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Questions and Answers of Finance

Define the following:a. A conditional sales contractb. A chattel mortgage
MacKenzie Corporation is considering leasing a new asset. The lease would run for eight years and require eight beginning-of-year payments of $100,000 each. If MacKenzie capitalizes this lease for
Ajax Leasing Services has been approached by Gamma Tools to provide lease financing for a new automated screw machine. The machine will cost $220,000 and will be leased by Gamma for five years. Lease
The First National Bank of Springer has established a leasing subsidiary. A local firm, Allied Business Machines, has approached the bank to arrange lease financing for $10 million in new machinery.
Jenkins Corporation wants to acquire a $200,000 computer. Jenkins has a 40 percent marginal tax rate. If owned, the computer would be depreciated on a straight-line basis to a book salvage value of
The following stream of after-tax cash flows are available to you as a potential equity investor in a leveraged lease:The cash flow in year 0 represents the initial equity investment. The positive
The Jacobs Company desires to lease a numerically controlled milling machine costing $200,000. Jacobs has asked both First Manufacturers Bank Leasing Corporation and Commercial Associates, Inc. (a
The First National Bank of Great Falls is considering a leveraged lease agreement involving some mining equipment with the Big Sky Mining Corporation. The bank (40 percent tax bracket) will be the
As a financial analyst for Muffin Construction, you have been asked to recommend the method of financing the acquisition of new equipment needed by the firm. The equipment has a useful life of eight
Darling Leasing is considering the lease to Major State University of a piece of equipment costing $100,000. The period of the lease will be eight years. The equipment will be depreciated under MACRS
Lobo Banks normally provides term loans that require repayment in a series of equal annual installments. If a $10 million loan is made, what would be the annual end-of-year payments, assuming the
Set up the amortization schedule for a 5-year, $1 million, 9 percent term loan that requires equal annual end-of-year payments. Be sure to distinguish between the interest and the principal portion
Set up the amortization schedule for a five-year, $1 million, 9 percent loan that requires equal annual end-of-year principal payments plus interest on the unamortized loan balance. What is the
Set up the amortization schedule for a 5-year, $1 million, 9 percent bullet loan. How is the principal repaid in this type of loan? What is the effective interest cost of this loan?
A firm receives a $1 million, 5-year loan at a 10 percent interest rate. The loan requires annual payments of $125,000 per year (at the end of each year) for years 1 to 4.a. What payment is required
A $10 million, 5-year loan bears an interest rate of 7 percent. The loan repayment plan calls for five annual end-of-year payments. Each payment is to include an equal amount of principal repayment
Huskie Bank has provided the Mucklup Manufacturing Company with a 2-year term loan for $200,000 at a stated annual rate of interest of 10 percent. Interest for the entire 2-year period must be
The James Company has been offered a 4-year loan from its bank in the amount of $100,000 at a stated interest rate of 10 percent per year. The loan will require four equal end-of-year payments of
A $1 million loan requires five end-of-year equal payments of $284,333.a. Calculate the effective interest rate on this loan.b. How much interest (in dollars) is paid over the life of this loan?
U.S. Fax has been granted a loan from a commercial finance company for $1 million at a stated interest rate of 10 percent. The loan requires that interest payments be made at the end of each of the
A $10 million principal amount, 3-year term loan carries an interest rate of 10 percent. All interest payments (which would normally be due at the end of each year) are deferred until the end of
1. Compute the net advantage to leasing.2. Which alternative should Kinko’s accept? What other factors might be considered?3. If the computer system is owned and Kinko’s borrows the needed funds
Define the following terms:a. Optionb. Callc. Putd. Contingent claim
What are the similarities and differences between options and warrants?
What variables are important in determining call option prices?
Will call option values generally be higher at a time when interest rates are relatively high, compared with a time when interest rates are relatively low, all other things being equal?
In what ways are convertible securities and warrants similar? Dissimilar?
Why do companies issue convertible securities?
What is the relationship between conversion value, bond value, and market value for a convertible security?
How can a company effectively force conversion of a convertible security?
What is the preemptive right of common stockholders? In what type of company is the preemptive right important? Unimportant?
Why would a firm use an interest rate swap as part of its financing strategy?
The BWS Corporation stock is selling at $50 a share today.a. Calculate the value of a BWS call option if its exercise price is $40 and it expires today.b. What can you say about the value of a BWS
The BWS Corporation stock is selling at $50 a share today.a. Calculate the value of a BWS put option if its exercise price is $40 and it expires today.b. What can you say about the value of a BWS put
The LeMonde Corporation has debentures outstanding (par value = $1,000) that are convertible into the company’s common stock at a price of $25 per share. The convertibles have a coupon interest
Automatic Data Processing recently issued $150 million of 61⁄2 percent convertible debentures maturing in 2011. The debentures are convertible into common stock at $83.45 a share. The company’s
The Manchester Corporation has warrants presently outstanding, and each warrant entitles the holder to purchase one share of the company’s common stock at an exercise price of $20 a share. If the
Horizon Corporation has warrants to purchase common stock outstanding. Each warrant entitles the holder to purchase one share of the company’s common stock at an exercise price of $20 a share.
Shaw Products Company, whose present balance sheet is summarized here, is considering issuing $100 million of 6 percent subordinated debentures (par value = $1,000), which are convertible into common
The capital structure of Whitefield Mills, Inc., is as follows:Long-term debt ..................$250 millionCommon stock, $1 par ..............25 millionContributed capital in excess of par value
You own 10 Bitterroot Industries, Inc., 8 percent convertible debentures maturing in 2030. The conversion ratio of the debentures is 30, and the debentures are callable at $1,070 each. You bought the
Calculate the after-tax component cost of capital, kc, for a 7.5 percent convertible debenture sold at par and due to mature in 25 years. The conversion ratio is 25, and conversion is expected to
Oswego Manufacturing Company has decided to sell additional common stock through a rights offering. The company has 50 million shares outstanding and plans to sell an additional 5 million shares
The Oil City Company plans to sell an additional 1 million shares of common stock through a rights offering. The company currently has 12 million shares outstanding. Each shareholder will receive one
The Monroeville Company has warrants outstanding that expire in five years. Each warrant entitles the holder to purchase 0.5 shares of common stock at an exercise price of $32 per share. Determine
The Findlay Company has debentures outstanding (par value = $1,000) that are convertible into common stock at a price of $50 per share. The convertible bonds have a coupon interest rate of 9 percent
The Wolverine Corporation has a convertible preferred stock outstanding. The par value of this preferred stock is $100, and it pays a $10 dividend. The preferred stock is callable at 103 percent of
Five years ago, in conjunction with a financial restructuring, Laurenberg Electric sold a $100 million issue of bonds at a coupon interest rate of 12 percent. Each bond came with 30 detachable
Nullcom, Inc., has debentures (face value = $1,000) outstanding that are convertible into common stock at a price of $40 per share. The debentures pay an interest rate of 9 percent per annum and have
The Warren Electric Company is considering refunding its $150 million, 12 percent debt issue with a 10 percent, 20-year debt issue. The existing (old) issue also matures in 20 years and now is
The Springfield Gas and Electric Company is considering refunding $50 million of 11 percent debt with an 8 percent, 20-year debt issue. The existing, or old, issue also matures in 20 years and now is
The Phillipsburg Power Company is considering refunding its $250 million, 11.5 percent debt issue with a 10 percent, 15-year debt issue. The existing (old) issue also matures in 15 years and now is
The Altoona Electric Company is considering refunding its $200 million, 12.5 percent debt issue with a 10 percent, 10-year debt issue. The existing (old) issue also matures in 10 years and now is
What types of risks should shareholder wealth-maximizing managers seek to offset in a firm they are managing? Why?
How can the acquisition of additional information be an effective tool of risk management? Give an original example of the use of this technique.
What role does diversification play in risk management strategies?
Against what types of risks should a wealth-maximizing firm try to purchase insurance?What types of risks should be self-insured?
What are the primary differences between forward contracts and futures contracts?
Options can protect a firm against the downside risk of a business transaction while preserving the upside potential from the transaction. In contrast, forward and futures contracts normally protect
California Plastics uses crude oil as one of its major raw material inputs. The current price of crude oil is $35 per barrel. The company is concerned that significant increases in the price of crude
In February, Global Photo Company, a major competitor in the photographic paper business, was negotiating a supply agreement with WorldMart; the agreement calls for the delivery of a large quantity
Disher Cotton Farms is a large cotton producer located near Lubbock, Texas. Each year Disher plants its fields in cotton and then waits until the fall before the cotton is picked and sold. Disher
One of the most important operating expenses for the Olde Virginia Brick Company is natural gas, which is used to bake and dry the bricks. Natural gas prices have recently been quite volatile, now
What is the theory of interest rate parity?
What is covered interest arbitrage?
Describe two techniques that a company can use to hedge against transaction exchange risk.
Describe the factors that cause exchange rates to change over time.
What are the advantages to a U.S. firm of financing its foreign investments with funds raised abroad?
Describe how the concepts of relative purchasing power parity, interest rate parity, and the international Fisher effect are related.
If the 1-year U.S. Treasury bill rate is 7.0 percent, the spot rate between U.S. dollars and British pounds is £1 = $1.69, and the 90-day forward rate is £1 = $1.68, what rate of interest is
Suppose the British short-term interest rate is 13 percent and the corresponding U.S. rate is 8 percent. Suppose at the same time that the discount on forward pounds is 3 percent per year. Do these
Mammouth Mutual Fund of New York has $5 million to invest in certificates of deposit (CDs) for the next six months (180 days). It can buy either a Philadelphia National Bank (PNB) CD with an annual
Last year, the French marketing subsidiary of International Pharmaceuticals Corporation (IPC), a New Jersey–based drug manufacturer, earned 700,000 euros. This year, partly due to a weaker U.S.
As of today, the following information is available:Using this information, make three independent forecasts of the 1-year future spot rate for the Israeli shekel. (Use exact, not
Shoesmith Wave, Inc., a new and largely unproven economic forecasting service, expects the inflation rate in South Korea to average 9 percent per year over the next five years. In comparison,
The Jennette Corporation, a firm based in Mt. Pleasant, South Carolina, has an account payable with a British firm coming due in 180 days. The payable requires Jennette to pay £200,000.Winthrop
On January 1, the cost of borrowing Hong Kong dollars (HKD) for one year was 18 percent. During the year the U.S. inflation rate was 2 percent and the Chinese inflation rate was 9 percent. The
The Vaderson Forecasting Associates sells a broad range of economic forecasting services to businesses and government agencies. One of its primary products is the Vaderson Exchange Rate Seer, a
The Swiss franc (CHF) is currently trading in the spot market at $0.5800/CHF. The 180-day forward rate is $0.5743/CHF. The U.S. Treasury bill rate for 180 days is 3.1 percent in the United States.
Define the following terms:a. Mergerb. Consolidationc. Holding company
Describe some of the measures used by companies to discourage unfriendly takeover attempts.
What is the difference between an asset purchase and a stock purchase?
What is the difference between an operational restructuring and a financial restructuring?
Discuss the differences between the following types of mergers:a. Horizontal mergersb. Vertical mergersc. Conglomerate mergers
What are some of the reasons why firms merge with other firms?
What methods do financial analysts use to value merger candidates? What are the limitations of each method?
Explain what happens to the postmerger earnings per share figure when a company with a relatively high P/E ratio acquires a company with a lower P/E ratio, assuming that the exchange ratio is based
What are the differences between the purchase method and the pooling of interests method of accounting for mergers?
What is a leveraged buyout? What is mezzanine financing?
Explain the difference between the economic and financial definitions of business failure.
Explain the differences among the following terms related to financial failure:a. Technical insolvencyb. Legal insolvencyc. Bankruptcy
What alternatives are available to the failing firm?
Basically, what determines whether a bankrupt company is reorganized or liquidated?
In debt reorganization, explain the difference between a composition and an extension.
What are the differences between Chapter 7 and Chapter 11 of the Bankruptcy Reform Act?
In connection with reorganization plans, what do fairness and feasibility mean?
Explain how a firm that has failed can be reorganized to operate successfully.
Rank in order of priority (highest to lowest) the following claims on the proceeds from the liquidation of a bankrupt firm:Taxes owed to federal, state, and local governmentsPreferred
The Blue Oil Corporation and the Grey Plastics Company have agreed to a merger. The Grey Plastics stockholders will receive 0.75 shares of Blue for each share of Grey held. Assume that no synergistic
The McPherson Company is considering acquiring the McAlester Company. Selected financial data for the two companies are shown here:Both companies have 40 percent marginal tax rates. Assume that no

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