What is fair market value?
> 1. Which of the following statements about IRR and NPV is incorrect? a. NPV and IRR yield the same ranking when evaluating projects. b. NPV assumes that cash flows are reinvested at the cost of capital of the firm. c. A project may have multiple IRRs whe
> 1. What will probably happen if a firm does not invest effectively? a. The firm could still maintain its competitive advantage. b. The cost of capital of the firm will be unchanged. d. The short‐term performance will be unaffected. 2. Which of the follo
> 1. Which of the following statements about a call option is false? a. A call option is the right, not the obligation, to buy the underlying asset. b. A call option is in the money if the asset price is less than the strike price. c. A call option is at t
> Assume two bonds in the market—bond A and bond B—have the same rating and the same YTM. Discuss three reasons that might make one bond preferable to the other.
> 1. Which of the following is not one of the three types of merger? a. Vertical M&A b. Horizontal M&A c. Proxy contest d. Conglomerate 2. Which of the following M&As is valid? a. VA T $400,000; VA $200,000; VT $205,000 b. VA T $390,000; VA $200,000; VT $
> 1. Which of the following statements about debt is incorrect? a. Interest payments and principal payments are fixed commitments. b. Interest payments are not tax deductible. c. Bond holders are paid a series of fixed periodic amounts before the maturity
> If you were opening a copy centre, do you think you would lease or borrow to buy the equipment and why?
> Why do you think that the major market for leasing is often SMEs, rather than large corporations?
> Why are leases often more flexible than a borrow-purchase option?
> What is a sale and leaseback agreement (SLB)?
> What type of leases do chartered banks normally make?
> What is the difference between an operating and a financial lease?
> Briefly describe the negative pledge and cross-default clauses.
> Discuss the rationale for including debt covenants in a public issue.
> If the interest rate for non‐fraudulent bonds is 8 percent, and chances are that one out of eight bonds is fraudulent, what is the interest rate based on a one‐year investment and assuming the market does not require a risk premium?
> Define mortgage bonds, secured debentures, unsecured debentures, and subordinated debt.
> What is SVAR and why do managers prefer to finance with shares than cash?
> What is the empirical record on the success of M&As in the 1990s?
> What tax benefits can occur in an M&A?
> What real options have you been given over the past year and how valuable were they? What factors do you think influenced your valuation of them?
> How are implied volatilities calculated? What information do they provide?
> Where are options traded?
> Briefly explain why short-form prospectuses are permitted by regulators for a large percentage of seasoned issues, and explain why they have led to the growth in popularity of bought deals.
> How do continuous disclosure requirements protect investors?
> Explain why the lock-up period is an important consideration for investors, especially for issues that are still largely held by insiders.
> You are a risk arbitrageur and you observe the following information about a deal: the current price of the target is $22 per share and the current price of the bidder is $16 per share. The bidder is offering two bidder shares per target share, and you e
> Explain how to synthetically create long and short positions in calls, puts, and the underlying assets using put-call parity.
> Explain why the put-call parity relationship should hold if markets are efficient.
> Illustrate how to combine the four basic option positions to create a variety of net payoff positions.
> Briefly describe the main factors that affect a put or a call option’s value, and explain how they affect the value of each.
> Explain how to estimate the intrinsic value and time value for a put option.
> Contrast the payoff from a put option with that from a call option.
> Discuss any differences in the evaluation of a replacement decision versus the evaluation of an expansion decision.
> What is measured by each of the five Greeks discussed in this section?
> How can the Black-Scholes equation be used to price options?
> Define yield spreads and explain how they arise.
> When Collingwood Corp. issued its 60‐day commercial paper the promised yield was 10 percent, whereas the 60‐day T‐bill yield was 6 percent. There is a 1-percent chance that Collingwood will default on this debt. If investors were willing to pay the full
> Contrast treasury bills, commercial paper, and BAs in terms of who issues them, their basic structure and default risk, and the yields they provide.
> Explain how interest is received on most money market instruments.
> What is the difference between an acquisition and a merger?
> What limitations of scenario analysis does the real option valuation approach address?
> What insights can be gained by using sensitivity analysis, scenario analysis, and NPV break-even analysis?
> What is the majority of the minority rule?
> What is an amalgamation?
> When does EPS increase when using a share swap?
> What is free cash flow?
> Why do differing capital structures cause problems with using P/E multiples?
> Collingwood Corp. is able to issue its 60‐day commercial paper at par with a promised yield of 10 percent per year. The current T‐bill yield is 6 percent per year (or 1 percent for the 60‐day period). The expected return on the commercial paper is 1.5 pe
> What key multiples are used in valuing companies?
> What is the difference between value and price?
> What three characteristics does the CRA look for to determine whether interest payments are tax deductible?
> Explain how to estimate the after-tax cost of debt.
> Distinguish debt from equity.
> Explain how to calculate comparisons in the lease-versus-buy decision when the lease in question is an operating lease.
> How do taxes affect the annual cash flows and terminal cash flows of an investment project?
> Explain why the valuation by components approach can save computational time and still lead to the correct answer.
> Why does the initial cash outlay often exceed the purchase price of an asset?
> Michael M. specializes in buying high‐risk commercial paper; his required return on these investments is 14 percent per year. He is considering buying some 60‐day paper from Collingwood Corp. with a promised yield of 10 percent per year. However, Michael
> How does the analysis change when the lease is a financial lease?
> Is the PI rule consistent with the NPV rule?
> What is the crossover rate?
> What are the reinvestment rate assumptions underlying NPV and IRR?
> Why do we sometimes get multiple IRRs for a project?
> What discount rate do we use to determine the NPV of a project and why?
> Why is the payback period a poor evaluation technique?
> When is it best to mount a hostile bid?
> What are some standard takeover defences?
> What is a shareholder rights plan?
> In Practice Problem 15, assuming that Nash Business School has an effective tax rate of 40 percent, should the shuttle buses be bought or leased?
> What is due diligence?
> What goes into a confidentiality agreement and why do people sign them?
> Why do we not deduct interest costs from the cash flows to be discounted?
> What are externalities and opportunity costs?
> What do we mean by incremental cash flows?
> How should we treat taxes and inflation when determining the present value of future cash flows?
> How can we compare two choices, one involving a wooden bridge lasting 10 years and another involving a steel bridge lasting 25 years that costs more?
> What is the difference between independent and mutually exclusive projects?
> Why might inflation affect cash inflows differently from the way it would affect cash outflows?
> Why is it usually more precise to use nominal cash flows and nominal discount rates when evaluating projects?
> In Practice Problem 24, what would the lease payment have to be for Paolo to be indifferent about whether the company buys or leases the electric cars?
> Describe the market or disaster “out” clause.
> Prepare a schedule of the annual capital cost allowance for a major project. The initial investment is $80,000, the tax rate is 40 percent, and the CCA rate is 30 percent. Determine the amount of CCA allowed each year. Assume that the item will continue
> A bidder paid $1,500 for a target. The target’s market asset is $2,000 and market liability is $1,250. What is the goodwill created during the acquisition?
> Does put‐call parity hold for the following? Riskfree rate = 5%, P0 = $13, C0 = $10, stock price (S) = $30, t = 4 years, strike price (X) = $33. If not, what is the put price according to put‐call parity, assuming the other figures are correct?
> Assume stock XYZ does not pay dividends and has a market value of $98 per share. There is a 60‐percent chance that the stock will trade for $130 in one year, and a 40‐ percent chance that it will trade for $55 in one year. What is the value of a put opti
> What is the strike price (X) if PU is $50, PD is $42, and the hedge ratio ( h) is 2?
> Calculate the put price (P), according to put‐call parity, given the information in Practice Problem 29.
> Calculate the present value of the operating cash flows if the revenue of a project grows at 5 percent, while expense grows at 4 percent, given that Revenue1 = $15,000 and Expense 1 = $7,000. Assume the firm is allequity financed; RF = 8%; project beta =
> You are given the following information: CFBT = $215,000; T = 40%; this project will last for eight years. The project has a 2.5-percent extra risk premium compared with the firm ’ s cost of capital. The firm has 40-percent debt at a cost of 6 percent an
> You are given the following information: C0 = $300,000; CCA rate (d) = 0.3; T = 0.4; RF = 4.5%; project beta = 1.2; market risk premium = 10%; SVn = $35,000; UCCn = $55,000. This project has a 5-year life. a. Calculate the discount rate. b. Assuming that
> Paolo, the CEO of Paola Bros Inc., wants to have a fleet of electric cars. These electric cars cost $1.5 million. For tax purposes, assume that these cars will depreciate at a rate of $160,000 per year. In five years, the electric cars can be sold for $8
> List and briefly describe the four basic stages of the IPO process.
> Determine the call price ( C ), given the following information: stock price ( S) $36, s trike price (X) $32, r isk-free rate (r) 5% , t 2 years, 20%.
> What is the price of a put option with a strike price of $50 and six months to maturity when the stock price is currently trading at $45? Assume the stock‐price variance is 0.5 and the risk‐free rate is 5 percent.
> Complete the following table. Assume that the asset class is left open, and/or the salvage value is less than the UCC for the entire class. CCA Tax Discount Initial Rate Rate Rate Investment Value Life (n) Shields) Salvage Project Тах A 15% 35% 10% $
> Back in their college days, David and Douglas Finn started renting refrigerators to other students for use in their dormitory rooms. Over the years, Finns’ Fridges has grown and financed its operations by retaining most of the profits it made. Now, howev
> What are continuous disclosure requirements?
> Fill in the missing information in the following table for a non‐dividend‐paying stock and European call options.
> Richards & Co. Analysts has provided FinCorp Inc. with incomplete information, and it is your job to fill in the missing information in the table below. At expiration Value of Value of Payoff Long or Call or Strike option underlying (intrinsic Pr
> Why do corporations issue long‐term bonds, knowing that interest rate risk is higher for longer‐term bonds?
