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Questions and Answers of Finance

Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100 percent of the purchase price, or it can lease the machinery. Assume that the
Two companies, Energen and Hastings Corporation, began operations with identical balance sheets. A year later, both required additional manufacturing capacity at a cost of $50,000. Energen obtained a
Define each of the following terms.a. Preferred stockb. Cumulative dividends; arrearagesc. Warrant; detachable warrantd. Stepped-up pricee. Convertible securityf. Conversion ratio; conversion price;
Is preferred stock more like bonds or common stock? Explain.
What effect does the trend in stock prices (subsequent to issue) have on a firm’s ability to raise funds through (a) Convertibles and (b) Warrants?
If a firm expects to have additional financial requirements in the future, would you recommend that it uses convertibles or bonds with warrants? What factors would influence your decision?
How does a firm’s dividend policy affect each of the following?a. The value of its long-term warrants.b. The likelihood that its convertible bonds will be converted.c. The likelihood that its
Evaluate the following statement: “Issuing convertible securities represents a means by which a firm can sell common stock at a price above the existing market.”
Why do corporations often sell convertibles on a rights basis?
Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10 percent and $50 million of straight bonds with a coupon rate of 14 percent. Both bonds have the same
Gregg Company recently issued two types of bonds. The first issue consisted of 20-year straight debt with an 8 percent annual coupon. The second issue consisted of 20-year bonds with a 6 percent
Peterson Securities recently issued convertible bonds with a $1,000 par value. The bonds have a conversion price of $40 a share. What is the convertible issue’s conversion ratio?
Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $25.a. Calculate the exercise value of the firms warrants if the common
The Tsetsekos Company was planning to finance an expansion in the summer of 2004. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by
Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 53⁄4 percent coupon rate, and were sold at their $1,000 par value. The conversion
The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of
Niendorf Incorporated needs to raise $25 million to construct production facilities for a new type of diskette drive. The firm’s straight nonconvertible debentures currently yield 14 percent. Its
Define each of the following terms:a. Working capital; net working capital; net operating working capitalb. Inventory conversion period; receivables collection period; payables deferral period; cash
What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?
Is it true that when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that, disregarding
What are the four elements of a firm’s credit policy? To what extent can firms set their own credit policies as opposed to having to accept policies that are dictated by “the competition”?
What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?
From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?
Firms can control their accruals within fairly wide limits. Discuss.
Firms can control their accruals within fairly wide limits. Discuss.
Is it true that most firms are able to obtain some free trade credit and that additional trade credit is often available, but at a cost? Explain.
What kinds of firms use commercial paper?
Williams & Sons last year reported sales of $10 million and an inventory turnover ratio of 2. The company is now adopting a new inventory system. If the new system is able to reduce the firm’s
Medwig Corporation has a DSO of 17 days. The company averages $3,500 in credit sales each day what is the company’s average accounts receivable?
What is the nominal and effective cost of trade credit under the credit terms of 3/15, net 30?
A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. Given that the retailer is an important customer, suppliers allow the firm
A chain of appliance stores, APP Corporation, purchases inventory with a net price of $500,000 each day. The company purchases the inventory under the credit terms of 2/15, net 40. APP always takes
McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500. Forty percent of the customers pay on the 10th day and take discounts; the other 60 percent pay, on average,
Calculate the nominal annual cost of non-free trade credit under each of the following terms. Assume payment is made either on the due date or on the discount date.a. 1/15, net 20.b. 2/10, net 60.c.
a. If a firm buys under terms of 3/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its non-free trade credit?b. Does it receive more or less
Grunewald Industries sells on terms of 2/10, net 40. Gross sales last year were $4,562,500, and accounts receivable averaged $437,500. Half of Grunewald’s customers paid on the 10th day and took
The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply working capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, and it currently pays on the 10th day
The Zocco Corporation has an inventory conversion period of 75 days, a receivables collection period of 38 days, and a payables deferral period of 30 days.a. What is the length of the firm’s cash
The Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Christie’s sales last year (all on credit) were
The Rentz Corporation is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has necessitated late
Suppose a firm makes purchases of $3.65 million per year under terms of 2/10, net 30, and takes discounts.a. What is the average amount of accounts payable net of discounts? (Assume that the $3.65
The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the
The Raattama Corporation had sales of $3.5 million last year, and it earned a 5 percent return, after taxes, on sales. Recently, the company has fallen behind in its accounts payable. Although its
Define each of the following terms:a. Derivativeb. Corporate risk managementc. Financial futures; forward contractd. Hedging; natural hedge; long hedge; short hedge; perfect hedgee. Swap; structured
Give two reasons stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.
List six reasons risk management might increase the value of a firm.
Discuss some of the techniques available to reduce risk exposures.
Explain how the futures markets can be used to reduce interest rate and input price risk.
How can swaps be used to reduce the risks associated with debt contracts?
What is the implied interest rate on a Treasury bond ($100,000) futures contract that settled at 100-16? If interest rates increased by 1 percent, what would be the contract’s new value?
The Zinn Company plans to issue $10,000,000 of 10-year bonds in June to help finance a new research and development laboratory. It is now November, and the current cost of debt to the high-risk
Carter Enterprises can issue floating-rate debt at LIBOR +2 percent or fixed-rate debt at 10.00 percent. Brence Manufacturing can issue floating-rate debt at LIBOR +3.1 percent or fixed-rate debt at
Define each of the following terms:a. Informal restructuring; reorganization in bankruptcyb. Assignment; liquidation in bankruptcy; fairness; feasibilityc. Absolute priority doctrine; relative
Why do creditors usually accept a plan for financial rehabilitation rather than demand liquidation of the business?
Would it be a sound rule to liquidate whenever the liquidation value is above the value of the corporation as a going concern? Discuss.
Why do liquidations usually result in losses for the creditors or the owners, or both? Would partial liquidation or liquidation over a period limit their losses? Explain.
Are liquidations likely to be more common for public utility, railroad, or industrial corporations? Why?
The Verbrugge's Publishing Company's 2004 balance sheet and income statement are as follows (in millions of dollars). Verbrugge's and its creditors have agreed upon a voluntary reorganization plan.
At the time it defaulted on its interest payments and filed for bankruptcy, the McDaniel Mining Company had the following balance sheet (in thousands of dollars). The court, after trying
The following balance sheet represents Boles Electronics Corporation's position at the time it filed for bankruptcy (in thousands of dollars):The mortgage bonds are secured by the plant, but not by
Define each of the following terms:a. Synergy; mergerb. Horizontal merger; vertical merger; congeneric merger; conglomerate mergerc. Friendly merger; hostile merger; defensive merger; tender offer;
Four economic classifications of mergers are (1) horizontal, (2) vertical, (3) conglomerate, and (4) congeneric. Explain the significance of these terms in merger analysis with regard to (a) the
Firm A wants to acquire Firm B. Firm B’s management agrees that the merger is a good idea. Might a tender offer be used?
Distinguish between operating mergers and financial mergers.
Vandell’s free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is 1.4. What is the value of Vandell’s operations? If Vandell has
Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years after which the current target capital structure of 30 percent debt will be maintained.
On the basis of your answers to Problems 25-1 and 25-2, if Hastings were to acquire Vandell, what would be the range of possible prices that it could bid for each share of Vandell common stock?
Assuming the same information for Problem 25-2, suppose Hastings will increase Vandell’s level of debt after Year 3 so that the target capital structure is now 45 percent debt. Assume that with
Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its current beta is 1.30. Conroy has been barely profitable, so it has
VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional cable company. VolWorld's analysts project the
Define each of the following terms:a. Multinational corporationb. Exchange rate; fixed exchange rate system; floating exchange ratesc. Trade deficit; devaluation; revaluationd. Exchange rate risk;
Under the fixed exchange rate system, what was the currency against which all other currency values were defined? Why?
Exchange rates fluctuate under both the fixed exchange rate and floating exchange rate systems. What, then, is the difference between the two systems?
If the United States imports more goods from abroad than it exports, foreigners will tend to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect to foreign
Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.
What is a Eurodollar? If a French citizen deposits $10,000 in Chase Manhattan Bank in New York, have Eurodollars been created? What if the deposit is made in Barclay’s Bank in London Chase
Does interest rate parity imply that interest rates are the same in all countries?
Why might purchasing power parity fail to hold?
A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 9 Mexican pesos or for 111.23 Japanese yen. What is the cross exchange rate between the yen and the
Six-month T-bills have a nominal rate of 7 percent, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5 percent. In the spot exchange market, 1 yen equals $0.009. If
A television set costs $500 in the United States. The same set costs 550 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?
If British pounds sell for $1.50 (U.S.) per pound, what should dollars sell for in pounds per dollar?
Suppose that 1 Swiss franc could be purchased in the foreign exchange market for 60 U.S. cents today. If the franc appreciated 10 percent tomorrow against the dollar, how many francs would a dollar
Suppose the exchange rate between U.S. dollars and the Swiss franc was SFr1.6 = $1, and the exchange rate between the dollar and the British pound was £1 = $1.50. What was the exchange rate
You are the vice president of International Info change, headquartered in Chicago, Illinois. All shareholders of the firm live in the United States. Earlier this month, you obtained a loan of 5
Early in September 1983, it took 245 Japanese yen to equal $1. More than 20 years later that exchange rate had fallen to 108 yen to $1. Assume the price of a Japanese-manufactured automobile was
Boisjoly Watch Imports has agreed to purchase 15,000 Swiss watches for 1 million francs at today's spot rate. The firm's financial manager, James Desreumaux, has noted the following current spot and
Assume that interest rate parity holds and that 90-day risk-free securities yield 5 percent in the United States and 5.3 percent in Germany. In the spot market, 1 euro equals $0.80 dollar.a. Is the
Assume that interest rate parity holds. In both the spot market and the 90-day forward market 1 Japanese yen equals 0.0086 dollar. The 90-day risk-free securities yield 4.6 percent in Japan. What is
In the spot market 7.8 pesos can be exchanged for 1 U.S. dollar. A compact disk costs $15 in the United States. If purchasing power parity holds, what should be the price of the same disk in Mexico?
Why is corporate finance important to all managers?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage
Describe the organizational forms a company might have as it evolves from a start-up to a major corporation. List the advantages and disadvantages of each form.MINI CASE Assume that you recently
How do corporations “go public” and continue to grow? What are agency problems? Discuss.
What should be the primary objective of managers?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage
Do firms have any responsibilities to society at large?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the
Should firms behave ethically?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage firm of Balik and
What three aspects of cash flows affect the value of any investment?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor
Is stock price maximization good or bad for society?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the brokerage
What are free cash flows? What are the three determinants of free cash flows?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment
What is the weighted average cost of capital? What affects it?MINI CASE Assume that you recently graduated with a degree in finance and have just reported to work as an investment advisor at the

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