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Corporate Finance With Connect Access Card 10th Edition Stephen Ross ,Randolph Westerfield ,Jeffrey Jaffe - Solutions
Many of the employees of East Coast Yachts have shares of stock in the company because of an existing employee stock purchase plan. To sell the stock, the employees can tender their shares to be sold in the IPO at the offering price, or the employees can retain their stock and sell it in the
Merger Accounting Explain the purchase accounting method for mergers. What is the effect on cash flows? On EPS?
Poison Pills Are poison pills good or bad for stockholders? How do you think acquiring firms are able to get around poison pills?
Economies of Scale What does it mean to say that a proposed merger will take advantage of available economies of scale? Suppose Eastern Power Co. and Western Power Co. are located in different time zones. Both operate at 60 percent of capacity except for peak periods, when they operate at 100
Hostile Takeovers What types of actions might the management of a firm take to fight a hostile acquisition bid from an unwanted suitor? How do the target firm shareholders benefit from the defensive tactics of their management team? How are the target firm shareholders harmed by such actions?
Merger Offers Suppose a company in which you own stock has attracted two take over offers. Would it ever make sense for your company’s management to favor the lower offer? Does the form of payment affect your answer at all?
Merger Profit Acquiring firm stockholders seem to benefit little from takeovers.Why is this finding a puzzle? What are some of the reasons offered for it?
Calculating Synergy Evan, Inc., has offered $340 million cash for all of the common stock in Tanner Corporation. Based on recent market information, Tanner is worth$317 million as an independent operation. If the merger makes economic sense for Evan, what is the minimum estimated value of the
Balance Sheets for Mergers Consider the following premerger information about firm X and firm Y :Firm X Firm Y Total earnings $90,000 $52,200 Shares outstanding 46,800 36,000 Per-share values:Market $ 53 $ 19 Book $ 21 $ 9 Assume that Firm X acquires Firm Y by paying cash for all the shares
Balance Sheets for Mergers Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $15,000 for James and raises the needed funds through an issue of long-term debt. Construct a postmerger balance sheet
Incorporating Goodwill In the previous problem, suppose the fair market value of James’s fixed assets is $15,000 versus the $8,900 book value shown. Jurion pays$23,000 for James and raises the needed funds through an issue of long-term debt.Construct the postmerger balance sheet now, assuming
Balance Sheets for Mergers Silver Enterprises has acquired All Gold Mining in a merger transaction. Construct the balance sheet for the new corporation if the merger is treated as a purchase for accounting purposes. The market value of All Gold Mining’s fixed assets is $5,800; the market values
Incorporating Goodwill In the previous problem, construct the balance sheet for the new corporation assuming that the transaction is treated as a purchase for accounting purposes. The market value of All Gold Mining’s fixed assets is $5,800;the market values for current and other assets are the
Cash versus Stock Payment Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flow by $1.1 million indefinitely. The current market value of Teller is $45 million, and that of Penn is
EPS, PE, and Mergers The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:Flannery Stultz Price–earnings ratio 6.35 12.70 Shares outstanding 73,000 146,000 Earnings $230,000 $690,000 Flannery’s shareholders
Merger Rationale Cholern Electric Company (CEC) is a public utility that provides electricity to the central Colorado area. Recent events at its Mile-High Nuclear Station have been discouraging. Several shareholders have expressed concern over last year’s financial statements.Income Statement
Cash versus Stock as Payment Consider the following premerger information about a bidding firm (Firm B ) and a target firm (Firm T ). Assume that both firms have no debt outstanding.Firm B Firm T Shares outstanding 4,800 1,200 Price per share $36 $24 Firm B has estimated that the value of the
Effects of a Stock Exchange Consider the following premerger information about Firm A and Firm B :Firm A Firm B Total earnings $2,100 $700 Shares outstanding 900 300 Price per share $ 60 $ 17 Assume that Firm A acquires Firm B via an exchange of stock at a price of $18 for each share of B ’s
Mergers and Shareholder Value Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:State Probability Bentley Rolls Boom .70 $290,000 $260,000 Recession .30 $110,000 $ 80,000 Bentley currently has a
Calculating NPV Plant, Inc., is considering making an offer to purchase Palmer Corp. Plant’s vice president of finance has collected the following information:Plant Palmer Price–earnings ratio 14.5 10 Shares outstanding 1,500,000 750,000 Earnings $4,200,000 $960,000 Dividends 1,050,000 470,000
Mergers and Shareholder Value The Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and form Fudge Swirl Consolidated.Both companies are exactly alike except that they are located in different towns.The end-of-period value of each firm is determined by the weather,
Suppose Hybrid shareholders will agree to a merger price of $68.75 per share. Should Birdie proceed with the merger?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352
What is the highest price per share that Birdie should be willing to pay for Hybrid?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352 million for Hybrid Golf. Both
Suppose Birdie is unwilling to pay cash for the merger but will consider a stock exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $68.75 per share?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After
What is the highest exchange ratio Birdie would be willing to pay and still undertake the merger?Birdie Golf, Inc., has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $352 million for Hybrid
Costs of Float Purple Feet Wine, Inc., receives an average of $16,000 in checks per day. The delay in clearing is typically three days. The current interest rate is.018 percent per day.a. What is the company’s float?b. What is the most Purple Feet should be willing to pay today to eliminate its
NPV and Collection Time Your firm has an average receipt size of $117. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,500 checks per day. The daily interest rate is .015 percent. If the bank charges a fee of
Value of Lockboxes Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:Average number of payments per day 435 Average value of payment $975 Variable lockbox fee (per transaction) $.50 Daily interest rate on money market
Lockboxes and Collections It takes Cookie Cutter Modular Homes, Inc., about five days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce receipt and
NPV and Reducing Float No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $3.2 million in collections a day and requires a $350,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so that two other banks
Lockboxes and Collection Time Bird’s Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh.The bank has estimated that use of the
Calculating Transactions Required Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $15,000 plus 10
What is Richmond Corporation’s total net cash flow from the current lockbox system available to meet payroll?Richmond Corporation was founded 20 years ago by its president, Daniel Richmond.The company originally began as a mail-order company but has grown rapidly in recent years, in large part
Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?Richmond Corporation was founded 20 years ago by its president, Daniel Richmond.The company originally began as a mail-order company but has grown rapidly in recent years, in large part
What cost of ACH transfers would make the company indifferent between the two systems?Richmond Corporation was founded 20 years ago by its president, Daniel Richmond.The company originally began as a mail-order company but has grown rapidly in recent years, in large part due to its website. Because
Credit Period Length What are some of the factors that determine the length of the credit period? Why is the length of the buyer’s operating cycle often considered an upper bound on the length of the credit period?
Just-in-Time Inventory If a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity (ROE)? ( Hint: Remember the Du-Pont equation from Chapter 3.)
ACP and Accounts Receivable Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/15, net 30.Based on experience, 65 percent of all customers will take the discount.a. What is the average collection period for Kyoto Joe?b. If Kyoto Joe sells 1,300 forecasts every
Size of Accounts Receivable Tidwell, Inc., has weekly credit sales of $27,500, and the average collection period is 27 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable figure?
Terms of Sale A firm offers terms of 1/10, net 30.What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what will happen to this effective rate if:a. The discount is changed to 2 percent.b. The credit period is
Size of Accounts Receivable Essence of Skunk Fragrances, Ltd., sells 4,900 units of its perfume collection each year at a price per unit of $495. All sales are on credit with terms of 1/10, net 40.The discount is taken by 40 percent of the customers.What is the total amount of the company’s
Size of Accounts Receivable The Arizona Bay Corporation sells on credit terms of net 30.Its accounts are, on average, 6 days past due. If annual credit sales are$9.3 million, what is the company’s balance sheet amount in accounts receivable?
Credit Policy Evaluation Lealos, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Lealos should proceed or not. Describe the buildup of receivables in this case. The required return is .95
Credit Policy Evaluation The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. The required return is 2.5 percent per period.Current Policy New Policy
Credit Policy Evaluation Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days.Based on the following information, what do you recommend? The required return is .95 percent per month.Current Policy New Policy
Credit Policy The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 600 bicycles.The average cost to the shop of a bicycle is $525. The owner knows that only 96 percent of the customers will be able to make their
Evaluating Credit Policy Solar Engines manufactures solar engines for tractortrailers.Given the fuel savings available, new orders for 125 units have been made by customers requesting credit. The variable cost is $11,400 per unit, and the credit price is $13,000 each. Credit is extended for one
Evaluating Credit Policy In the previous problem, assume that the probability of default is 15 percent. Should the orders be filled now? Assume the number of repeat customers is affected by the defaults. In other words, 30 percent of the customers who do not default are expected to be repeat
Tricia Haltiwinger, the president of Braam Industries, has been exploring ways of improving the company’s financial performance. Braam Industries manufactures and sells office equipment to retailers. The company’s growth has been relatively slow in recent years, but with an expansion in the
Nick mentions to James Hendrix, the president of Hendrix Leasing, that although the company will need the equipment for four years, he would like a lease contract for two years instead. At the end of the two years, the lease could be renewed. Nick would also like to eliminate the security deposit,
In the leasing discussion, James informs Nick that the contract could include a purchase option for the equipment at the end of the lease. Hendrix Leasing offers three purchase options:a. An option to purchase the equipment at the fair market value.b. An option to purchase the equipment at a fixed
James also informs Nick that the lease contract can include a cancellation option. The cancellation option would allow Warf Computers to cancel the lease on any anniversary date of the contract. In order to cancel the lease, Warf Computers would be required to give 30 days’ notice prior to the
Leasing vs. Borrowing What are the key differences between leasing and borrowing?Are they perfect substitutes?
Leasing and Taxes Taxes are an important consideration in the leasing decision.Which is more likely to lease: A profitable corporation in a high tax bracket or a less profitable one in a low tax bracket? Why?
Leasing and IRR What are some of the potential problems with looking at IRRs when evaluating a leasing decision?
Leasing Comment on the following remarks:a. Leasing reduces risk and can reduce a firm’s cost of capital.b. Leasing provides 100 percent financing.c. If the tax advantages of leasing were eliminated, leasing would disappear.
Accounting for Leases Discuss the accounting criteria for determining whether a lease must be reported on the balance sheet. In each case give a rationale for the criterion.
IRS Criteria Discuss the IRS criteria for determining whether a lease is tax deductible. In each case give a rationale for the criterion.
Off–Balance Sheet Financing What is meant by the term off–balance sheet financing? When do leases provide such financing, and what are the accounting and economic consequences of such activity?
Sale and Leaseback Why might a firm choose to engage in a sale and leaseback transaction? Give two reasons.
Leasing Cost Explain why the aftertax borrowing rate is the appropriate discount rate to use in lease evaluation.
Finding the Break-Even Payment What would the lease payment have to be for both the lessor and the lessee to be indifferent about the lease?
Taxes and Leasing Cash Flows Assume that your company does not contemplate paying taxes for the next several years. What are the cash flows from leasing in this case?
Setting the Lease Payment In the previous question, over what range of lease payments will the lease be profitable for both parties?
MACRS Depreciation and Leasing Rework Problem 1 assuming that the scanner will be depreciated as three-year property under MACRS (see Chapter 6 for the depreciation allowances).
Lease or Buy Super Sonics Entertainment is considering buying a machine that costs $540,000. The machine will be depreciated over five years by the straight-line method and will be worthless at that time. The company can lease the machine with year-end payments of $145,000. The company can issue
Setting the Lease Payment Quartz Corporation is a relatively new firm. Quartz has experienced enough losses during its early years to provide it with at least eight years of tax loss carryforwards. Thus, Quartz’s effective tax rate is zero. Quartz plans to lease equipment from New Leasing
Lease or Buy What is the NAL for Wildcat? What is the maximum lease payment that would be acceptable to the company?
Leasing and Salvage Value Suppose it is estimated that the equipment will have an aftertax residual value of $700,000 at the end of the lease. What is the maximum lease payment acceptable to Wildcat now?
Deposits in Leasing Many lessors require a security deposit in the form of a cash payment or other pledged collateral. Suppose Lambert requires Wildcat to pay a$500,000 security deposit at the inception of the lease. If the lease payment is still$1,650,000, is it advantageous for Wildcat to lease
Debt Capacity Monster Magnet Manufacturing is considering leasing some equipment. The annual lease payment would be $375,000 per year for six years.The appropriate interest rate is 8 percent and the company is in the 38 percent tax bracket. How would signing the lease affect the debt capacity for
Setting the Lease Price An asset costs $550,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The corporate tax rate is 34 percent, and the appropriate interest rate is 10 percent.a. What set of lease payments will make the lessee and the
Setting the Lease Price An asset costs $620,000 and will be depreciated in a straight-line manner over its three-year life. It will have no salvage value. The lessor can borrow at 7 percent and the lessee can borrow at 9 percent. The corporate tax rate is 34 percent for both companies.a. How does
L ease vs. Borrow Return to the case of the diagnostic scanner discussed in Problems 1 through 6.Suppose the entire $5,200,000 purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan will be repaid in equal installments. Create a lease-versus-buy analysis that
Intrinsic Value What is the intrinsic value of a call option? Of a put option? How do we interpret these values?
Option Risk True or false: The unsystematic risk of a share of stock is irrelevant for valuing the stock because it can be diversified away; therefore, it is also irrelevant for valuing a call option on the stock. Explain.
Option Pricing Suppose a certain stock currently sells for $30 per share. If a put option and a call option are available with $30 exercise prices, which do you think will sell for more? Explain.
Option Valuation and NPV You are the CEO of Titan Industries and have just been awarded a large number of employee stock options. The company has two mutually exclusive projects available. The first project has a large NPV and will reduce the total risk of the company. The second project has a
Put–Call Parity You find a put and a call with the same exercise price and maturity.What do you know about the relative prices of the put and call? Prove your answer and provide an intuitive explanation.
Put–Call Parity A put and a call have the same maturity and strike price. If they have the same price, which one is in the money? Prove your answer and provide an intuitive explanation.
Put–Call Parity One thing put–call parity tells us is that given any three of a stock, a call, a put, and a T-bill, the fourth can be synthesized or replicated using the other three.For example, how can we replicate a share of stock using a call, a put, and a T-bill?
Two-State Option Pricing Model T-bills currently yield 4.8 percent. Stock in Nina Manufacturing is currently selling for $63 per share. There is no possibility that the stock will be worth less than $61 per share in one year.a. What is the value of a call option with a $60 exercise price? What is
Understanding Option Quote s Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $83.Option and NY Close Expiration Strike Price Calls Puts Vol. Last Vol. Last RWJ March 80 230 2.80 160 .80 April 80 170 6 127 1.40 July 80 139 8.05 43
Calculating Payoff s Use the option quote information shown here to answer the questions that follow. The stock is currently selling for $114.Option and NY Close Expiration Strike Price Calls Puts Vol. Last Vol. Last Macrosoft February 110 85 7.60 40 .60 March 110 61 8.80 22 1.55 May 110 22 10.25
Two-State Option Pricing Model The price of Ervin Corp. stock will be either $74 or $96 at the end of the year. Call options are available with one year to expiration.T-bills currently yield 5 percent.a. Suppose the current price of Ervin stock is $80. What is the value of the call option if the
Two-State Option Pricing Model The price of Tara, Inc., stock will be either $50 or $70 at the end of the year. Call options are available with one year to expiration.T-bills currently yield 5 percent.a. Suppose the current price of Tara stock is $62. What is the value of the call option if the
Put–Call Parity A stock is currently selling for $38 per share. A call option with an exercise price of $40 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, what is the price of a put option with the same exercise
Put–Call Parity A put option that expires in six months with an exercise price of $65 sells for $4.89. The stock is currently priced at $61, and the risk-free rate is 3.6 percent per year, compounded continuously. What is the price of a call option with the same exercise price?
Put–Call Parity A put option and a call option with an exercise price of $85 and three months to expiration sell for $2.40 and $5.09, respectively. If the risk-free rate is 4.8 percent per year, compounded continuously, what is the current stock price?
Put–Call Parity A put option and a call option with an exercise price of $55 expire in two months and sell for $2.65 and $5.32, respectively. If the stock is currently priced at $57.30, what is the annual continuously compounded rate of interest?
Black–Scholes What are the prices of a call option and a put option with the following characteristics?Stock price = $57 Exercise price = $60 Risk-free rate = 6% per year, compounded continuously Maturity = 3 months Standard deviation = 54% per year
Black–Scholes What are the prices of a call option and a put option with the following characteristics?Stock price = $93 Exercise price = $90 Risk-free rate = 4% per year, compounded continuously Maturity = 5 months Standard deviation = 62% per year
Delta What are the deltas of a call option and a put option with the following characteristics? What does the delta of the option tell you?Stock price = $67 Exercise price = $70 Risk-free rate = 5% per year, compounded continuously Maturity = 9 months Standard deviation = 49% per year
Black–Scholes and Asset Value You own a lot in Key West, Florida, that is currently unused. Similar lots have recently sold for $1.1 million. Over the past five years, the price of land in the area has increased 12 percent per year, with an annual standard deviation of 25 percent. A buyer has
Black–Scholes and Asset Value In the previous problem, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of the transaction today?
Time Value of Options You are given the following information concerning options on a particular stock:Stock price = $83 Exercise price = $80 Risk-free rate = 6% per year, compounded continuously Maturity = 6 months Standard deviation = 53% per yeara. What is the intrinsic value of the call option?
Risk-Neutral Valuation A stock is currently priced at $73. The stock will either increase or decrease by 15 percent over the next year. There is a call option on the stock with a strike price of $70 and one year until expiration. If the risk-free rate is 8 percent, what is the risk-neutral value of
Risk-Neutral Valuation In the previous problem, assume the risk-free rate is only 5 percent. What is the risk-neutral value of the option now? What happens to the risk-neutral probabilities of a stock price increase and a stock price decrease?
Black–Scholes A call option matures in six months. The underlying stock price is $75, and the stock’s return has a standard deviation of 30 percent per year. The risk-free rate is 4 percent per year, compounded continuously. If the exercise price is$0, what is the price of the call option?
Black–Scholes A call option has an exercise price of $80 and matures in six months. The current stock price is $84, and the risk-free rate is 5 percent per year, compounded continuously. What is the price of the call if the standard deviation of the stock is 0 percent per year?
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