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Questions and Answers of Finance

Describe the typical first-day returns of an IPO and the long-term returns to IPO investors.MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point
What are the direct and indirect costs of an IPO?MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point where expansion throughout the entire southeast
What are equity carve-outs?MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point where expansion throughout the entire southeast is feasible. The
In what other ways are investment banks involved in issuing securities?MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point where expansion
What is meant by going private? What are some advantages and disadvantages?
How do companies manage the maturity structure of their debt?MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point where expansion throughout the
Under what conditions would a firm exercise a bonds call provision?MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point where expansion throughout
Explain how firms manage the risk structure of their debt with: (1) project financing, and (2) securitization.MINI CASE Randy’s, a family-owned restaurant chain operating in Alabama, has grown
Who are the two parties to a lease transaction?MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives
What are the five primary types of leases, and what are their characteristics?MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home
How are leases classified for tax purposes?MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current
What effect does leasing have on a firm’s balance sheet?MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system
What effect does leasing have on a firm’s capital structure?MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The
What is the present value cost of owning the equipment? set up a time line which shows the net cash flows over the period t = 0 to t = 4, and then find the PV of these net cash flows, or the pv cost
Explain the rationale for the discount rate you used to find the PV.MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office.
What is Lewis’s present value cost of leasing the equipment?MINI CASE Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The
What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or lease the equipment? Explain.MINI CASE Lewis Securities Inc. has decided to acquire a new market
Now assume that the equipment’s residual value could be as low as $0 or as high as $400,000, but that $200,000 is the expected value. Since the residual value is riskier than the other cash flows
The lessee compares the cost of owning the equipment with the cost of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not
Assume that the lease payments were actually $280,000 per year, that Consolidated Leasing is also in the 40 percent tax bracket, and that it also forecasts a $200,000 residual value. Also, to furnish
What do you think the lessor’s NPV would be if the lease payment were set at $280,000 per year? (Hint: the lessor’s cash flows would be a “mirror image” of the lessee’s cash flows.)MINI
Lewis’s management has been considering moving to a new downtown location, and they are concerned that these plans may come to fruition prior to the expiration of the lease. If the move occurs,
How does preferred stock differ from both common equity and debt? Is preferred stock more risky than common stock? What is floating rate preferred stock?MINI CASE Paul Duncan, financial manager
What is a call option? How can knowledge of call options help a financial manager to better understand warrants and convertibles?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is
One of the firm’s alternatives is to issue a bond with warrants attached. Edusoft’s current stock price is $20, and its investment banker estimates that the cost of a 20-year, annual coupon bond
Suppose the bonds were issued and the warrants immediately traded on the open market for $5 each. What would this imply about the terms of the issue? Did the company “win” or “lose”?MINI
When would you expect the warrants to be exercised? Assume they have a 10-year life; that is, they expire 10 years after issue.MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing
Will the warrants bring in additional capital when exercised If so, how much, and what type of capital?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing a dilemma. The firm was
Since warrants lower the cost of the accompanying debt issue, shouldn’t all debt be issued with warrants? What is the expected return to the holders of the bond with warrants (or the expected cost
What conversion price is built into the bond?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing a dilemma. The firm was founded five years ago to provide educational software
What is the convertible’s straight-debt value? What is the implied value of the convertibility feature?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing a dilemma. The firm
What is the formula for the bonds expected conversion value in any year? What is its conversion value at year 0 at year 10?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing a
What is meant by the “floor value” of a convertible? What is the convertibles expected floor value at year 0 at year 10?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing a
Assume that Edusoft intends to force conversion by calling the bond as soon as possible after its conversion value exceeds 20 percent above its par value, or 1.2($1,000) = $1,200. When is the issue
What is the expected cost of capital for the convertible to Edusoft? Does this cost appear to be consistent with the riskiness of the issue?MINI CASE Paul Duncan, financial manager of Edusoft
Edusoft’s market value capital structure is as follows (in millions of dollars):Debt $ 50Equity 50
Mr. Duncan believes that the costs of both the bond with warrants and the convertible bond are close enough to one another to call them even, and also consistent with the risks involved. Thus, he
How do convertible bonds help reduce agency costs?MINI CASE Paul Duncan, financial manager of Edusoft Inc., is facing a dilemma. The firm was founded five years ago to provide educational
Why might stockholders be indifferent whether or not a firm reduces the volatility of its cash flows?MINI CASE Assume that you have just been hired as a financial analyst by Tennessee Sunshine
What are six reasons risk management might increase the value of a corporation?MINI CASE Assume that you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized
What is corporate risk management? Why is it important to all firms?MINI CASE Assume that you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee
Risks that firms face can be categorized in many ways. Define the following types of risk: (1) speculative risks; (2) pure risks; (3) demand risks; (4) input risks; (5) financial risks; (6) property
What are the three steps of corporate risk management?MINI CASE Assume that you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized Tennessee company that
What are some actions that companies can take to minimize or reduce risk exposures?MINI CASE Assume that you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized
What is financial risk exposure? Describe the following concepts and techniques that can be used to reduce financial risks:(1) Derivatives;(2) Futures markets;(3) Hedging; and(4) Swaps.MINI
Describe how commodity futures markets can be used to reduce input price risk.MINI CASE Assume that you have just been hired as a financial analyst by Tennessee Sunshine Inc., a mid-sized
What are the major causes of business failure?
What are the major causes of business failure?MINI CASE Kimberly Mackenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing, is worried. Her firm has been
Which size of firm, large or small, is more prone to business failure? Why?MINI CASE Kimberly Mackenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing,
What key issues must managers face in the financial distress process?MINI CASE Kimberly Mackenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing, is
What informal remedies are available to firms in financial distress? In answering this question, define the following terms: (1) workout, (2) restructuring, (3) extension, (4) composition, (5)
Briefly describe U.S. Bankruptcy Law, including the following terms: (1) Chapter 11, (2) Chapter 7, (3) Trustee, (4) Voluntary bankruptcy, and (5) Involuntary bankruptcy.MINI CASE Kimberly
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items: (1) Common pool problem, (2)
What is a prepackaged bankruptcy? Why have prepackaged bankruptcies become more popular in recent years?MINI CASE Kimberly Mackenzie, president of Kim's Clothes Inc., a medium-sized manufacturer
Briefly describe the priority of claims in a Chapter 7 liquidation.MINI CASE Kimberly Mackenzie, president of Kim's Clothes Inc., a medium-sized manufacturer of women's casual clothing, is
Assume that Russ Brothers did indeed fail, and that it had the following balance sheet when it was liquidated (in millions of dollars): Athe debentures are subordinated to the notes payable. The
What is a multinational corporation? Why do firms expand into other countries?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County,
What are the six major factors which distinguish multinational financial management from financial management as practiced by a purely domestic firm?MINI CASE Citrus Products Inc. is a
Consider the following illustrative exchange rates.U. S. Dollars required to buyOne unit of foreign currencyEuro 0.8000Swedish krona 0.1000Are these currency prices direct quotations or indirect
Calculate the indirect quotations for Euros and Kronas.MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now,
What is a cross rate? Calculate the two cross rates between euros and kronas.MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County,
Assume citrus products can produce a liter of orange juice and ship it to Spain for $1.75. If the firm wants a 50 percent markup on the product, what should the orange juice sell for in Spain?MINI
Now assume Citrus Products begins producing the same liter of orange juice in Spain. The product costs 2.0 euros to produce and ship to Sweden, where it can be sold for 20 kronas. What is the dollar
What is exchange rate risk?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its
Briefly describe the current International Monetary System. How does the current system differ from the system that was in place prior to August 1971?MINI CASE Citrus Products Inc. is a
What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?MINI CASE Citrus Products Inc. is a medium-sized producer
What is the difference between spot rates and forward rates? When is the forward rate at a premium to the spot rate at a discount?MINI CASE Citrus Products Inc. is a medium-sized producer of
What is interest rate parity? Currently, you can exchange 1 euro for 0.8100 dollars in the 180-day forward market, and the risk-free rate on 180-day securities is 6 percent in the United States and 4
What is purchasing power parity? If grapefruit juice costs $2.00 a liter in the United States and purchasing power parity holds, what should be the price of grapefruit juice in Spain?MINI
What impact does relative inflation have on interest rates and exchange rates?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County,
Briefly discuss the international capital markets.MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the
To what extent do average capital structures vary across different countries?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County,
What is the impact of multinational operations on each of the following financial management topics Cash management?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice
Capital budgeting decisions.MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its
Credit management?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations
Inventory management?MINI CASE Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its
How important are pension funds to the U. S. Economy?MINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion
Define the following pension fund terms:1. Defined benefit plan2. Defined contribution plan3. Profit sharing plan4. Cash balance plan5. Vesting6. Portability7. Fully funded; over funded; under
What two organizations provide guidelines for reporting pension fund activities to stockholders? Describe briefly how pension fund data are reported in a firm's financial statements. (Hint: consider
Assume that an employee joins the firm at age 25, works for 40 years to age 65, and then retires. The employee lives another 15 years, to age 80, and during retirement draws a pension of $20,000 at
Discuss the risks to both the plan sponsor and plan beneficiaries under the four types of pension plans.MINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated
The possibility of age discrimination in hiringMINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion throughout the
The possibility of sex discrimination in hiringMINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion throughout the
Employee training costsMINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering expansion throughout the region to take
The militancy of unions when a company faces financial adversityMINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now considering
How can a corporate financial manager judge the performance of pension plan managers?MINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is
What are the two components of a plan's funding strategy? What is the primary goal of a plan's investment strategy?MINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that
What is meant by "tapping" pension fund assets? Why is this action so controversial?MINI CASE Southeast Tile Distributors Inc. is a building tile wholesaler that originated in Atlanta but is now
What has happened to the cost of retiree health benefits over the last decade? How are retiree health benefits reported to shareholders?MINI CASE Southeast Tile Distributors Inc. is a building
What are the key features of investor-owned firms? How do a firm's owners exercise control?MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling her
What is a not-for-profit corporation? What are the major control differences between investor-owned and not-for-profit businesses?MINI CASE Sandra McCloud a finance major in her last term of
How do goals differ between investor-owned and not-for-profit businesses?MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling her placement interviews
Is the weighted average cost of capital (WACC) relevant to not-for-profit businesses?MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling her placement
Is there any difference between the WACC formula for investor-owned firms and that for not-for-profit businesses?MINI CASE Sandra McCloud a finance major in her last term of college is currently
What is fund capital? How is the cost of fund capital estimated?MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling her placement interviews through the
Is the trade-off theory of capital structure applicable to not-for-profit businesses what about the asymmetric information theory?MINI CASE Sandra McCloud a finance major in her last term of
What problem do not-for-profit businesses encounter when they attempt to implement the trade-off theory?MINI CASE Sandra McCloud a finance major in her last term of college is currently
Why is capital budgeting important to not-for-profit businesses?MINI CASE Sandra McCloud a finance major in her last term of college is currently scheduling her placement interviews through the
What is social value? How can the net present value method be modified to include the social value of proposed projects?MINI CASE Sandra McCloud a finance major in her last term of college is
Which of the three project risk measures--stand-alone, corporate, and market--is relevant to not-for-profit businesses?MINI CASE Sandra McCloud a finance major in her last term of college is

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