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Questions and Answers of Finance

How can the firm use currency options to hedge foreign-currency exposures resulting from international transactions?
N and M Corp. is considering leasing a new machine for $25,000 per year. The lease arrangement calls for a 5-year lease with an option to purchase the machine at the end of the lease for $3,500. The
During the past 2 years Meacham Industries issued three separate convertible bonds. For each of them, calculate the conversion price:a. A $1,000-par-value bond that is convertible into 10 shares of
Newcomb Company has a bond outstanding with a $1,500 par value and convertible at $30 per share. What is the bond’s conversion ratio? If the underlying stock currently trades at $25 per share,
Crystal Cafes recently sold a $2,000-par-value, 10-year convertible bond with an 8% coupon interest rate. The interest payments will be paid annually at the end of each year and the principal will be
A 6-month call option on 100 shares of SRS Corp. stock is selling for $300. The strike price for the option is $40. The stock is currently selling at $38 per share. Ignoring brokerage fees, what
Given the lease payments and terms shown in the following table, determine the yearly after-tax cash outflows for each firm, assuming that lease payments are made at the end of each year and that the
For each of the loan amounts, interest rates, annual payments, and loan terms shown in the following table, calculate the annual interest paid each year over the term of the loan, assuming that the
Schuyler Company wishes to purchase an asset costing $117,000. The full amount needed to finance the asset can be borrowed at 14% interest. The terms of the loan require equal end-of-year payments
JLB Corporation is attempting to determine whether to lease or purchase research equipment. The firm is in the 40% tax bracket, and its after tax cost of debt is currently 8%. The terms of the
Northwest Lumber Company needs to expand its facilities. To do so, the firm must acquire a machine costing $80,000. The machine can be leased or purchased. The firm is in the 40% tax bracket, and its
Joanna Browne is considering either leasing or purchasing a new Chrysler Sebring convertible that has a manufacturer’s suggested retail price (MSRP) of $33,000. The dealership offers a 3-year lease
Given the lease payments, terms remaining until the leases expire, and discount rates shown in the following table, calculate the capitalized value of each lease, assuming that lease payments are
Calculate the conversion price for each of the following convertible bonds:a. A $1,000-par-value bond that is convertible into 20 shares of common stock.b. A $500-par-value bond that is convertible
What is the conversion ratio for each of the following bonds?a. A $1,000-par-value bond that is convertible into common stock at $43.75 per share.b. A $1,000-par-value bond that is convertible into
What is the conversion (or stock) value of each of the following convertible bonds?a. A $1,000-par-value bond that is convertible into 25 shares of common stock. The common stock is currently selling
Find the conversion (or stock) value for each of the $1,000-par-value convertible bonds described in the following table.
Calculate the straight bond value for each of the bonds shown in the tablebelow.
Eastern Clock Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10% annual coupon interest rate
Craig’s Cake Company has an outstanding issue of 15-year convertible bonds with a $1,000 par value. These bonds are convertible into 80 shares of common stock. They have a 13% annual coupon
Calculate the implied price of each warrant for each of the bonds shown in the following table.
Dinoo Mathur wishes to determine whether the $1,000 price asked for Stanco Manufacturing’s bond is fair in light of the theoretical value of the attached warrants. The $1,000-par-value, 30-year,
Kent Hotels has warrants that allow the purchase of three shares of its outstanding common stock at $50 per share. The common stock price per share and the market value of the warrant associated with
Susan Michaels is evaluating the Burton Tool Company’s common stock and warrants to choose the better investment. The firm’s stock is currently selling for $50 per share; its warrants to purchase
Tom Baldwin can invest $6,300 in the common stock or the warrants of Lexington Life Insurance. The common stock is currently selling for $30 per share. Its warrants, which provide for the purchase of
Define and differentiate among the members of each of the following sets of terms: (a) Mergers, consolidations, and holding companies;(b) Acquiring company and target company; (c) Friendly merger and
Briefly describe each of the following motives for merging: (a) Growth or diversification, (b) Synergy, (c) Fund raising, (d) Increased managerial skill or technology, (e) Tax considerations, (f)
Briefly describe each of the following types of mergers: (a) Horizontal,(b) Vertical, (c) Congeneric, and (d) Conglomerate.
What is a leveraged buyout (LBO)? What are the three key attributes of an attractive candidate for acquisition via an LBO?
What is an operating unit? What is a divestiture? What are four common methods used by firms to divest themselves of operating units? What is breakup value?
Describe the procedures that are typically used by an acquirer to value a target company, whether it is being acquired for its assets or as a going concern.
What is the ratio of exchange? Is it based on the current market prices of the shares of the acquiring and target firms? Why may a long-run view of the merged firm’s earnings per share change a
What role do investment bankers often play in the merger negotiation process? What is a tender offer? When and how is it used?
Briefly describe each of the following takeover defenses against a hostile merger: (a) White knight, (b) Poison pill, (c) Greenmail, (d) Leveraged recapitalization, (e) Golden parachutes, and (f)
What key advantages and disadvantages are associated with holding companies? What is pyramiding and what are its consequences?
Discuss the differences in merger practices between U.S. companies and companies in other countries. What changes are occurring in international merger activity, particularly in Western Europe and
What are the three types of business failure? What is the difference between insolvency and bankruptcy? What are the major causes of business failure?
Define an extension and a composition, and explain how they might be combined to form a voluntary settlement plan to sustain the firm. How is a voluntary settlement resulting in liquidation handled?
What is the concern of Chapter 11 of the Bankruptcy Reform Act of 1978? How is the debtor in possession (DIP) involved in(1) The valuation of the firm,(2) The recapitalization of the firm, and(3) The
What is the concern of Chapter 7 of the Bankruptcy Reform Act of 1978? Under which conditions is a firm liquidated in bankruptcy? Describe the procedures (including the role of the trustee) involved
Indicate in which order the following claims would be settled when distributing the proceeds from liquidating a bankrupt firm: (a) Claims of preferred stockholders; (b) Claims of secured creditors;
Toni’s Typesetters is analyzing a possible merger with Pete’s Print Shop. Toni’s has a tax loss carry forward of $200,000, which it could apply to Pete’s expected earnings before taxes of
Cautionary Tales, Inc., is considering the acquisition of Danger Corp. at its asking price of $150,000. Cautionary would immediately sell some of Danger’s assets for $15,000 if it makes the
Willow Enterprises is considering the acquisition of Steadfast Corp. in a stock swap transaction. Currently, Willow’s stock is selling for $45 per share. Although Steadfast’s shares are currently
Phylum Plants’ stock is currently trading at a price of $55 per share. The company is considering the acquisition of Taxonomy Central, whose stock is currently trading at $20 per share. The
All-Stores, Inc., is a holding company that has voting control over both General Stores and Star Stores. All-Stores owns General Stores and Star Stores common stock valued at $15,000 and $12,000,
Connors Shoe Company is contemplating the acquisition of Salinas Boots, a firm that has shown large operating tax losses over the past few years. As a result of the acquisition, Connors believes that
Trapani Tool Company is evaluating the acquisition of Sussman Casting. Sussman has a tax loss carry forward of $1.8 million. Trapani can purchase Sussman for $2.1 million. It can sell the assets for
Hahn Textiles has a tax loss carry forward of $800,000. Two firms are interested in acquiring Hahn for the tax loss advantage. Reilly Investment Group has expected earnings before taxes of $200,000
Zarin Printing Company is considering the acquisition of Freiman Press at a cash price of $60,000. Freiman Press has liabilities of $90,000. Freiman has a large press that Zarin needs; the remaining
Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the
In corporate settings, it is not unusual for firms to assess the financial viability of a business unit and decide whether to retain it within the corporation or divest it. The selling of units that
Marla's Cafe is attempting to acquire the Victory Club. Certain financial data on these corporations are summarized in the following table.Marla's Cafe has sufficient authorized but unissued shares
Cleveland Corporation is interested in acquiring Lewis Tool Company by swapping 0.4 share of its stock for each share of Lewis stock. Certain financial data on these companies are given in the
Calculate the ratio of exchange (1) of shares and (2) in market price for each of the cases shown in the following table. What does each ratio signify?Explain.
Graham & Sons wishes to evaluate a proposed merger into the RCN Group. Graham had 2012 earnings of $200,000, has 100,000 shares of common stock outstanding, and expects earnings to grow at an
Data for Henry Company and Mayer Services are given in the following table. Henry Company is considering merging with Mayer by swapping 1.25 shares of its stock for each share of Mayer stock. Henry
Scully Corporation holds enough stock in company A and company B to give it voting control of both firms. Consider the accompanying simplified balance sheets for these companies.a. What percentage of
Classify each of the following voluntary settlements as an extension, a composition, or a combination of the two.a. Paying all creditors 30 cents on the dollar in exchange for complete discharge of
What are the important international trading blocs? What is the European Union and what is its single unit of currency? What is GATT? What is the WTO?
What is a joint venture? Why is it often essential to use this arrangement? What effect do joint-venture laws and restrictions have on the operation of foreign-based subsidiaries?
From the point of view of a U.S.-based MNC, what key tax factors need to be considered?
Discuss the major reasons for the growth of the Euromarket. What is an offshore center? Name the major participants in the Euromarket.
Under FASB No. 52, what are the translation rules for financial statement accounts? How does the temporal method differ from these rules?
Define spot exchange rate and forward exchange rate. Define and compare accounting exposures and economic exposures to exchange rate fluctuations.
Explain how differing inflation rates between two countries affect their exchange rate over the long term.
Discuss macro and micro political risk. What is the emerging third path to political risk? Describe some techniques for dealing with political risk.
Indicate how NPV can differ depending on whether it is measured from the parent MNC’s point of view or from that of the foreign subsidiary, when cash flows may be blocked by local authorities.
Briefly discuss some of the international factors that cause the capital structures of MNCs to differ from those of purely domestic firms.
Describe the difference between foreign bonds and Eurobonds. Explain how each is sold, and discuss the determinant(s) of their interest rates.
What are the long-run advantages of having more local debt and less MNC-based equity in the capital structure of a foreign subsidiary?
What is the Eurocurrency market? What are the main factors determining foreign exchange rates in that market? Differentiate between the nominal interest rate and the effective interest rate in this
Discuss the steps to be followed in adjusting a subsidiary’s accounts relative to third parties when that subsidiary’s local currency is expected to appreciate in value in relation to the
Outline the changes to be undertaken in intra-MNC accounts if a subsidiary’s currency is expected to depreciate in value relative to the currency of the parent MNC.
What are some of the major reasons for the rapid expansion in international mergers and joint ventures of firms?
Santana Music is a U.S.-based MNC whose foreign subsidiary had pretax income of $55,000; all after-tax income is available in the form of dividends to the parent company. The local tax rate is 40%,
Assume that the Mexican peso currently trades at 12 pesos to the U.S. dollar. During the year U.S. inflation is expected to average 3%, while Mexican inflation is expected to average 5%. What is the
If Like A Lot Corp. borrows yen at a nominal annual interest rate of 2% and during the year the yen appreciates by 10%, what will the effective annual interest rate be for the loan?
Carry Trade, Inc., borrows yen when the yen is trading at ¥110/US$. If the nominal annual interest rate of the loan is 3% and at the end of the year the yen trades at ¥120/US$, what is the
Denim Industries can borrow its needed financing for expansion using one of two foreign lending facilities. It can borrow at a nominal annual interest rate of 8% in Mexican pesos or at 3% in Canadian
A U.S.-based MNC has a foreign subsidiary that earns $250,000 before local taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of
A U.S.-based MNC has a subsidiary in France (local currency, euro, ‚¬). The balance sheet and income statement of the subsidiary follow. On December 31, 2112, the exchange rate is
Fred Nappa is planning to take a wine-tasting tour through Italy this summer. The tour will cost 2,750 euros (€) and includes transportation, hotels, and a guide. Fred estimates that round-trip
The economies of the world tend to rise and fall in cycles that offset each other. International stocks can provide possible diversification for a portfolio heavy on U.S. equities. Because research
A U.S.-based multinational company has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the
Organic Solutions (OS), one of the nation’s largest plant wholesalers in the southeastern United States, was poised for expansion. Through strong profitability, a conservative dividend policy, and
What is finance? Explain how this field affects all of the activities in which businesses engage.
What is the financial services area of finance? Describe the field of managerial finance.
Which legal form of business organization is most common? Which form is dominant in terms of business revenues?
Describe the roles and the basic relationships among the major parties in a corporation—stockholders, board of directors, and managers. How are corporate owners rewarded for the risks they take?
Briefly name and describe some organizational forms other than corporations that provide owners with limited liability.
Why is the study of managerial finance important to your professional life regardless of the specific area of responsibility you may have within the business firm? Why is it important to your
What is the goal of the firm and, therefore, of all managers and employees? Discuss how one measures achievement of this goal.
For what three basic reasons is profit maximization inconsistent with wealth maximization?
What is risk? Why must risk as well as return be considered by the financial manager who is evaluating a decision alternative or action?
Describe the role of corporate ethics policies and guidelines, and discuss the relationship that is believed to exist between ethics and share price.
In what financial activities does a corporate treasurer engage?
What is the primary economic principle used in managerial finance?
What are the major differences between accounting and finance with respect to emphasis on cash flows and decision making?
What are the two primary activities of the financial manager that are related to the firm’s balance sheet?

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