No More Pencils, Inc., disburses checks every two weeks that average $58,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .015 percent per day for these seven days? Ignore the effects of compounding interest.
> A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded continuously. If the exercise price is $0, what is the pr
> What are some actions a small company like The Grandmother Calendar Company can take (besides expansion of capacity) if it finds itself in a situation in which growth in sales outstrips production?
> A stock has an expected return of 13.1 percent, a beta of 1.28, and the expected return on the market is 11 percent. What must the risk-free rate be?
> Which was the biggest culprit here: Too many orders, too little cash, or too little production capacity?
> Sysco Corporation, the distributor of food and food-related products (not to be confused with Cisco Systems), announced it had signed an interest rate swap. The interest rate swap effectively converted the company’s $100 million, 4.6 percent interest rat
> A stock has an expected return of 13.4 percent, its beta is 1.60, and the risk-free rate is 5.5 percent. What must the expected return on the market be?
> A controversy erupted regarding bond-rating agencies when some agencies began to provide unsolicited bond ratings. Why do you think this is controversial?
> If financial markets are perfectly competitive and the Eurodollar rate is above that offered in the U.S. loan market, you would immediately want to borrow money in the United States and invest it in Eurodollars. True or false? Explain.
> Is it true that a U.S. Treasury security is risk-free?
> If the firm was so successful at selling, why wouldn’t a bank or some other lender step in and provide it with the cash it needed to continue?
> Show that the NPV of a merger can be expressed as the value of the synergistic benefits, D V , less the merger premium.
> In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain
> What is the impact of an increase in the volatility of the underlying stock’s return on an option’s value? Explain.
> A stock has a beta of 1.15, the expected return on the market is 11 percent, and the risk-free rate is 5 percent. What must the expected return on this stock be?
> What are the implications for bond investors of the lack of transparency in the bond market?
> In evaluating the Cayenne, what do you think Porsche needs to assume regarding the substantial profit margins that exist in this market? Is it likely that they will be maintained as the market becomes more competitive, or will Porsche be able to maintain
> What do you suppose happens to the plane at the end of the lease period?
> An unfortunately common practice goes like this (Warning: Don’t try this at home): Suppose you are out of money in your checking account; however, your local grocery store will, as a convenience to you as a customer, cash a check for you. So, you cash a
> BlueSky lengthened its payables period to “control costs and optimize cash flow.” Exactly what is the cash benefit to BlueSky from this change? Last month, BlueSky Airline announced that it would stretch out its bill payments to 45 days from 30 days. The
> In the context of capital budgeting, what is an opportunity cost?
> Do you think the company would have suffered the same fate if its product had been less popular? Why or why not?
> Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market?
> Porsche was one of the last manufacturers to enter the sports utility vehicle market. Why would one company decide to proceed with a product when other companies, at least initially, decide not to enter the market?
> What factors influence a firm’s choice of external versus internal equity financing?
> Another option usually available is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?
> Referring back to the Bank of America example at the beginning of the chapter, note that we suggested that Bank of America’s stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?
> Suppose a firm enters a fixed for floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.
> Nina Corp. uses no debt. The weighted average cost of capital is 9 percent. If the current market value of the equity is $37 million and there are no taxes, what is EBIT?
> You own a stock portfolio invested 10 percent in Stock Q , 35 percent in Stock R , 20 percent in Stock S , and 35 percent in Stock T . The betas for these four stocks are .75, 1.90, 1.38, and 1.16, respectively. What is the portfolio beta?
> Looking back at the crossover bonds we discussed in the chapter, why do you think split ratings such as these occur?
> In the context of capital budgeting, what is an opportunity cost?
> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation as erosion?
> In evaluating the Cayenne, would you consider the possible damage to Porsche’s reputation as erosion?
> Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.
> If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate in value over this period, is there any value in hedging your currency exposure?
> One option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?
> Is it ethical for large firms to unilaterally lengthen their payables periods, particularly when dealing with smaller suppliers?
> What is the basic goal of financial management with regard to capital structure?
> What is the difference between internal financing and external financing?
> What is wrong with measuring the performance of a U.S. growth stock manager against a benchmark composed of British stocks?
> Could a company’s cash flow to stockholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?
> Suppose the interest rate on T-bills suddenly and unexpectedly rises. All other things being the same, what is the impact on call option values? On put option values?
> What is the difference between the term structure of interest rates and the yield curve?
> Suppose that when TMCC offered the security for $24,099 the U.S. Treasury had offered an essentially identical security. Do you think it would have had a higher or lower price? Why?
> Is it unfair or unethical for corporations to create classes of stock with unequal voting rights?
> We discussed five international capital market relationships: Relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you expect to hold most closely? Which do you think would be most likely to be violated?
> Suppose a company in which you own stock has attracted two take over offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment affect your answer at all?
> If a company’s inventory carrying costs are $5 million per year and its fixed order costs are $8 million per year, do you think the firm keeps too much inventory on hand or too little? Why?
> It is sometimes argued that excess cash held by a firm can aggravate agency problems and, more generally, reduce incentives for shareholder wealth maximization. How would you describe the issue here?
> What impact did the announcement have on BlueSky’s suppliers?
> As you increase the length of time involved, what happens to future values? What happens to present values?
> A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuously compounded rate of interest?
> Explain why the after tax borrowing rate is the appropriate discount rate to use in lease evaluation. Refer to the following example for Questions 10–12. In May 2011, Air Lease Corporation (ALC) announced that it had signed lease agreements for 29 aircra
> Firms sometimes use the threat of a bankruptcy filing to force creditors to renegotiate terms. Critics argue that in such cases the firm is using bankruptcy laws “as a sword rather than a shield.” Is this an ethical tactic?
> What is homemade leverage?
> Both ROA and ROE measure profitability. Which one is more useful for comparing two companies? Why?
> You own a callable, convertible bond with a conversion ratio of 24.25. The stock is currently selling for $48 per share. The issuer of the bond has announced a call at a call price of 110. What are your options here? What should you do?
> Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.
> What are the three factors that determine a company’s price−earnings ratio?
> Suppose the current exchange rate for the Polish zloty is Z 3.14. The expected exchange rate in three years is Z 3.23. What is the difference in the annual inflation rates for the United States and Poland over this period? Assume that the anticipated rat
> If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity (ROE)?
> Why does the value of a share of stock depend on dividends?
> What impact did this change in payables policy have on BlueSky’s operating cycle? Its cash cycle?
> Why will convertible bonds not be voluntarily converted to stock before expiration?
> Your company currently uses traditional capital budgeting techniques, including net present value. After hearing about the use of real option analysis, your boss decides that your company should use real option analysis in place of net present value. How
> A put option and a call option with an exercise price of $85 and three months to expiration sell for $2.40 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuously, what is the current stock price?
> Why is the use of debt financing referred to as financial “leverage”?
> Critically evaluate the following statements: Playing the stock market is like gambling. Such speculative investing has no social value other than the pleasure people get from this form of gambling.
> How can the return on a portfolio be expressed in terms of a factor model?
> Why is it not necessarily bad for the operating cash flow to be negative for a particular period?
> True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock. Explain.
> Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it?
> Define financial distress using the stock-based and flow-based approaches.
> Given that eGain Communications was up by almost 412 percent for 2011, why didn’t all investors hold eGain Communications?
> How does the number of periods in a moving average affect the responsiveness of the forecast?
> What advantages as a forecasting tool does exponential smoothing have over moving averages?
> What are the main uses of time study information?
> What is a time standard? What factors must be taken into account when developing standards?
> How are devices such as flow process charts and worker-machine charts useful?
> What are motion study principles? How are they classified?
> What is job design, and why is it important?
> What trade-offs are involved when deciding how often to rebalance an assembly line?
> As Foxconn cuts jobs as it shifts to greater use of automation, jobs will be created in other companies. In what types of companies would you expect to see jobs created?
> Determine the approximate number of tons of salt produced annually.
> Where would you place salt production in the product-process spectrum?
> Contrast the use of MAD and MSE in evaluating forecasts.
> What are some of the possible reasons why the company continues to use the old processing equipment instead of buying new, more modern equipment?
> Do you think that inadequate strategic planning was a factor that resulted in the company’s asking for trade protection?
> Briefly describe quality assurance efforts in round can production.
> What is group technology?
> What is cellular manufacturing? What are its main benefits and limitations?
> Why are product layouts atypical in service environments?
> Briefly outline the impact that job sequence has on each of the layout types.
> Briefly discuss the advantages and disadvantages of automation.
> Explain the importance of process selection in system design.
> Name two unethical behaviors related to process selection and two related to layout, and the ethical principles they violate.
> What factors would you consider in deciding whether to use wide or narrow control limits for forecasts?
> What are the major trade-offs in capacity planning?
> A new machine will cost $18,000, but result it will in savings of $2,400 per year. What will the payback time be in years?
> Why is the degree of customization an important consideration in process planning?
