Question: Calculate convenience yield for magnoosium scrap

> Many commentators have blamed the subprime crisis on “irrational exuberance.” What is your view? Explain briefly.

> In recent years, several large banks have paid management bonuses partly in bonds and partly in stock. What do you think is the reason for this? Do you think it is a good idea?

> If Winterbourne from Problem 12 has a price-earnings ratio of 12 and Monkton has a P/E ratio of 8, what should be the P/E ratio of the merged firm? Assume in this case that the merger is financed by an issue of new Winterbourne shares. Monkton will get o

> Winterbourne is considering a takeover of Monkton Inc. Winterbourne has 10 million shares outstanding, which sell for $40 each. Monkton has 5 million shares outstanding, which sell for $20 each. If the merger gains are estimated at $25 million, what is t

> Gobi Desserts is bidding to take over Universal Puddings. Gobi has 3,000 shares outstanding, selling at $50 per share. Universal has 2,000 shares outstanding, selling at $17.50 a share. Gobi estimates the economic gain from the merger to be $15,000. a. I

> As financial manager of Corton Inc., you are investigating a possible acquisition of Denham. You have the basic data given in the following table. You estimate that investors expect a steady growth of about 6% in Denham’s earnings and d

> Examine several recent mergers and suggest the principal motives for merging in each case.

> How do you think mergers should be regulated? For example, what defenses should target companies be allowed to employ? Should managers of target firms be compelled to seek out the highest bids? Should they simply be passive and watch from the sidelines?

> Examine a hostile acquisition and discuss the tactics employed by both the predator and the target companies. Do you think that the management of the target firm was trying to defeat the bid or to secure the highest price for its stockholders? How did ea

> True or false? a. Under purchase accounting any difference between the amounts paid for the target’s assets and their book value is shown as goodwill in the merged company’s balance sheet. b. In a tax-free merger, the acquirer can write up the value of t

> In Section 30-5, we described a three-month bill that was issued on an annually compounded yield of 5%. Suppose that one month has passed and the investment still offers the same annually compounded return. What is the percentage discount? What was your

> The financial manager of JAC Cosmetics is considering opening a lockbox in Pittsburgh. Checks cleared through the lockbox will amount to $10,000 per day. The lockbox will make cash available to the company three days earlier than is currently the case. a

> True or false? a. Most managers tend to be overconfident. b. Psychologists have found that, once people have suffered a loss, they are more relaxed about the possibility of incurring further losses. c. Psychologists have observed that people tend to put

> Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lockbox system. She forecasts that 300 payments a day will be made to lockboxes with an average payment size of $1,500. The bank’s charge for operating the lockboxes

> True or false? a. “Money market” refers to the system of electronic cash transfers between corporations and within the banking industry. b. The eurodollar market is a market for exchanging dollars for euros or vice versa. c. Most large corporations maint

> Polar Express Railroad keeps a $5 million inventory of spare parts on hand for repairing unexpected breakdowns and equipment failures. The inventory is held in one centralized warehouse at a storage cost of $330,000 per year. The inventory has been finan

> Take another look at Example 30.1. Suppose a rise in interest rates increases carrying cost per ton from $55 to $75. What is the effect on economic order quantity?

> Central banks pushed short-term interest rates down to extremely low levels in the financial crisis that started in 2008. Some Treasury bill rates in Europe were negative. Other things equal, how would you expect corporations’ inventory levels to respond

> True or false? a. Companies with negative net working capital are usually in financial trouble. b. Principal payments on long-term debt are shown as current liabilities if due within the next 12 months. c. Accounts payable are usually a small fraction of

> Look again at Problem 7, which asked you to assume that the 6.5% interest rate was the opportunity cost of capital. Was that a reasonable assumption? What should the opportunity cost of capital for inventory depend on? Would it ever make sense to use the

> Uppose you are a wealthy individual paying 37% tax on interest income, 20% on dividends, and zero tax on municipal notes. What is the expected after-tax yield on each of the following investments? a. A municipal note yielding 6.5% pretax. b. A Treasury b

> What is a territorial corporate income tax system? How does it differ from the U.S. tax system that was in place before 2018? Explain why the U.S. system in 2017 and earlier forced U.S companies to leave and invest profits abroad.

> Look up current interest rates offered by short-term investment alternatives. Suppose that your firm has $1 million excess cash to invest for the next two months. How would you invest this cash? How would your answer change if the excess cash were $5,000

> Explain how incentive and agency problems might contribute to mispricing of securities or to bubbles. Give examples.

> Take a look at Figure 30.1. Why do food stores hold large inventories? Why do railroads hold small inventories? Why do you think that pharmaceutical companies hold so much cash and securities? Answer briefly.

> The financial statements of Eagle Sport Supply are shown in Table 29.17. For simplicity, “Costs” include interest. Assume that Eagle’s assets are proportional to its sales. a. Find Eagle’s required external funds if it maintains a dividend payout ratio o

> Abbreviated financial statements for Archimedes Levers are shown in Table 29.16. If sales increase by 10% in 2018 and all other items, including debt, increase correspondingly, what must be the balancing item? What will be its value?

> Table 29.15 summarizes the 2019 income statement and end year balance sheet of Drake’s Bowling Alleys. Drake’s financial manager forecasts a 10% increase in sales and costs in 2020. The ratio of sales to average assets is expected to remain at .40. Inter

> Construct a new model for Dynamic Mattress based on your answer to Problem 19. Does your model generate a feasible financial plan for 2019? (Hint: If it doesn’t, you may have to allow the firm to issue stock.)

> Each of the following events affects one or more tables in Sections 29-2 and 29-3. Show the effects of each event by adjusting the tables listed in parentheses: a. Dynamic repays only $10 million of short-term debt in 2018 (Tables 29.2 and 29.3). b. Dyna

> a. Paymore places orders for goods equal to 75% of its sales forecast for the next quarter. What will orders be in each quarter of the coming year if the sales in the current quarter are expected to be $320 and the sales forecasts for the next five quart

> In fiscal 2017 and 2016, Estée Lauder’s financial statements included the following items. What was its cash cycle?

> Table 29.11 shows Dynamic Mattress’s year-end 2016 balance sheet, and Table 29.12 shows its income statement for 2017. Work out the statement of cash flows for 2017. Group these items into sources of cash and uses of cash. What will be

> Table 29.18 shows the 2019 financial statements for the Executive Cheese Company. Annual depreciation is 10% of fixed assets at the beginning of the year, plus 10% of new investments. The company plans to invest a further $200,000 per year in fixed asset

> Here are alphas and betas for Estée Lauder and Caterpillar Tractor for the 60 months ending June 2017. Alpha is expressed as a percent per month. Explain how these estimates would be used to calculate an abnormal return.

> a. What is the internal growth rate of Eagle Sport (see Problem 25) if the dividend payout ratio is fixed at 50% and the equity-to-asset ratio is fixed at two-thirds? b. What is the sustainable growth rate?

> State whether each of the following events is a source or use of cash, or neither. a. An automobile manufacturer increases production in response to a forecasted increase in demand. Unfortunately, the demand does not increase. b. Competition forces the f

> Look up some firms that have been in trouble. Plot the changes over the preceding years in the principal financial ratios. Are there any patterns?

> a. If a firm’s assets of $10,000 represent 200 days’ sales, what is its annual sales? b. What is its asset turnover ratio?

> Sara Togas sells all its output to Federal Stores. The following table shows selected 2017 financial data, in millions, for the two firms: The company’s tax rate is 35%. Calculate the sales-to-assets ratio, the operating profit margin,

> Look again at Table 28.8, which gives abbreviated balance sheets and income statements for Walmart. Assume Walmart had a 35% marginal corporate tax rate in 2017. Calculate the following using balance-sheet figures from the start of the year: a. Return on

> Table 28.8 gives abbreviated balance sheets and income statements for Walmart. At the end of fiscal 2017, Walmart had 2,960 million shares outstanding with a share price of $106. The company’s weighted-average cost of capital was about

> Keller Cosmetics maintains an operating profit margin of 8% and a sales-to-assets ratio of 3. It has assets of $500,000 and equity of $300,000. Assume that interest payments are $30,000 and the tax rate is 25%. a. What is the return on assets? b. What is

> In December 2017, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later she sells the shares for 550 pesos each. The exchange rates when she buys the stock are shown in

> In March 2017, the exchange rate for the Narnianleo was L2,419 = $1. Inflation in the year to March 2018 was about 30% in Narnia and 2% in the United States. a. If purchasing power parity held, what should have been the nominal exchange rate in March 20

> New-model commercial airplanes are much more fuel-efficient than older models. How is it possible for airlines flying older models to make money when its competitors are flying newer planes? Explain briefly.

> Look at Table 27.1. a. How many Japanese yen do you get for your dollar? b. What is the three-month forward rate for yen? c. Is the yen at a forward discount or premium on the dollar? d. Use the one-year forward rate to calculate the annual percentage di

> In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5% against Euribor (the short-term interest rate for euro loans). Euribor at the time was 4.1%. Suppose that A arranges with a dealer to swap a €10 million fi

> In March 2018, six-month bitcoin futures were priced at $7,925. The spot price was $7,946. The six-month interest rate was 1.92%. a. What was the convenience yield? b. Is your answer to part (a) consistent with what you would expect? Explain.

> In December 2017, six-month futures on the Australian S&P/ASX 200 Index traded at 5,947. Spot was 6,001. The interest rate was 1.8% a year, and the dividend yield was about 4.4% a year. Were the futures fairly priced?

> Calculate the value of a six-month futures contract on a Treasury bond. You have the following information: 1. Six-month interest rate: 10% per year, or 4.9% for six months. 2. Spot price of bond: 95. 3. The bond pays an 8% coupon, 4% every six months.

> Yesterday, you sold six-month futures on the German DAX stock market index at a price of 13,200. Today, the DAX closed at 13,150 and DAX futures closed at 13,250. You get a call from your broker, who reminds you that your futures position is marked to ma

> The Safety Razor Company has a large tax-loss carry-forward and does not expect to pay taxes for another 10 years. The company is therefore proposing to lease $100,000 of new machinery. The lease terms consist of eight equal lease payments prepaid annual

> In Section 25-5, we showed that the lease offered to Greymare Bus Lines had a positive NPV of $660 if Greymare paid no tax and a +$4,930 NPV to a lessor paying 21% tax. What is the minimum lease payment the lessor could accept under these assumptions? Wh

> Look again at the bus lease described in Table 25.2. a. What is the value of the lease if Greymare’s marginal tax rate is Tc = .30? b. What would the lease value be if the tax rate is 21%, but for tax purposes, the initial investment had to be written of

> Demand for concave utility meters is expanding rapidly, but the industry is highly competitive. A utility meter plant costs $50 million to set up, and it has an annual capacity of 500,000 meters. The production cost is $5 per meter, and this cost is not

> Look again at the National Waferonics lease in Problem 11. Suppose that National Waferonics is highly levered and is unable to deduct further interest payments for tax. a. Does this make a lease more or less attractive? b. Recalculate the NPV of the leas

> Suppose that National Waferonics has before it a proposal for a four-year financial lease of a Waferooney machine. The firm constructs a table like Table 25.2. The bottom line of its table shows the lease cash flows: These flows reflect the cost of the

> Look again at Problem 7. Suppose a blue-chip company requests a six-year financial lease for a $3,000 desk. The company has just issued five-year notes at an interest rate of 6% per year. What is the break-even rate in this case? Assume administrative co

> Acme has branched out to rentals of office furniture to start-up companies. Consider a $3,000 desk. Desks last for six years and can be depreciated immediately. What is the break-even operating lease rate for a new desk? Assume that lease rates for old a

> True or false? a. Lease payments are usually made at the start of each period. Thus, the first payment is usually made as soon as the lease contract is signed. b. A sensible motive for financial leases is that they provide off-balance-sheet financing. c.

> Lenders to leveraged leases hold nonrecourse debt. What does “nonrecourse” mean? What are the benefits and costs of nonrecourse debt to the equity investors in the lease?

> Some of the following reasons for leasing are rational. Others are irrational or assume imperfect or inefficient capital markets. Which of the following reasons are the rational ones? a. The lessee’s need for the leased asset is only temporary. b. Specia

> Match each of the following terms with one of the definitions below: A. Revolving credit B. Bridge loan C. Term loan D. Syndicated loan E. Commitment fee F. Maintenance covenant a. Requirement that borrower keeps in the future to a certain condition—for

> Zenco Inc. is financed by 3 million shares of common stock and by $5 million face value of 8% convertible debt maturing in 2029. Each bond has a face value of $1,000 and a conversion ratio of 200. What is the value of each convertible bond at maturity if

> Sweeney Pies has issued a zero-coupon 10-year bond that can be converted into 10 Sweeney shares. Comparable straight bonds are yielding 8%. Sweeney stock is priced at $50 a share. a. Suppose that you had to make a now-or-never decision on whether to conv

> Thanks to acquisition of a key patent, your company now has exclusive production rights for barkelgassers (BGs) in North America. Production facilities for 200,000 BGs per year will require a $25 million immediate capital expenditure. Production costs ar

> Maple Aircraft has issued a 4¾% convertible subordinated debenture due 2023. The conversion price is $47.00 and the debenture is callable at 102.75% of face value. The market price of the convertible is 91% of face value, and the price of the common is $

> a. Look at Table 24.1. Suppose that AMAT decides to call the bond one year before it is due to expire. The interest rate on one-year Treasury bonds is 2%. What price must AMAT pay to call the bonds? b. Now suppose that the interest rate on Treasury bonds

> Suppose that the AMAT bond was issued at face value and that investors continue to demand a yield of 5.85%. Sketch what you think would happen to the bond price as the first interest payment date approaches and then passes. What about the price of the bo

> Select the most appropriate term from within the parentheses: a. (High-grade bonds/Low-grade bonds) generally have only light sinking-fund requirements. b. Equipment trust certificates are usually issued by (railroads/bank holding companies). c. Mortgage

> Find the terms and conditions of a recent bond issue and compare them with those of the AMAT issue.

> Term loans usually require firms to pay a fluctuating interest rate. For example, the interest rate may be set at 1% over LIBOR. LIBOR can sometimes vary by several percentage points within a single year. Suppose that your firm has decided to borrow $40

> Complete the passage below by selecting the most appropriate terms from the following list: floating lien, revolving credit, medium-term note, warehouse receipt, unsecured, commitment fee, commercial paper. Companies with fluctuating needs for cash often

> Suppose that you are a banker responsible for approving corporate loans. Nine firms are seeking secured loans. They offer the following assets as collateral: a. Firm A, a heating oil distributor, offers a tanker load of fuel oil in transit from the Middl

> Look at Table 24.1: a. The AMAT bond was issued on June 8, 2011, at 99.592%. How much would you have to pay to buy one bond delivered on June 15? Don’t forget to include accrued interest. b. When is the first interest payment on the bond, and what is the

> Look back at Section 23-4. Suppose that the standard deviation of the return on Upsilon’s assets is 50%. Recalculate the probability that the company will default.

> We characterized the interstate rail lines owned by major U.S. railroads as “strategic assets” that could generate increased profits. In what conditions would you expect these assets to generate economic rents? Keep in mind that railroads compete with tr

> A friend has mentioned that she has read somewhere that the following variables can be used to predict bankruptcy: (a) the company debt ratio; (b) the interest coverage; (c) the amount of cash relative to sales or assets; (d) the return on assets;(e) the

> Square File’s assets are worth $100. It has $80 of zero-coupon debt outstanding that is due to be repaid at the end of two years. The risk-free interest rate is 5%, and the standard deviation of the returns on Square File’s assets is 40% per year. Calcul

> Other things equal, would you expect the difference between the price of a Treasury bond and a corporate bond to increase or decrease with a. The company’s business risk? b. The degree of leverage? c. The time to maturity?

> It is 2030 and the yields on corporate bonds are as follows: Tau Corp wishes to raise $10 million by an issue of 9% 10-year bonds. What will be the likely issue price (as a percent of face value) if Tau is rated (a)Aaa, (b) A, or (c) Ba?

> In February 2018, Aaa bonds yielded 3.38%, Baa bonds yielded 4.51%, and comparable Treasuries yielded 2.86%. a. What was the credit spread on Aaa bonds? b. What was the spread on Baa bonds? c. What do you think would be the difference in price (as a perc

> Construct a sensitivity analysis of the value of the pharmaceutical R&D project described in Figure 22.8. What input assumptions are most critical for the NPV of the project? Be sure to check the inputs to valuing the real option to invest at year 2.

> Take another look at the perpetual crusher example in Section 22-3. Construct a sensitivity analysis showing how the value of the abandonment put changes depending on the standard deviation of the project and the exercise price.

> Flip back to Tables 6.2 and 6.3, where we assumed an economic life of seven years for IM&C’s guano plant. What’s wrong with that assumption? How would you undertake a more complete analysis?

> Look back at the Malted Herring option in Section 22-2. How did the company’s analysts estimate the present value of the project? It turns out that they assumed that the probability of low demand was about 45%. They then estimated the expected payoff as

> Describe each of the following situations in the language of options: a. Drilling rights to undeveloped heavy crude oil in Northern Alberta. Development and production of the oil is a negative-NPV endeavor. (Assume a break-even oil price is C$90 per barr

> True or false? a. A firm that earns the opportunity cost of capital is earning economic rents. b. A firm that invests in positive-NPV ventures expects to earn economic rents. c. Financial managers should try to identify areas where their firms can earn e

> Alert financial managers can create real options. Give three or four possible examples.

> Respond to the following comments. a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash flows in the tree at the company cost of capital.” b. “These option pricing methods are just plain nutty. The

> Calculate and compare the risk (betas) of the following investments: (a) a share of Amazon stock; (b) a one-year call option on Amazon; (c) a one-year put option; (d) a portfolio consisting of a share of Amazon stock and a one-year put option; (e) a port

> For which of the following options might it be rational to exercise before maturity? Explain briefly why or why not. a. American put on a non-dividend-paying stock. b. American call—the dividend payment is $5 per annum, the exercise price is $100, and th

> Use the Black–Scholes program to estimate how much you should be prepared to pay to insure the value of your pension fund portfolio for the coming year. Make reasonable assumptions about the volatility of the market and use current interest rates. Rememb

> a. Use the Black-Scholes formula to find the value of the following call option. i. Time to expiration 1 year. ii. Standard deviation 40% per year. iii. Exercise price $50. iv. Stock price $50. v. Interest rate 4% (effective annual yield). b. Now recalcu

> Take another look at our two-step binomial trees for Amazon in Figure 21.2. Use the risk-neutral method to value six-month call and put options with an exercise price of $750. Assume the Amazon stock price is $900.

> The stock price of Heavy Metal (HM) changes only once a month: Either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 1% per month. a. What is the value of a one-month call option with an exercise price of $40? b. What

> Problem 21 considered an arbitrage opportunity involving an American option. Suppose that this option was a European call. Show that there is a similar possible arbitrage profit.

> Look at actual trading prices of call options on stocks to check whether they behave as the theory presented in this chapter predicts. For example, a. Follow several options as they approach maturity. How would you expect their prices to behave? Do they

> Photographic laboratories recover and recycle the silver used in photographic film. Stikine River Photo is considering purchase of improved equipment for their laboratory at Telegraph Creek. Here is the information they have: 1) The equipment costs $100,