Cases in Finance 3rd edition Jim DeMello - Solutions

Calculate the net present value, payback period, and the traditional IRR for each tanning option under the various scenarios. What do the decision rules indicate?
If you decide to use the replacement chain method, how do the calculations and decisions change?
What are some externalities, side effects, and other relevant issues that could affect the decision?
How would the numbers turn out after taking into consideration the contingency that the drug may not be sold until year 2 or 3 due to delay in getting FDA approval?
Using the data given in Table 2, determine the relative variability of each division’s sales as compared to that of the consolidated firm (We Are Not All Alike!). Which one is the riskiest and why?
Explain the process by which Julie must have determined the hurdle rate for the entire company. The corporate tax rate was 40%, the yield on outstanding bonds was 11%, treasury bills were yielding 4% and the market risk premium was estimated at 10%. The company currently had 30% of its capital in
Using Julie’s methodology of adjusting the firm’(We Are Not All Alike!)s hurdle rate based on the relative variability of each division’s sales in relation to that of the consolidated firm(We Are Not All Alike!), calculate the divisional hurdle rates.
Comment on this methodology of estimating the divisional hurdle rates. Do you agree with it or not? Explain your answer.
Using the firm’s(We Are Not All Alike!) overall weighted average cost of capital evaluate the three divisions’ project proposals. What are your findings?
How should Cecil go about figuring out the cost of debt? Calculate the firm’s(Where Do We Draw the Line?) cost of debt.
Why is there a cost associated with a firm’s(Where Do We Draw the Line?) retained earnings?
If Norton Electronics Inc. were to raise all of the required capital by issuing debt, what would the impact be on the firm’s(Look before you Leverage!) shareholders?
What does “homemade leverage” mean? Using the data in the case explain how a shareholder might be able to use homemade leverage to create the same payoffs as achieved by the firm(Look before you Leverage!).
What is the current weighted average cost of capital of the firm(Look before you Leverage!)? What effect would a change in the debt to equity ratio have on the weighted average cost of capital and the cost of equity capital of the firm(Look before you Leverage!)?
The firm’s(Look before you Leverage!) beta was estimated at 1.1. Treasury bills were yielding 4% and the expected rate of return on the market index was estimated to be 12%. Using various combinations of debt and equity, under the assumption that the costs of each component stays constant, show
How would the key profitability ratios of the firm(Look before you Leverage!) be affected if the firm(Look before you Leverage!) were to raise all of the capital by issuing 5-year notes?
If you were Clive Jones, what would you recommend to the board and why?
What are some issues to be concerned about when increasing leverage?
Is it fair to assume that if profitability is positively affected in the short run, due to the higher debt ratio, the stock price would increase? Explain.
Using suitable diagrams and the data in the case explain how Clive Jones could enlighten the board members about Modigliani and Miller’s
What are the various ways in which firms(Is It Worth More Dead or Alive?) can be financially distressed? What seemed to be the main problem at Durawear Corporation?
What does the absolute priority rule mean? Develop a priority list for Durawear that would be followed if it were liquidated.
Why has Durawear’s management attempted to get a pre-packaged bankruptcy?
If you were Don Thompson, how would you explain the differences between bankruptcy reorganization and bankruptcy liquidation to Alex Peterson?
Should Alex vote in favor of or against the voluntary reorganization? Explain why by performing the necessary calculations.
Comment on Bernie Simmons’ suggestion of not paying any dividend. What are the pros and cons of such a policy?
Critically evaluate Geoff Scott’s argument that shareholders are expecting a dividend and if not paid one the share price will suffer. Does he have a point? Please explain.
What did Helen Bedford mean when she said, “those shareholders who don’t like our dividend policy can create “homemade dividends.” How can one make homemade dividends? Assume you are a shareholder who owns 1000 shares and are expecting the company to pay at least $0.25 per share. If the
What does the composition of shareholder groups within a corporation have to do with dividend policy? Based on the majority shareholding groups and their relative proportions of ownership in the company, what sort of dividend policy should NuSkin adopt?
How does a residual dividend policy work? Based on a residual dividend policy how much dividend per share can the company afford to pay? Assume that the company’s bonds are trading at par value.
What are some of the drawbacks of following a strict residual dividend policy? What do firms(Is It Much Ado About Nothing?) typically do in practice?
Critically evaluate Chuck’s suggestion of following a residual dividend policy accompanied by a repurchase of stock at $8 per share. What are the pros and cons of using a stock repurchase option instead of a cash dividend to distribute returns to shareholders?
Comment on the dividend policy debate at NuSkin Products Inc. In your opinion should they pay dividends at all? Why or why not? If they decide to pay dividends, what kind of dividend policy should they adopt? Please explain.
What is meant by the term ‘transactions exposure’? What kind of transactions exposure is The Pre-Fab Pipe Co. faced with?
What seems to be the major problem with Hunt Distributing Inc.? Why has this problem occurred?
Based on the prior years’ financial statements, what conclusion do you think Patrick would be justified in reaching? What calculations should he make to analyze the cash position of the company? Substantiate your answer by making the necessary calculations.
Should Patrick prepare a quarterly or a monthly cash budget for Hunt Distributing Inc.? Explain why.
Prepare a suitable cash budget for Hunt Distributing Inc. Build in a minimum cash balance and a maximum cash balance as requested by Donald. Assume that the cash position at the start of the budgeting period is zero.
Based on your calculations, which months seem to be the most vulnerable to cash deficits and which ones have the greatest surplus funds?
If borrowed funds cost 10% per year and excess funds can be invested at 6% per year, prepare an annual financial plan for Hunt Distributing Inc.
How might the firm(The Elusive Cash Balance) avoid cash shortages in the future? Please explain.
Based on the data provided calculate and comment on the absolute liquidity of Hunt Distributing Inc.
What did Roger mean when he said that, based on covered interest arbitrage, it made no difference whether Siemens Technologies raised the capital needed for the joint venture in India or in the USA? Do you agree? Please explain.
Based on the differential inflation rate projections, what are the expected end of year exchange rates between the US$ and the Indian rupee for the next seven years?
Based on the “home currency” approach what should Hal recommend? Please explain with the help of suitable calculations.
As Hal went over the numbers once again, he realized that he had made a major error. One of the machines, which were to be shipped over to India as part of Siemens Technologies initial investment, had been accounted for at its book value of $500,000, even though it had an estimated market value of
As Hal was inquiring about the tax provisions in India, he was told that there was a high probability that the Indian government would offer a reduced tax rate (20%) to foreign investors who used some indigenous raw materials and employed Indians. If this does happen, how would the analysis be
How would Hal’s analysis and recommendation change if Siemens Technologies intends to use this joint venture as a stepping-stone to maintain a permanent position in India and therefore reinvests its earnings in India?
Besides exchange rate fluctuations, what other risk factors would Hal have to take into consideration before making his recommendation? Please explain
What are the different ways in which Siemens’s share of the cash flows from the joint venture can be remitted to the USA?
How much variability has there been in the spot price of high-grade copper over the past twelve months? Is it large enough to warrant the need for hedging? Please explain.
What kind of hedging strategy should Kirk recommend for minimizing Pre-Fab’s exposure to volatility in copper prices? Design a suitable hedge and show what would be the result if copper prices went to 277.5 cents per lb. at the end of three months when the company would be ordering the high-grade
How should Kirk respond if Brian argues that there is a good chance that copper prices could be coming down?
Why is Kirk concerned about the dollar strengthening in value against the British pound?
What hedging strategies can Kirk recommend to minimize the impact of exchange rate volatility?
Using the data given for British Pound futures contracts design a suitable hedge that would minimize Pre-Fab’s exposure to fluctuations in the exchange rate between the US$ and the British Pound. Explain the results of the hedge if by September 2005, when payment is received from the British
Brian questions Kirk, “What about forward contracts? Why not use forward contracts instead?” How should Kirk respond?
Besides an interest rate swap, what other strategies could Kirk recommend to Brian to help minimize the company’s exposure to interest rate risk?
Using the formula for free cash flow, explain the various reasons why firms(Made For Each Other) undertake mergers and acquisitions? Which of these reasons are most likely to apply to the acquisition that Metallic Creations Inc. is considering?
Comment on the director’s suggestion of playing the “relative P/E game.” For your calculations assume that New Horizon Products’ shareholders have agreed to an exchange ratio of 1 share of Metallic Creations Inc. for every 2 shares held in New Horizon. Also, assume that the combined net
Using the free cash flow method of valuation calculate the maximum offer price that Metallic Creations Inc. would be justified in making for New Horizon Products.
After doing all the calculations, Henry realizes that he underestimated the cost savings that would result from improved efficiency by $1000 per year. How should this error be handled? Is it relevant? Explain.
Let’s say that Metallic Creations Inc. is able to close the deal at a price of $1,000m by paying cash or by exchanging 1 of its shares for 2 of New Horizon’s shares. Should it use cash or stock as the payment mechanism? Why? What are the pros and cons of each payment mechanism for the acquiring
If New Horizon Products wants to block the takeover attempt what can it do? Please explain the rationale and possible outcome of each suggestion.
If Quicken Leasing Company’s tax rate is 40%, what is the minimum lease payment that it would be willing to accept? Explain.
What typically happens to the leased equipment after the term of the lease expires?
What are the different kinds of leases available and which one would be best suited for Henry’s restaurant? Explain why.
If the book value of the net fixed assets of New Horizon Products is only at 80% of its current market value, and Metallic Creations Inc. decides to step up the basis of the assets for depreciation after the deal is closed, what would the balance sheet of the combined firm(Made For Each Other)
What are some tax issues that must be considered by Metallic Creations Inc.’ management team when making the bid?
One of the M&A committee members had told Dan that the main advantage of this deal to Metallic Creations Inc. is the diversification benefit that exists from the two companies being in totally different industry sectors and that it be stressed the most in the presentation. Do you agree? Explain.
Calculate the net advantage to leasing (NAL) the restaurant equipment. It is assumed that the old equipment has no resale value whereas the new equipment would have a salvage value of $30,000 after 5 years. The restaurant’s tax rate is estimated to be 40%.
How should depreciation and taxes be accounted for in the calculations?
If the equipment were to be leased, would the lease payments be tax deductible? Explain.
What is the maximum lease payment that Henry should be willing to pay? Explain.
How much of an impact does the forecast of the salvage value of the new machine have on the lease versus buy decision?
If Henry leases the equipment, what impact would it have on the firm’s(Why Buy It When You Can Lease It?) debt capacity?
Does the size of the business play any role in lease versus buy decisions of this type?
Does the type of asset under consideration have much effect on the lease versus buy decision?
Are there any other factors that need to be considered in a lease versus borrow and buy decision of this type? Explain.
All things considered, should Henry lease or borrow and buy the equipment? Explain.
Why do you think Jason prefers to use the WACC when analyzing product acquisitions rather than some baseline rate or the rate on the cheapest capital component?
What are strategic options? What kind of strategic options would apply in this case?
If you were a director on Advanced Pharmaceuticals’ board would you agree with Richard’s analysis? Explain.
What is a real option? Explain how this project can be viewed as a real option.
Based upon your analysis, which of the two units is “Too Hot to Handle?” Why?
In order to shed some light on the firm’s financial condition, which statements should Denny analyze and which measures/calculations should he use so as to compile a detailed report. Please explain why.
What is the lesson to be learned from this case? Explain using suitable calculations.
“Why is there so much variation in the coupon rates and prices of these various bonds?” asks one of Jill’s wealthiest clients. How should Jill respond?
“How are corporate bond ratings determined?” asks another client, “and how and why do these ratings change once they are arrived at?” What should Jill say?
During the presentation, one of the clients is confused about the fact that some of these bonds sell for less than their face value while others sell at a premium. She asks whether the cheaper bonds are a bargain. How should Jill go about clearing up her confusion?
Jill knows that the call period and its implications will be of particular concern to the audience. How should she go about explaining the effects of the call provision on bond risk and return potential.
What are the advantages and disadvantages of going public? Do you agree with Billy’s concerns or do you concur with the other members of the Goodman family regarding the issuance of an IPO? Explain why.
Realizing that the CIC will demand some kind of sensitivity analyses, how should Matt and Chris prepare their report? Which variables or inputs are obvious ones that need to be analyzed using multiple values? Explain by performing suitable calculations.
How should the interest expenses be treated? Explain.
Let’s say that the company had spent $600,000 in developing the prototype of the Lawn Robot. How should Matt and Chris treat this item in their report? Please explain.
Calculate the IRR of the project. Based on your calculations what would you recommend? Why?
How sensitive is the Net Present Value of the project to the cost of capital?
Calculate the operating leverage entailed by this project. What does it indicate?
What other types of contingency planning should Matt and Chris include to make the report comprehensive? Please explain the relevance of each suggestion.
What is meant by the ‘pure play’ approach to estimating the required return on an investment?

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Cases in Finance 3rd edition Jim DeMello - Solutions

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