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. Suppose that the bank offers to run the lockbox for a $20,000 compensating balance. Is the lockbox worthwhile? b. Suppose that the bank offers to run the lockbox for a fee of $.10 per check cleared instead of a compensating balance. What must the average check size be for the fee alternative to be less costly? Assume an interest rate of 6% per year. c. Why did you need to know the interest rate to answer part (b) but not to answer part (a)?
> Phoenix Corp. faltered in the recent recession but is recovering. Free cash flow has grown rapidly. Forecasts made in 2019 are as follows: Phoenix’s recovery will be complete by 2024, and there will be no further growth in net income or
> Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.8 million barrels per year in 2018, but production is declining at 7% per year for the foreseeable future. Costs of production, transportation, and administration add up
> True or false? a. The bid price is always greater than the ask price. b. An investor who wants to sell his stock immediately should enter a limit order. c. The sale of shares by a large investor usually takes place in the primary market. d. Electronic Co
> Write a spreadsheet program to construct a series of bond tables that show the present value of a bond given the coupon rate, maturity, and yield to maturity. Assume that coupon payments are semiannual and yields are compounded semiannually.
> A bond’s credit rating provides a guide to its price. In the fall of 2017 Aaa bonds yielded 3.6% and Baa bonds yielded 4.3%. If some bad news causes a 10% five-year bond to be unexpectedly downrated from Aaa to Baa, what would be the effect on the bond
> True or false? The efficient-market hypothesis assumes that: a. There are no taxes. b. There is perfect foresight. c. Successive price changes are independent. d. Investors are irrational. e. There are no transaction costs. f. Forecasts are unbiased.
> The following table shows the prices of a sample of Narnian Treasury strips in December 2018. Each strip makes a single payment of $1,000 at maturity. a. Calculate the annually compounded, spot interest rate for each year. b. Is the term structure upward
> Look again at the bonds in part (b) of Problem 24. a. Explain intuitively why the yield to maturity on the 10% bond is less than that on the 5% bond. b. What should be the yield to maturity on a five-year zero-coupon bond? c. Show that the correct yield
> Choose 10 U.S. Treasury bonds with different coupons and different maturities. Calculate how their prices would change if their yields to maturity increased by 1 percentage point. Are long- or short-term bonds most affected by the change in yields? Are h
> Bond prices and yields In November 2017, Treasury 4¾s of 2041 offered a semiannually compounded yield to maturity of 2.6%. Recognizing that coupons are paid semiannually, calculate the bond’s price.
> The following statements are true. Explain why. a. If a bond’s coupon rate is higher than its yield to maturity, then the bond will sell for more than face value. b. If a bond’s coupon rate is lower than its yield to maturity, then the bond’s price will
> A 10-year bond is issued with a face value of $1,000, paying interest of $60 a year. If interest rates increase shortly after the bond is issued, what happens to the bonds: a. Coupon rate? b. Price? c. Yield to maturity?
> A bank loan requires you to pay $70,000 at the end of each of the next eight years. The interest rate is 8%. a. What is the present value of these payments? b. Calculate for each year the loan balance that remains outstanding, the interest payment on the
> Annuities due A store offer two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a 10% discount from the purchase price. a. Which i
> The $40 million lottery prize that you have just won actually pays out $2 million a year for 20 years. The interest rate is 8%. a. If the first payment comes after 1 year, what is the present value of your winnings? b. What is the present value if the fi
> Lofting Snodbury is considering investing in a new boring machine. It costs $380,000 and is expected to produce the following cash flows: If the cost of capital is 12%, what is the machine’s NPV?
> Some extreme bubbles are obvious with hindsight, after they burst. But how would you define a bubble? There are many examples of good news and rising stock prices, followed by bad news and falling stock prices. Can you set out rules and procedures to dis
> a. If the present value of $139 is $125, what is the discount factor? b. If that $139 is received in year 5, what is the interest rate?
> In the five years preceding the end of 2016, the price of Amazon shares rose by 34% a year. If you had invested $100 in Amazon at the beginning of this period, how much would you have by the end of the period?
> Compute the future value of a $100 investment for the following combinations of rates and times. a. r = 6%, t = 10 years b. r = 6%, t = 20 years c. r = 4%, t = 10 years d. r = 4%, t = 20 years
> In 2017, Leonardo da Vinci’s painting Salvator Mundi sold for a record $450.3 million. In 1958, it sold for $125, equivalent in purchasing power to about $1,060 at 2017 prices. The painting was originally commissioned by King Louis XII of France in about
> You are contemplating membership in the St. Swithin’s and Ancient Golf Club. The annual membership fee for the coming year is $5,000, but you can make a single payment today of $12,750, which will provide you with membership for the next three years. Sup
> a. The cost of a new automobile is $10,000. If the interest rate is 5%, how much would you have to set aside now to provide this sum in five years? b. You have to pay $12,000 a year in school fees at the end of each of the next six years. If the interest
> Old Time Savings Bank pays 4% interest on its savings account. If you deposit $1,000 in the bank and leave it there: a. How much interest will you earn in the first year? b. How much interest will you earn in the second year? c. How much interest will yo
> Do large block holders increase company value? Does your answer depend on the structure of the financial system?
> It is suggested that family control allows the firm to focus on the long-term interests of the firm. What do you think are the offsetting disadvantages of family ownership?
> True/false? a. In China, networks of companies are known as keiretsus. b. Dual-class equity prevents any one group of shareholders from maintaining control. c. Large firms in Germany have two boards of directors. d. Opaqueness is particularly dangerous i
> “The strong form of the efficient-market hypothesis is nonsense. Look at mutual fund X; it has had superior performance for each of the last 10 years.” Does the speaker have a point? Suppose that there is a 50% probability that X will obtain superior per
> Generally in most Anglo-Saxon economies, managers have an obligation to act in the interests of shareholders. In other countries, they may have wider obligations to society as a whole. What are the pros and cons of the two sets of obligations?
> What is a keiretsu? Give a brief description. What are some of their advantages and disadvantages?
> True/ false? a. Direct holdings of equity by households are larger in Japan than in the United States. b. Bank financing of corporations is relatively important in Japan and continental Europe. c. Intercompany loans and trade credit are particularly impo
> Examine some recent examples of divestitures. What do you think were the underlying reasons for them? How did investors react to the news?
> True or false? a. Carve-out or spin-off of a division improves incentives for the division’s managers. b. The announcement of a spin-off is generally followed by a sharp fall in the stock price. c. Privatizations are generally followed by massive layoffs
> List the disadvantages of traditional U.S. conglomerates. Can private-equity firms overcome these disadvantages?
> True or false? a. One of the first tasks of an LBO’s financial manager is to pay down debt. b. Once an LBO or MBO goes private, it almost always stays private. c. Many early MBOs were arranged for unwanted divisions of large diversified companies. d. “Ca
> In Section 31-5, we described how Valeant and its ally, Pershing Square, lost the battle to acquire Allergan. Sometimes, the losers in a takeover battle can also win if they own a toehold stake in the target’s stock. Between April and June 2014, Pershing
> Connect each term to its correct definition or description. a. poison pill b. tender offer c. shark repellent d. merger e. tax inversion f. proxy contest A. Changes in the corporate charter that are designed to deter an unwelcome takeover B. Measure in w
> Examine a recent merger in which at least part of the payment made to the seller was in the form of stock. Use stock market prices to obtain an estimate of the gain from the merger and the cost of the merger.
> 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
> 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.
> Calculate convenience yield for magnoosium scrap from the following information: 1. Spot price: $2,550 per ton. 2. Futures price: $2,408 for a one-year contract. 3. Interest rate: 12%. 4. Storage costs: $100 per year.
> 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?
