symbol NOK on the NYSE. Each A

> How does a toehold help overcome the free rider problem?

> Loki, Inc., and Thor, Inc., have entered into a stock swap merger agreement whereby Loki will pay a 40% premium over Thor’s premerger price. If Thor’s premerger price per share was $40 and Loki’s was $50, what exchange ratio will Loki need to offer?

> What are the two primary mechanisms under which ownership and control of a public corporation can change?

> Which of the following one-year $1000 bank loans offers the lowest effective annual rate? a. A loan with an APR of 6%, compounded monthly b. A loan with an APR of 6%, compounded annually, that also has a compensating balance requirement of 10% (on which

> What is the difference between evergreen credit and a revolving line of credit?

> Consider two loans with a 1-year maturity and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate? Why?

> Hand-to-Mouth (H2M) is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or take out a loan. They owe the supplier $10,000 with terms of 2/10 Net 40, so the supplier will give them a 2% discount if t

> Why might a company choose to finance permanent working capital with short-term debt?

> Quarterly working capital levels for your firm for the next year are included in the following table. What are the permanent working capital needs of your company? What are the temporary needs? Quarter ($000) 1 2 3 4 Cash $100 $100 $100 $100 Accoun

> What is the difference between permanent working capital and temporary working capital?

> Throughout the 1990s, interest rates in Japan were lower than interest rates in the United States. As a result, many Japanese investors were tempted to borrow in Japan and invest the proceeds in the United States. Explain why this strategy does not repre

> Discuss the three different arrangements under which a firm may use inventory to secure a loan.

> What is the difference between direct paper and dealer paper?

> Which of the following companies are likely to have high short-term financing needs? Why? a. A clothing retailer b. A professional sports team c. An electric utility d. A company that operates toll roads e. A restaurant chain

> What are the three steps involved in establishing a credit policy?

> The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system would decrease its collection float by as much as five days.

> The Greek Connection had sales of $32 million in 2015, and a cost of goods sold of $20 million. A simplified balance sheet for the firm appears below: a. Calculate The Greek Connection’s net working capital in 2015. b. Calculate the c

> Does an increase in a firm’s cash cycle necessarily mean that a firm is managing its cash poorly?

> Which of the following short-term securities would you expect to offer the highest before tax return: Treasury bills, certificates of deposit, short-term tax exempts, or commercial paper? Why?

> Ohio Valley Homecare Suppliers, Inc. (OVHS) had $20 million in sales in 2015. Its cost of goods sold was $8 million, and its average inventory balance was $2,000,000. a. Calculate the average number of inventory days outstanding for OVHS. b. The average

> Use the financial statements supplied on the next page for International Motor Corporation (IMC) to answer the following questions. a. Calculate the cash conversion cycle for IMC for both 2015 and 2016. What change has occurred, if any? All else being eq

> Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans. a. What arbitrage opportunity is available? b. Which bank would experience a surge in the

> What is meant by “stretching the accounts payable”?

> Answer the following questions: a. What is the difference between a firm’s cash cycle and its operating cycle? b. How will a firm’s cash cycle be affected if a firm increases its inventory, all else being equal? c. How will a firm’s cash cycle be affect

> Suppose Procter and Gamble (P&G) is considering purchasing $15 million in new manufacturing equipment. If it purchases the equipment, it will depreciate it on a straight-line basis over the five years, after which the equipment will be worthless. It will

> Suppose Clorox can lease a new computer data processing system for $975,000 per year for five years. Alternatively, it can purchase the system for $4.25 million. Assume Clorox has a borrowing cost of 7% and a tax rate of 35%, and the system will be obsol

> Riverton Mining plans to purchase or lease $220,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $5

> Craxton Engineering will either purchase or lease a new $756,000 fabricator. If purchased, the fabricator will be depreciated on a straight-line basis over seven years. Craxton can lease the fabricator for $130,000 per year for seven years. Craxton’s tax

> Your firm is considering leasing a $50,000 copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is 9% APR with monthly compounding. Classify each lease below as a capital lease or operating lease, and ex