It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing for $2500. However, if you cannot ski because the helicopters cannot fly due to bad weather, there is no snow, or you get sick, you do not get a refund. There is a 40% probability that you will not be able to ski. If you wait until the last minute and go only if you know that the conditions are perfect and you are healthy, the vacation will cost $4000. You estimate that the pleasure you get from heli-skiing is worth $6000 per week to you (if you had to pay any more than that, you would choose not to go). If your cost of capital is 8% per year, should you book ahead or wait?
> 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
> Acme Distribution currently has the following items on its balance sheet: Under current FASB accounting standards (that is, prior to 2019), how will Acme’s balance sheet change if it enters into an $80 million capital lease for new wa
> Consider a five-year lease for a $400,000 bottling machine, with a residual market value of $150,000 at the end of the five years. If the risk-free interest rate is 6% APR with monthly compounding, compute the monthly lease payment in a perfect market fo
> Suppose the risk-free interest rate is 5% APR with monthly compounding. If a $2 million MRI machine can be leased for seven years for $22,000 per month, what residual value must the lessor recover to break even in a perfect market with no risk?
> Your computer manufacturing firm must purchase 10,000 keyboards from a supplier. One supplier demands a payment of $100,000 today plus $10 per keyboard payable in one year. Another supplier will charge $21 per keyboard, also payable in one year. The risk
> Use EDGAR to find Qualcomm’s 10K filing for 2015. From the balance sheet, answer the following questions: a. How much did Qualcomm have in cash, cash equivalents, and marketable securities (short- and long-term)? b. What were Qualcomm’s total accounts re
> Western Airlines is considering a new route that will require adding an additional Boeing 777 to its fleet. Western can purchase the airplane for $225 million or lease it for $25 million per year. If it purchases the airplane, its seating can be optimize
> Suppose Amazon is considering the purchase of computer servers and network infrastructure to expand its very successful business offering cloud-based computing. In total, it will purchase $48 million in new equipment. This equipment will qualify for acce
> Suppose an H1200 supercomputer has a cost of $200,000 and will have a residual market value of $60,000 in five years. The risk-free interest rate is 5% APR with monthly compounding. a. What is the risk-free monthly lease rate for a five-year lease in a p
> What is the distinguishing feature of how municipal bonds are taxed?
> Describe what prepayment risk in a GNMA is.
> On January 15, 2020, the U.S. Treasury issued a 10-year inflation-indexed note with a coupon of 6%. On the date of issue, the CPI was 400. By January 15, 2030, the CPI had decreased to 300. What principal and coupon payment was made on January 15, 2030?
> Suppose on January 15, 2013, the U.S. Treasury issued a five-year inflation-indexed note with a coupon of 3%. On the date of issue, the consumer price index (CPI) was 250. By January 15, 2018, the CPI had increased to 300. What principal and coupon payme
> Describe the kinds of securities the U.S. government uses to finance the federal debt.
> What is the difference between a foreign bond and a Eurobond?
> Explain the difference between a secured corporate bond and an unsecured corporate bond.
> Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose onl
> Why do bonds with lower seniority have higher yields than equivalent bonds with higher seniority?
> Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature.
> General Electric has just issued a callable 10-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year or anytime thereafter on a coupon payment date. It has a price of $102. What is the bond’s yield to maturity and yi
> Explain why bond issuers might voluntarily choose to put restrictive covenants into a new bond issue.
> Explain some of the differences between a public debt offering and a private debt offering.
> What are the main advantages and disadvantages of going public?
> Bit Box has raised $10 million in a Series A round with $40 million post-money value and a 1.5x liquidation preference, and $25 million in a Series B round with a $75 million post-money value and a 3x liquidation preference plus seniority over Series A.
> Beru.com recently raised $5 million with a pre-money value of $9 million. They are seeking to raise another $6 million. What is the largest fraction of the firm they can offer and avoid a down round?
> Your robotic automation start-up, Kela Controls, has raised capital as follows: a. How much did Kela raise in each round? b. Assuming no other securities were issued, what fraction of the firm’s shares were held by common shareholders
> Suppose venture capital firm GSB partners raised $100 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB wil
> In early-2015, Abercrombie & Fitch (ANF) had a book equity of $1390 million, a price per share of $25.52, and 69.35 million shares outstanding. At the same time, The Gap (GPS) had a book equity of $2983 million, a share price of $41.19, and 421 million s
> What are the advantages and the disadvantages to a private company of raising money from a corporate investor?
> What are the advantages to a company of selling stock in an SEO using a cash offer? What are the advantages of a rights offer?
> You have an arrangement with your broker to request 1000 shares of all available IPOs. Suppose that 10% of the time, the IPO is “very successful” and appreciates by 100% on the first day, 80% of the time it is “successful” and appreciates by 10%, and 10%
> Your firm has 10 million shares outstanding, and you are about to issue 5 million new shares in an IPO. The IPO price has been set at $20 per share, and the underwriting spread is 7%. The IPO is a big success with investors, and the share price rises to
> What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing?
> Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds: Currently,
> Do underwriters face the most risk from a best-efforts IPO, a firm commitment IPO, or an auction IPO? Why?
> What are some of the alternative sources from which private companies can raise equity capital?
> Consider again the electric car dealership in Section 22.3. Suppose the current value of a dealership is $5 million because the first-year free cash flow is expected to be $500,000 rather than $600,000. What is the beta of a corporation whose only asset
> A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a 17-year life. The technology wil
> In early 2012, General Electric (GE) had a book value of equity of $116 billion, 10.6 billion shares outstanding, and a market price of $17.00 per share. GE also had cash of $84 billion, and total debt of $410 billion. Three years later, in early 2015, G
> You are a financial analyst at Global Conglomerate and are considering entering the shoe business. You believe that you have a very narrow window for entering this market. Because of Christmas demand, the time is right today and you believe that exactly
> Describe the benefits and costs of delaying an investment opportunity.
> Using the information in Problem 2, rework the problem assuming you find out the size of the Everlasting Gobstopper market one year after you make the investment. That is, if you do not make the investment, you do not find out the size of the market. Con
> Consider the United Studios example in Section 22.2. Suppose United has the rights to produce the first film, but has not yet purchased the sequel rights. a. How much are the sequel rights worth to United? b. Suppose United can purchase the sequel rights
> Assume that the project in Example 22.5 pays an annual cash flow of $80,000 (instead of $90,000). a. What is the NPV of investing today? b. What is the NPV of waiting and investing tomorrow? c. Verify that the hurdle rate rule of thumb gives the correct
> Assume that the project in Example 22.5 pays an annual cash flow of $100,000 (instead of $90,000). a. What is the NPV of investing today? b. What is the NPV of waiting and investing tomorrow? c. Verify that the hurdle rate rule of thumb gives the correct
> Your firm is thinking of expanding. If you invest today, the expansion will generate $10 million in FCF at the end of the year, and will have a continuation value of either $150 million (if the economy improves) or $50 million (if the economy does not im
> Your engineers are developing a new product to launch next year that will require both software and hardware innovations. The software team requests a budget of $5 million and forecasts an 80% chance of success. The hardware team requests a $10 million b
> Genenco is developing a new drug that will slow the aging process. In order to succeed, two breakthroughs are needed: one to increase the potency of the drug, and the second to eliminate toxic side effects. Research to improve the drug’s potency is expec
> What was the change in Global Conglomerate’s book value of equity from 2014 to 2015 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2015? Explain. Table 2.1: GLOBAL C
> You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $500 per month per cab, or you can purchase the cabs outright for $30,000, in which case the cabs will last
> What implicit assumption is made when managers use the equivalent annual benefit method to decide between two projects with different lives that use the same resource?
> You own a piece of raw land in an up-and-coming area in Gotham City. The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs 0.1 * q2 to build. After you construct a building on the l
> You are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Gobstoppers. There is a 60% chance that the market for these candies will produce profits of $100 million annually, a 20% chance the market
> An original silver dollar from the late eighteenth century consists of approximately 24 grams of silver. At a price of $0.19 per gram ($6 per troy ounce), the silver content of the coin is worth about $4.50. Assume that these coins are in plentiful suppl
> You own a copper mine. The price of copper is currently $1.50 per pound. The mine produces 1 million pounds of copper per year and costs $2 million per year to operate. It has enough copper to operate for 100 years. Shutting the mine down would entail br
> You own a wholesale plumbing supply store. The store currently generates revenues of $1 million per year. Next year, revenues will either decrease by 10% or increase by 5%, with equal probability, and then stay at that level as long as you operate the st
> You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25 per share. Yo
> Repeat Problem 14, but this time assume that all the probabilities are risk-neutral probabilities, which means the cost of capital is always the risk-free rate and risk-free rates are as follows: The current interest rate for a risk-free perpetuity is 8%
> You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate
> Consider the following potential events that might have taken place at Global Conglomerate on December 30, 2015. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s boo
> Your R&D division has just synthesized a material that will super conduct electricity at room temperature; you have given the go-ahead to try to produce this material commercially. It will take five years to find out whether the material is commercially
> What decision should you make in Problem 2 if the one-year cost of capital is 15.44% and the profits last forever? Data from Problem 2: You are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Go
> The management of Southern Express Corporation is considering investing 10% of all future earnings in growth. The company has a single growth opportunity that it can take either now or in one period. Although the managers do not know the return on invest
> Under the same assumptions as in Section 22.3, suppose your corporation owns an operating electric car dealership, together with one-year options to open five more. a. What is the value and beta of your firm if the expected first-year free cash flow for
> Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year
> Hema Corp. is an all equity firm with a current market value of $1000 million (i.e., $1 billion), and will be worth $900 million or $1400 million in one year. The risk-free interest rate is 5%. Suppose Hema Corp. issues zero-coupon, one-year debt with a
> What is the highest possible value for the delta of a call option? What is the lowest possible value?
> Eagletron’s current stock price is $10. Suppose that over the current year, the stock price will either increase by 100% or decrease by 50%. Also, the risk-free rate is 25% (EAR). a. What is the value today of a one-year at-the-money European put option
> Suppose the option in Example 21.2 actually sold today for $5. You do not know what the option will trade for next period. Describe a trading strategy that will yield arbitrage profits. Example 21.2: Problem Suppose the current price of Narver Network
> Suppose the option in Example 21.1 actually sold in the market for $8. Describe a trading strategy that yields arbitrage profits. Example 21.1: Problem Suppose a stock is currently trading for $60, and in one period will either go up by 20% or fall by
> Find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources: a. From the company’s Web page www.starbucks.com. b. From the SEC Web site www.sec.gov. c. From the Yahoo! Finance Web site finance.yahoo.com. d. From
> Using the information in Problem 3, use the Binomial Model to calculate the price of a twoyear European put option on Natasha stock with a strike price of $7. Data from Problem 3: The current price of Natasha Corporation stock is $6. In each of the nex
> The current price of Natasha Corporation stock is $6. In each of the next two years, this stock price can either go up by $2.50 or go down by $2. The stock pays no dividends. The one-year risk-free interest rate is 3% and will remain constant. Using the
> The J. Miles Corp. has 25 million shares outstanding with a share price of $20 per share. Miles also has outstanding zero-coupon debt with a 5-year maturity, a face value of $900 million, and a yield to maturity of 9%. The risk-free interest rate is 5%.
> You would like to know the unlevered beta of Schwartz Industries (SI). SI’s value of outstanding equity is $400 million, and you have estimated its beta to be 1.2. SI has four-year zero-coupon debt outstanding with a face value of $100 million that curre
> Consider the March 2010 $5 put option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1% per year. a. What is the put option’s lev
> Calculate the beta of the January 2010 $9 call option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1% per year. What is the optionâ€&#
> Explain why risk-neutral probabilities can be used to price derivative securities in a world where investors are risk averse.
> Explain the difference between the risk-neutral and actual probabilities. In which states is one higher than the other? Why?
> Using the information in Problem 3, calculate the risk-neutral probabilities. Then use them to price the option. Data from Problem 3: The current price of Natasha Corporation stock is $6. In each of the next two years, this stock price can either go up
> Using the information in Problem 1, calculate the risk-neutral probabilities. Then use them to price the option. Data from Problem 1: The current price of Estelle Corporation stock is $25. In each of the next two years, this stock price will either go
> Who reads financial statements? List at least three different categories of people. For each category, provide an example of the type of information they might be interested in and discuss why.
> Using the information on Harbin Manufacturing in Problem 19, answer the following: a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike price of $25? b. What is the expected return of the call
> Using the information in Problem 1, use the Binomial Model to calculate the price of a oneyear put option on Estelle stock with a strike price of $25. Data from Problem 1: The current price of Estelle Corporation stock is $25. In each of the next two y
> Harbin Manufacturing has 10 million shares outstanding with a current share price of $20 per share. In one year, the share price is equally likely to be $30 or $18. The risk-free interest rate is 5%. a. What is the expected return on Harbin stock? b. Wha
> Consider again the at-the-money call option on Roslin Robotics evaluated in Problem 11. What is the impact on the value of this call option of each of the following changes (evaluated separately)? a. The stock price increases by $1 to $61. b. The volatil
> Consider the at-the-money call option on Roslin Robotics evaluated in Problem 11. Suppose the call option is not available for trade in the market. You would like to replicate a long position in 1000 call options. a. What portfolio should you hold today?
> Plot the value of a two-year European put option with a strike price of $20 on World Wide Plants as a function of the stock price. Recall that World Wide Plants has a constant dividend yield of 5% per year and that its volatility is 20% per year. The two
> Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the 800 January 2014 call option. Data from Problem 14: Using the market data in Figu
> Using the market data in Figure 20.10 and a risk-free rate of 0.25% per annum, calculate the implied volatility of Google stock in September 2012, using the bid price of the 700 January 2014 call option. Figure 20.10: GOOG (GOOGLE INC) 700.77 – 5.3
