Question: Is it possible for a firm’s

> Here are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount: COUNTRY KETTLES, INC. Balance Sheet 2011 2012 Assets Cash $ 48,180 $ 45,81

> Ted and Alice Hansel have a son who will begin college 10 years from today. School expenses of $30,000 will need to be paid at the beginning of each of the four years that their son plans to attend college. What is the duration of this liability to the c

> What is the difference between transactions and economic exposure? Which can be hedged more easily? Why?

> A stock is currently priced at $73. The stock will either increase or decrease by 15 percent over the next year. There is a call option on the stock with a strike price of $70 and one year until expiration. If the risk-free rate is 8 percent, what is the

> Rob Stevens is the chief executive officer of Isner Construction, Inc., and owns 950,000 shares of stock. The company currently has 6 million shares of stock and convertible bonds with a face value of $40 million outstanding. The convertible bonds have a

> What is the impact of lengthening the time to expiration on an option’s value? Explain.

> Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a $500,000 security deposit at the inception of the lease. If the lease payment is still $1,650,000, is it advantag

> There is a European put option on a stock that expires in two months. The stock price is $73, and the standard deviation of the stock returns is 70 percent. The option has a strike price of $80, and the risk-free interest rate is a 5 percent annual perce

> Why would ALC be willing to buy planes from Boeing and Airbus and then lease the planes to China Eastern Airlines? How is this different from just lending money to China Eastern Airlines to buy the planes?

> Triad Corporation has established a joint venture with Tobacco Road Construction, Inc., to build a toll road in North Carolina. The initial investment in paving equipment is $80 million. The equipment will be fully depreciated using the straight-line met

> Here are some important figures from the budget of Cornell, Inc., for the second quarter of 2013: The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sale, and th

> ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a well-established firm with an excellent credit rating in the debt market; it can borrow funds either at 11 percent fixed rate

> Bernanke Corp. has just issued a 30-year callable, convertible bond with a coupon rate of 6 percent annual coupon payments. The bond has a conversion price of $93. The company’s stock is selling for $28 per share. The owner of the bond will be forced to

> A warrant with six months until expiration entitles its owner to buy 10 shares of the issuing firm ’ s common stock for an exercise price of $31 per share. If the current market price of the stock is $15 per share, will the warrant be worthless?

> You are in discussions to purchase an option on an office building with a strike price of $63 million. The building is currently valued at $60 million. The option will allow you to purchase the building either six months from today or one year from today

> You are given the following information concerning options on a particular stock: Stock price = $83 Exercise price = $80 Risk-free rate = 6% per year, compounded continuously Maturity = 6 months Standard deviation = 53% per year a. What is the

> How would the analysis of real options change if a company has competitors?

> When you take out an ordinary student loan, it is usually the case that whoever holds that loan is given a guarantee by the U.S. government, meaning that the government will make up any payments you skip. This is just one example of the many loan guarant

> Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carry forwards. Thus, Quartz’s effective tax rate is zero. Quartz plans to lease equipment from N

> Suppose it is estimated that the equipment will have an after tax residual value of $700,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat now? Required information The Wildcat Oil Company is trying to decide whether to

> Why wouldn’t China Eastern Airlines purchase the planes if they were obviously needed for the company’s operations?

> Shattered Glass, Inc., is an all-equity firm. The cost of the company’s equity is currently 11 percent, and the risk-free rate is 3.5 percent. The company is currently considering a project that will cost $11.4 million and last six years. The project wil

> Bolero, Inc., has compiled the following information on its financing costs: The company is in the 35 percent tax bracket and has a target debt–equity ratio of 60 percent. The target short-term debt/long-term debt ratio is 20 percent.

> Lewellen Products has projected the following sales for the coming year: Sales in the year following this one are projected to be 15 percent greater in each quarter. a. Calculate payments to suppliers assuming that Lewellen places orders during each qua

> In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?

> What is the duration of a bond with four years to maturity and a coupon of 8 percent paid annually if the bond sells at par?

> Explain why a put option on a bond is conceptually the same as a call option on interest rates.

> Sportime Fitness Center, Inc., issued convertible bonds with a conversion price of $51. The bonds are available for immediate conversion. The current price of the company’s common stock is $44 per share. The current market price of the convertible bonds

> Why do firms issue convertible bonds and bonds with warrants?

> Wet for the Summer, Inc., manufactures filters for swimming pools. The company is deciding whether to implement a new technology in its pool filters. One year from now the company will know whether the new technology is accepted in the market. If the dem

> You are discussing real options with a colleague. During the discussion, the colleague states, “Real option analysis makes no sense because it says that a real option on a risky venture is worth more than a real option on a safe venture.’’ How should you

> Super Sonics Entertainment is considering buying a machine that costs $540,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $1

> What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you? Stock price = $67 Exercise price = $70 Risk-free rate = 5% per year, compounded continuously Maturity = 9 month

> The following is the sales budget for Shleifer, Inc., for the first quarter of 2013: Credit sales are collected as follows: 65 percent in the month of the sale. 20 percent in the month after the sale. 15 percent in the second month after the sale. The a

> What is meant by the term off–balance sheet financing? When do leases provide such financing, and what are the accounting and economic consequences of such activity?

> Daniel Kaffe, CFO of Kendrick Enterprises, is evaluating a 10-year, 8 percent loan with gross proceeds of $5,850,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.5 percent of gross proceeds and will be a

> Consider the following financial statement information for the Bulldog Icers Corporation: Calculate the operating and cash cycles. How do you interpret your answer? Item Beginning Ending Inventory $17,385 $19,108 Accounts receivable 13,182 13,973 Ac

> What are the costs of shortages? Describe them.

> What is the duration of a bond with three years to maturity and a coupon of 7 percent paid annually if the bond sells at par?

> If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could buy cotton futures contracts or buy call options on cotton futures contracts. What would be the pros and cons of the two approaches?

> An analyst has recently informed you that at the issuance of a company’s convertible bonds, one of the two following sets of relationships existed: Assume the bonds are available for immediate conversion. Which of the two scenarios do

> An analyst has recently informed you that at the issuance of a company’s convertible bonds, one of the two following sets of relationships existed: Assume the bonds are available for immediate conversion. Which of the two scenarios do y

> Star Mining buys a gold mine, but the cost of extraction is currently too high to make the mine profitable. In option terminology, what type of option(s) does the company have on this mine?

> Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS Problem 1 Assume that the tax rate is 35 percent. You can borrow at 8 percent before taxes. Should you lease or buy? Required data: You work for a nuclear

> Refer to Table 25.2 given below to answer this question. Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 140,000 bushels of corn in March 2012 for an upcoming promotion. You would like to lock in your costs today bec

> What are the prices of a call option and a put option with the following characteristics? Stock price = $93 Exercise price = $90 Risk-free rate = 4% per year, compounded continuously Maturity = 5 months Standard deviation = 62% per year

> Discuss the IRS criteria for determining whether a lease is tax deductible. In each case give a rationale for the criterion.

> What are the two types of risk that are measured by a levered beta?

> The Litzenberger Company has projected the following quarterly sales amounts for the coming year: a. Accounts receivable at the beginning of the year are $310. Litzenberger has a 45-day collection period. Calculate cash collections in each of the four q

> You are short 25 gasoline futures contracts, established at an initial settle price of $2.46 per gallon, where each contract represents 42,000 gallons. Over the subsequent four trading days, gasoline settles at $2.42, $2.47, $2.50, and $2.56, respectivel

> A company produces an energy-intensive product and uses natural gas as the energy source. The competition primarily uses oil. Explain why this company is exposed to fluctuations in both oil and natural gas prices.

> A warrant gives its owner the right to purchase three shares of common stock at an exercise price of $53 per share. The current market price of the stock is $58. What is the minimum value of the warrant?

> What is dilution, and why does it occur when warrants are exercised?

> Jet Black is an international conglomerate with a petroleum division and is currently competing in an auction to win the right to drill for crude oil on a large piece of land in one year. The current market price of crude oil is $93 per barrel, and the l

> Explain why a swap is effectively a series of forward contracts. Suppose a firm enters a swap agreement with a swap dealer. Describe the nature of the default risk faced by both parties.

> In the previous question, over what range of lease payments will the lease be profitable for both parties? Required information You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice wi

> What are the prices of a call option and a put option with the following characteristics? Stock price = $57 Exercise price = $60 Risk-free rate = 6% per year, compounded continuously Maturity = 3 months Standard devi ation = 54% per year

> Discuss the accounting criteria for determining whether a lease must be reported on the balance sheet. In each case give a rationale for the criterion.

> North Pole Fishing Equipment Corporation and South Pole Fishing Equipment Corporation would have identical equity betas of 1.10 if both were all equity financed. The market value information for each company is shown here: The expected return on the ma

> If Wild Widgets, Inc., were an all-equity company, it would have a beta of .85. The company has a target debt–equity ratio of .40. The expected return on the market portfolio is 11 percent, and Treasury bills currently yield 4 percent. The company has on

> Indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change. a. The terms of cash discounts offered to customers are made less

> You are long 10 gold futures contracts, established at an initial settle price of $1,580 per ounce, where each contract represents 100 ounces. Over the subsequent four trading days, gold settles at $1,587, $1,582, $1,573, and $1,584, respectively. Comput

> Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements in the price of oil because this is the firm’s primary source of revenue. What should the firm do? Provide at least two reasons why it probably will not

> Hannon Home Products, Inc., recently issued $2 million worth of 8 percent convertible debentures. Each convertible bond has a face value of $1,000. Each convertible bond can be converted into 21.50 shares of common stock any time before maturity. The sto

> What happens to the price of a convertible bond if interest rates increase?

> General Modems has five-year warrants that currently trade in the open market. Each warrant gives its owner the right to purchase one share of common stock for an exercise price of $55. a. Suppose the stock is currently trading for $51 per share. What is

> The Webber Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $25 million to construct. Due to low d

> Utility companies often face a decision to build new plants that burn coal, oil, or both. If the prices of both coal and gas are highly volatile, how valuable is the decision to build a plant that can burn either coal or oil? What happens to the value of

> The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price of Tara stock is $62. What is the value of the call o

> Assume that your company does not contemplate paying taxes for the next several years. What are the cash flows from leasing in this case? You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common p

> Comment on the following remarks: a. Leasing reduces risk and can reduce a firm’s cost of capital. b. Leasing provides 100 percent financing. c. If the tax advantages of leasing were eliminated, leasing would disappear.

> Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt–equity ratio of 40 percent and makes interest payments of $41,000 at the end of each year. The cost of the firm’s levered equity is 19 perce

> Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change. a. Receivables average goes up. b. Credit repayment times for customers are in

> For the year just ended, you have gathered the following information about the Holly Corporation: a. A $200 dividend was paid. b. Accounts payable increased by $500. c. Fixed asset purchases were $900. d. Inventories increased by $625. e. Long-term debt

> Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $95 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise price of $95 per barrel. Consider her gains and losses

> What is the difference between a forward contract and a futures contract? Why do you think that futures contracts are much more common? Are there any circumstances under which you might prefer to use forwards instead of futures? Explain.

> When should a firm force conversion of convertibles? Why?

> Eckely, Inc., recently issued bonds with a conversion ratio of 17.5. If the stock price at the time of the bond issue was $48.53, what was the conversion premium?

> Gasworks, Inc., has been approached to sell up to 5 million gallons of gasoline in three months at a price of $3.65 per gallon. Gasoline is currently selling on the wholesale market at $3.30 per gallon and has a standard deviation of 58 percent. If the r

> What is the difference between an American option and a European option?

> The price of Ervin Corp. stock will be either $74 or $96 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. a. Suppose the current price of Ervin stock is $80. What is the value of the call

> What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease? You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a common practice with expensive, high

> What are some of the potential problems with looking at IRRs when evaluating a leasing decision?

> Gemini, Inc., an all-equity firm, is considering a $1.7 million investment that will be depreciated according to the straight-line method over its four-year life. The project is expected to generate earnings before taxes and depreciation of $595,000 per

> McConnell Corp. has a book value of equity of $13,205. Long-term debt is $8,200. Net working capital, other than cash, is $2,205. Fixed assets are $18,380. How much cash does the company have? If current liabilities are $1,630, what are current assets?

> Refer to Table 25.2 in the text to answer this question. Suppose you sell five March 2012 silver futures contracts on November 22, 2011, at the last price of the day. What will your profit or loss be if silver prices turn out to be $31.39 per ounce at ex

> If a firm is buying call options on pork belly futures as a hedging strategy, what must be true about the firm’s exposure to pork belly prices?

> In the previous problem, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of the transaction today? Data from previous problem

> Explain the following limits on the prices of warrants: a. If the stock price is below the exercise price of the warrant, the lower bound on the price of a warrant is zero. b. If the stock price is above the exercise price of the warrant, the lower bound

> Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $410,000, his three-year contract states that his compensation will include 15,000 at-the-money European call options on

> Complete the following sentence for each of these investors: a. A buyer of call options. b. A buyer of put options. c. A seller (writer) of call options. d. A seller (writer) of put options. “The (buyer/seller) of a (put/call) option (pays/receives) mone

> Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over five years using the straight-line method. The new cars are expected to generate $175,000 per year in ear

> Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114. a. Suppose you buy 10 contracts of the February 110 call option. How much will you pay, ignoring commissions? b. In part (a), supp

> Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs. a. A dividend is paid with funds received from a sale of debt. b. Real estate is purchased and paid for with

> Refer to Table 25.2 in the text to answer this question. Suppose you purchase a March 2012 cocoa futures contract on November 22, 2011, at the last price of the day. What will your profit or loss be if cocoa prices turn out to be $2,431 per metric ton at

> If a firm is selling futures contracts on lumber as a hedging strategy, what must be true about the firm’s exposure to lumber prices?

> Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 30,000 at-the-money European call options on the company’s stock, which is currently trading at $50 per share. The stock pays no

> What is a call option? A put option? Under what circumstances might you want to buy each? Which one has greater potential profit? Why?

> In the previous problem, assume that the exercise style on the option is American rather than European. What is the price of the option now? Previous problem The stock price is $73, and the standard deviation of the stock returns is 70 percent. The optio

> Why might a firm choose to engage in a sale and leaseback transaction? Give two reasons.