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Questions and Answers of Finance

Brash Corporation initiated a new corporate strategy that fixes its annual dividend at $2.25 per share forever. If the risk-free rate is 4.5% and the risk premium on Brash’s stock is 10.8%, what is
Aspin Corporation’s charter authorizes issuance of 2,000,000 shares of common stock. Currently, 1,400,000 shares are outstanding, and 100,000 shares are being held as treasury stock. The firm
Slater Lamp Manufacturing has an outstanding issue of preferred stock with an $80 par value and an 11% annual dividend.a. What is the annual dollar dividend? If it is paid quarterly, how much will
In each case in the following table, how many dollars of preferred dividends per share must be paid to preferred stockholders in the current period before common stock dividends arepaid?
Valerian Corp. convertible preferred stock has a fixed conversion ratio of 5 common shares per 1 share of preferred stock. The preferred stock pays a dividend of $10.00 per share per year. The common
Scotto Manufacturing is a mature firm in the machine tool component industry. The firm’s most recent common stock dividend was $2.40 per share. Because of its maturity as well as its stable sales
Kelsey Drums, Inc., is a well-established supplier of fine percussion instruments to orchestras all over the United States. The company’s class A common stock has paid a dividend of $5.00 per share
Jones Design wishes to estimate the value of its outstanding preferred stock. The preferred issue has an $80 par value and pays an annual dividend of $6.40 per share. Similar-risk preferred stocks
Use the constant-growth model (Gordon growth model) to find the value of each firm shown in the following table.
McCracken Roofing, Inc., common stock paid a dividend of $1.20 per share last year. The company expects earnings and dividends to grow at a rate of 5% per year for the foreseeable future.a. What
Elk County Telephone has paid the dividends shown in the following table over the past 6 years.Year Dividend per share2012 .......$2.872011 ....... 2.762010 ....... 2.602009 ....... 2.462008 .......
Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $4.25 per share and paid cash dividends of $2.55 per share (D0 = $2.55).
Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when it is complete, it should
Lawrence Industries’ most recent annual dividend was $1.80 per share (D0 = $1.80), and the firm’s required return is 11%. Find the market value of Lawrence’s shares when:a. Dividends are
You are evaluating the potential purchase of a small business currently generating $42,500 of after-tax cash flow (D0 = $42,500). On the basis of a review of similar-risk investment opportunities,
Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have
Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $12.50 per share. Although you are very much interested in owning the company, you are concerned about
Book and liquidation value The balance sheet for Gallinas Industries is as follows.Additional information with respect to the firm is available:(1) Preferred stock can be liquidated at book value.(2)
For each of the firms shown in the following table, use the data given to estimate its common stock value employing price/earnings (P/E)multiples.
REH Corporation’s most recent dividend was $3 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. A variety of proposals are being considered by
Given the following information for the stock of Foster Company, calculate the risk premium on its common stock.Current price per share of common ........$50.00Expected dividend per share next year
Giant Enterprises’ stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an
Hamlin Steel Company wishes to determine the value of Craft Foundry, a firm that it is considering acquiring for cash. Hamlin wishes to determine the applicable discount rate to use as an input to
Why is it important to study international financial management?
How is international financial management different from domestic financial management?
Discuss the major trends that have prevailed in international business during the last two decades.
How is a country's economic well-being enhanced through free international trade in goods and services?
What considerations might limit the extent to which the theory of comparative advantage is realistic?
What are multinational corporations (MNCs) and what economic roles do they play?
Ross Perot, a former presidential candidate of the Reform Party, which is a third political party in the United States, had strongly objected to the creation of the North American Trade Agreement
In 1995, a working group of French chief executive officers was set up by the Confederation of French Industry (CNPF) and the French Association of Private Companies (APEP) to study the French
Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President George W. Bush stated
Suppose you are interested in investing in shares of Nokia Corporation of Finland, which is a world leader in wireless communication. But before you make an investment decision, you would like to
Country C can produce seven pounds of food or four yards of textiles per unit of input. Compute the opportunity cost of producing food instead of textiles. Similarly, compute the opportunity cost
Consider the no-trade input/output situation presented in the following table for countries X and Y. Assuming that free trade is allowed, develop a scenario that will benefit the citizens of
Nike, a company headquartered in Beaverton, Oregon, is a major force in the sports footwear and fashion industry, with annual sales exceeding $12 billion, more than half of which now come from
Explain Gresham's law.
Explain the mechanism that restores the balance-of-payments equilibrium when it is disturbed under the gold standard.
Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the franc is pegged to gold at 12 francs per ounce. This, of course, implies that the equilibrium exchange rate should be two
Discuss the advantages and disadvantages of the gold standard.
What were the main objectives of the Bretton Woods system?
Comment on the proposition that the Bretton Woods system was programmed to an eventual demise.
Explain how special drawing rights (SDR) are constructed. Also, discuss the circumstances under which the SDR was created.
Explain the arrangements and workings of the European Monetary System (EMS).
There are arguments for and against the alternative exchange rate regimes.a. List the advantages of the flexible exchange rate regime.b. Criticize the flexible exchange rate regime from the
In an integrated world financial market, a financial crisis in a country can be quickly transmitted to other countries, causing a global crisis. What kind of measures would you propose to prevent the
Discuss the criteria for a "good" international monetary system.
Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so.
Assess the possibility for the euro to become another global currency rivaling the U.S. dollar. If the euro really becomes a global currency, what impact will it have on the U.S. dollar and the world
When the euro was introduced in January 1999, the United Kingdom was conspicuously absent from the list of European countries adopting the common currency. Although the previous Labour government led
Define balance of payments.
Why would it be useful to examine a country's balance-of-payments data?
The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S.
In contrast to the United States, Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have continuous current account
Comment on the following statement: "Since the United States imports more than it exports, it is necessary for the United States to import capital from foreign countries to finance its current
Explain how a country can run an overall balance-of-payments deficit or surplus.
Explain official reserve assets and its major components.
Explain how to compute the overall balance and discuss its significance.
Since the early 1980s, foreign portfolio investors have purchased a significant portion of U.S. Treasury bond issues. Discuss the short-term and long-term effects of foreigners' portfolio investment
Describe the balance-of-payments identity and discuss its implications under the fixed and flexible exchange rate regimes.
Exhibit 3.5 indicates that in 1999, Germany had a current account deficit and at the same time a capital account deficit. Explain how this can happen.
Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments:a. A Japanese insurance company purchases U.S. Treasury bonds
Construct a balance-of-payments table for Japan for the year 2006 which is comparable in format to Exhibit 3.1, and interpret the numerical data. You may consult International Financial Statistics
Discuss the possible strengths and weaknesses of SDRs versus the dollar as the main reserve currency. Do you think the SDR should or could replace the U.S. dollar as the main global reserve currency?
Examine the following summary of the U.S. balance of payments for 2000 (in $ billion) and fill in the blankentries.
Mexico experienced large-scale trade deficits, depletion of foreign reserve holdings, and a major currency devaluation in December 1994, followed by the decision to freely float the peso. These
The majority of major corporations are franchised as public corporations. Discuss the key strength and weakness of the "public corporation." When do you think the public corporation as an
The public corporation is owned by a multitude of shareholders but run by professional managers. Managers can take self-interested actions at the expense of shareholders. Discuss the conditions under
Following corporate scandals and failures in the United States and abroad, there has been a growing demand for corporate governance reform. What should be the key objectives of corporate governance
Studies show that the legal protection of shareholder rights varies a great deal across countries. Discuss the possible reasons why the English common law tradition provides the strongest protection
Explain "the wedge" between control and cash flow rights and discuss its implications for corporate governance.
Discuss different ways that dominant investors may establish and maintain control of a company with relatively small investments.
The Cadbury Code of Best Practice, adopted in the United Kingdom, led to a successful reform of corporate governance in the country. Explain the key requirements of the code and discuss how it
Many companies grant stock or stock options to managers. Discuss the benefits and possible costs of using this kind of incentive compensation scheme.
It has been shown that foreign companies listed on U.S. stock exchanges are valued more than those from the same countries that are not listed in the United States. Explain why U.S.-listed foreign
Explain "free cash flows." Why do managers like to retain free cash flows instead of distributing it to shareholders? Discuss what mechanisms may be used to solve this problem.
Following such high-profile corporate scandals as Enron and WorldCom in the United States, European business executives smugly proclaimed that the same could not happen on their side of the Atlantic
Give a full definition of the market for foreign exchange.
What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?
Who are the market participants in the foreign exchange market?
How are foreign exchange transactions between international banks settled?
What is meant by a currency trading at a discount or at a premium in the forward market?
Why does most interbank currency trading worldwide involve the U.S. dollar?
Banks find it necessary to accommodate their clients' needs to buy or sell FX forward, in many instances for hedging purposes. How can the bank eliminate the currency exposure it has created for
A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of the market is trading at CD 1.3436-CD 1.3441. What is implied about the trader's beliefs by his prices?
What is-triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity?
Over the past five years, the exchange rate between the British pound and the U.S. dollar, $/£, has changed from about 1.90 to about 1.45. Would you agree that over this five-year period, British
Using the American term quotes from Exhibit 5.4, calculate a cross-rate matrix for the euro, Swiss franc, Japanese yen, and British pound so that the resulting triangular matrix is similar to the
Using the American term quotes from Exhibit 5.4, calculate the one-, three-, and six-month forward cross-exchange rates between the Canadian dollar and the Swiss franc. State the forward cross-rates
A foreign exchange with a U.S. bank took a short position of £5,000,000 when the $/£ exchange rate was 1.55. Subsequently, the exchange rate has changed to 1.61. Is this movement in the exchange
Restate the following one-, three-, and six-month outright forward European term bid-ask quotes in forward points.Spot ......... 1.3431-1.3436One-Month ....... 1.3432-1.3442Three-Month
Using the spot and outright forward quotes in problem 4, determine the corresponding bid-ask spreads in points.Spot ..............................1.3431-1.3436One-Month
Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the Canadian dollar versus the U.S. dollar using American term quotations. For simplicity, assume each
Using Exhibit 5.4, calculate the one-, three-, and six-month forward premium or discount for the U.S. dollar versus the British pound using European term quotations. For simplicity, assume each month
A bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar:SFr/$ = 1.5960-70A$/$ = 1.7225-35An Australian firm asks the bank for an A$/SFr quote.
Given the following information, what are the NZD/SGD currency against currency bid-askquotations?
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:Swiss franc/dollar = SFr1.5971/$Australian dollar/U.S. dollar =A$1.8215/$Australian dollar/Swiss franc =
Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering SF1.1806/$1.00. You
The current spot exchange rate is $1.95/£ and the three-month forward rate is $1.90/£. On the basis of your analysis of the exchange rate, you are pretty confident that the spot exchange rate
Omni Advisors, an international pension fund manager, plans to sell equities denominated in Swiss francs (CHF) and purchase an equivalent amount of equities denominated in South African rands (ZAR).

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