Question: Look at actual trading prices of call

> 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.

> 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,

> Respond to the following statements. a. “I’m a conservative investor. I’d much rather hold a call option on a safe stock like Exxon Mobil than a volatile stock like Amazon.” b. “I bought an American call option on Fava Farms stock, with an exercise pric

> How does the price of a call option respond to the following changes, other things equal? Does the call price go up or down? a. Stock price increases. b. Exercise price is increased. c. Risk-free rate increases. d. Expiration date of the option is extend

> In April 2017, Facebook’s stock price was about $145. An eight-month call on the stock, with an exercise price of $145, sold for $10.18. The risk-free interest rate was 1% a year. How much would you be willing to pay for a put on Facebook stock with the

> Ms. Higden has been offered yet another incentive scheme (see Section 20-2). She will receive a bonus of $500,000 if the stock price at the end of the year is $120 or more; otherwise she will receive nothing. (Don’t ask why anyone should want to offer s

> Option traders often refer to “straddles” and “butterflies.” Here is an example of each: 1) Straddle: Buy one call with exercise price of $100 and simultaneously buy one put with exercise price of $100. 2) Butterfly: Simultaneously buy one call with exer

> Dr. Livingstone I. Presume holds £600,000 in East African gold stocks. Bullish as he is on gold mining, he requires absolute assurance that at least £500,000 will be available in six months to fund an expedition. Describe two wa

> Three six-month call options are traded on Hogswill stock: How would you make money by trading in Hogswill options? (Hint: Draw a graph with the option price on the vertical axis and the ratio of stock price to exercise price on the horizontal axis. Plot

> Note Figure 20.12 below. Match each diagram, (a) and (b), with one of the following positions: 1) Call buyer 2) Call seller 3) Put buyer 4) Put seller

> Consider another perpetual project like the crusher described in Section 19-1. Its initial investment is $1,000,000, and the expected cash inflow is $95,000 a year in perpetuity. The opportunity cost of capital with all-equity financing is 10%, and the p

> To finance the Madison County project (see Problem 10), Wishing Well needs to arrange an additional $80 million of long-term debt and make a $20 million equity issue. Underwriting fees, spreads, and other costs of this financing will total $4 million. Ho

> On the London Metals Exchange, the price for copper to be delivered in one year is $5,500 a ton. (Note: Payment is made when the copper is delivered.) The risk-free interest rate is 2% and the expected market return is 8%. a. Suppose that you expect to p

> You chair the compensation committee of the board of directors of Androscoggin Copper. A consultant suggests two stock-option packages for the CEO: a. A conventional stock-option plan, with the exercise price fixed at today’s stock price. b. An alternati

> Blackburn Building Products Company provided the following information for the current year ended December 31. Required: a. Prepare the current-year classified balance sheet using the report format. b. Prepare the current-year classified balance sheet u

> Classify each of the following accounts as asset, liability, or stockholders’ equity. In the case of the assets, further classify them as current assets; long-term investments; property, plant, and equipment; intangible assets; or other

> Classify each of the following accounts as an asset, liability, or stockholders’ equity. In the case of the assets, further classify them as current assets; long-term investments; property, plant, and equipment; intangible assets; or ot

> Classify each of the following accounts as an asset, liability, or stockholders’ equity. In the case of the assets, further classify them as current assets; long-term investments; property, plant, and equipment; intangible assets; or ot

> Use the information presented below to complete the following table. Scenarios A, B, and C are independent scenarios. Assume that there are no dividends declared in any of the scenarios.

> Compute cash flows from operating activities for Edwards Company under the indirect reporting format. Edwards Company provided you with the following information for the current year. Accounts Payable relate to Selling, General and Administrative Expense

> Using the information from E6-9, compute the net cash flow from operating activities for Bernadino Company under the direct reporting format. Data From E6-9:

> Darin Development Company engaged in the following transactions during the current year. a. Borrowed $400,000 from Pleasantville Community Bank at the beginning of the year. The terms of the note call for annual payments of $50,000. The first annual paym

> The following items are from the financial statements of Tall Oak Company Compute Tall Oak’s debt-to-equity ratio and interest coverage ratio for 2018 and 2019. Comment on Tall Oak’s solvency and changes in solvency f

> Use the following excerpt of Dragonfly Corporation’s asset balances to compute Dragonfly’s working capital and current ratio for 2019 and 2018. Comment on Dragonfly’s liquidity and changes in liquidit

> Using the information provided in BE5-7, prepare a multiple-step income statement for the current year. Data From BE5-7:

> Use the information from E6-15 that Hockey Apparel Providers, Inc. provided for the current year to compute net cash flow from operating activities under the direct reporting format. Data From E6-15:

> Use the following information Hockey Apparel Providers, Inc. provided for the current year to compute net cash flow from operating activities under the indirect reporting format.

> Use Johnson & Johnson’s 2016 Annual Report, 10-K, to answer the following questions. You can locate Johnson & Johnson’s financial statements on its Web site, the Securities and Exchange Commission’s Web site of company reports, or the accompanying textbo

> For each of the following subsequent event financial statement disclosures, determine whether the treatment is proper. The fiscal year-end is December 31 in each scenario. The financial statements are issued on February 7, 2019. a. On January 21, 2019, t

> Use the following excerpt from Dragonfly Corporation’s balance sheet and its income statement to compute Dragonfly’s profit margin and return on assets for 2018 and 2019. Comment on Drag onfly’s profi

> Bluebird Products, Inc. provided the following information from its current-year trial balance. Bluebird issued $345,000 of no-par common stock on June 30 of the current year. The company is subject to a 40% income tax rate. The beginning balance in com

> Ciara’s Cookie Company provided the following account balances from its year-end trial balance. During the year, Ciara issued no-par common stock. The proceeds of the new issue were $25,000. The company is subject to a 40% income tax r

> Dane Products, Incorporated provided the following information for the current year ended December 31. Required: Prepare a statement of stockholders’ equity for the current year.

> Elegant Homes Corporation provided the following statement of net income on December 31, 2018, before the disposal of a business segment. The income statement includes the results of operations of Elegant’s mobile home division. The com

> Ciara’s Cookie Company provided the following accounts from its year end trial balance. The company is subject to a 40% income tax rate. Prepare a multiple-step income statement for the current year.

> IFRS. Using the information provided in BE5-7, prepare a statement of net income and additional disclosures that would meet IFRS requirements. Indicate items that IFRS requires be reported on the statement of net income. Use the condensed format. Data F

> Using the information provided in E5-5, prepare a condensed, multiple-step statement of net income for Boley Boxes, Inc. that includes all supporting schedules. Data From E5-5:

> The current year’s statement of net income for Boley Boxes, Inc. in a single-step format follows.

> Kimbro Concrete Companies is disposing of its blacktop segment this year and is reporting it as a discontinued operation on the statement of net income in the current year. The ratio of consolidated debt to equity is uniform for all operations of the com

> Techy Corporation, a calendar-year company, manufactures innovative technological equipment. Techy began experiencing extensive financial difficulties in the current fiscal year due to the entrance of several competitors into the industry. On December 31

> Moocher Company, a publicly traded company that has a December 31 year-end, manufactures and sells novelty toys. Recently, one of the toys that Moocher produced and sold was found to cause serious digestive problems for dogs that ate the toy. Accordingly

> The CFO of First Things Computing, Inc. (FTC) prepared the following net income statement for the year ended December 31, 2019. FTC had 15,000 common shares outstanding for the entire year. It had no preferred stock or dilutive securities. Thus, its ear

> The CFO of First Things Computing, Inc. (FTC) prepared the following balance sheet as of December 31, 2019. For the sake of simplicity, assume that FTC does not incur income tax expense. Thus, the impact on equity can be computed as the combination of t

> Use Foot Locker, Inc.’s balance sheet and other information provided on the next page to answer the following questions. a. Compute Foot Locker’s working capital in 2015 and 2014. b. Compute Foot Lockerâ€&#

> Pfizer Inc. is a U.S. company that manufactures and distributes pharmaceutical and consumer healthcare products that are similar to those sold by Johnson & Johnson. In the following, we present Johnson & Johnson’s profitability

> Pfizer Inc. is a US company that manufactures and distributes pharmaceutical and consumer healthcare products that are similar to those sold by Johnson & Johnson. Use the excerpts of Johnson & Johnson’s and Pfizerâ€&#

> Carr Corporation provided the following partial-trial balance for the current year. Prepare a single-step income statement for the year ended December 31. Carr is subject to a 40% income tax rate.

> Both U.S. GAAP and IFRS include the concept of comprehensive income. Comprehensive income is divided into net income and other comprehensive income. Read paragraphs 58 through 67 in SFAS No. 130 and paragraph BC49 through BC54 in IAS 1. Also read the dis

> Companies report all amounts related to other comprehensive income net of tax. Net of tax means that the amount of income (or loss) reported includes any income tax effects. Companies do not include the income tax expense (or benefit) related to items in

> A student needs to have $80,000 in four years. What amount must she invest today if her investment earns 12% annual interest compounded quarterly? Draw a timeline to illustrate the problem.

> Blake Shelton decides to invest $50,000 in a fund that will earn 8% annual interest compounded semiannually. How much will his investment be worth in three years? Draw a timeline to illustrate the problem.

> Adam Levine invested $100,000 in a fund that earns 8% annual interest compounded annually. How much will his investment be worth in five years? Draw a timeline to illustrate the problem.