Essentials Of Financial Management 4th Edition Eugene F. Brigham, Joel F. Houston, Jun-Ming Hsu, Yoon Kee Koong, A. N. Bany-Ariffin - Solutions

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21-5 CAPITAL BUDGETING ANALYSIS The Stanley Stationery Shoppe wants to acquire The Carlson Card Gallery for $400,000. Stanley expects the merger to provide incremental earnings of about 564,000 a year for 10 years.Ken Stanley has calculated the marginal cost of capital for this investment to be
21-4 MERGER ANALYSIS Goldilocks Appliance Corporation is considering a merger with the Black-Wolf Vacuum Company. Black-Wolf is a publicly traded company, and its current beta is 1.30. Black-Wolf has been barely profitable, so it has paid an average of only 20% in taxes during the last several
21-3 MERGER BID On the basis of your answers to Problems 21-1 and 21-2, if Angry Ducks were to acquire Farmers' Ville, what would be the range of possible prices it could bid for each share of Farmers' Ville common stock?
21-2 MERGER VALUATION Angry Ducks estimates that if it acquires Farmers'Ville, the year-end dividend will remain at $2.00 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of the current 5%). Angry Ducks also plans to increase the debt ratio of what
21-1 VALUATION Farmers' Ville currently expects to pay a year-end dividend of $2.00 a share (D = $2.00). Farmers' Ville's dividend is expected to grow at a constant rate of 5% a year, and its beta is 0.9. What is the current price of Farmers' Ville's stock?
21-5 Two large, publicly owned firms are contemplating a merger. No operating synergy is expected. However, because returns on the two firms are not perfectly positively correlated, the standard deviation of earnings would be reduced for the combined corporation. One group of consult-ants argues
21-4 In the spring of 1984, Disney Productions' stock was selling for about 53.125 per share. (All prices have been adjusted for 4-for-1 splits in 1986 and 1992.) Then Saul Steinberg, a New York financier, began acquiring it; after he had 12%, he announced a tender offer for another 37% of the
21-3 Distinguish between operating mergers and financial mergers.
21-2 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? Why or why not?
21-1 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 likelihood of governmental intervention and (b) possibilities for operating synergy.
20-12 Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 9% and $50 million of nonconvertible bonds with a coupon rate of 12%. Both bonds have the same maturity. Because the convertible issue has the lower coupon rate, is it less risky than the
20-11 Evaluate the following statement. Issuing convertible securities repre-sents a means by which a firm can sell common stock at a price above the existing market price.
20-10a. How would a firm's decision to pay out a higher percentage of its earnings as dividends affect each of the following?1.The value of its long-term warrants 2.The likelihood that its convertible bonds will be converted·3.The likelihood that its warrants will be exercisedb. If you owned the
20-9 What effect does the expected growth rate of a firm's stock price (subse-quent to issue) have on its ability to raise additional funds through(1) convertibles and (2) warrants?
20-8 Suppose Congress changed the tax laws in a way that (1) permitted equip-ment to be depreciated over a shorter period, (2) lowered corporate tax rates, and (3) reinstated the investment tax credit. Discuss how each of these changes would affect the relative use of leasing versus conventional
20-7 Suppose there were no IRS restrictions on what constitutes a valid lease.Explain in a manner that a legislator might understand why some restric-tions should be imposed
20-6 One alleged advantage of leasing voiced in the past was that it kept liabil-ities off the balance sheet, thus making it possible for a firm to obtain more leverage than it otherwise could have. This raised the question of whether the lease obligation and the asset involved should be
20-5 Distinguish between operating leases and financial leases. Would a firm be more likely to finance a fleet of trucks or a manufacturing plant with an operating lease? Explain.
20-4 Why would a company choose to issue floating rate as opposed to fixed-rate preferred stock?
20-3 One often finds that a company's bonds have a higher yield than its preferred stock, even though an investor considers the bonds to be less risky than the preferred. What causes this yield differential?
20-2 You are told that one corporation just issued $100 million of preferred stock and another purchased $100 million of preferred stock as an invest-ment. You are also told that one firm has an effective tax rate of 20%, whereas the other is in the 35% tax bracket. Which firm is more likely to
20-1 For purposes of measuring a firm's leverage, should preferred stock be classified as debt or equity? Does it matter whether the classification is being made (a) by the firm's management, (b) by creditors, or (c) by equity investors?
19-17 FOREIGN CAPITAL BUDGETING Solitaire Machinery is a Swiss multina-tional manufacturing company. Currently, Solitaire's financial planners are considering undertaking a 1-year project in the United States. The project's expected dollar-denominated cash flows consist of an initial investment
19-16 FOREIGN INVESTMENT ANALYSIS After all foreign and U.S. taxes, a U.S.corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year. The exchange rate at the end of the year is expected to be $1.67 per pound, and the pound is expected to depreciate 5%
19-11 PURCHASING POWER PARITY In the spot market, 1.40 Singapore dollars can be exchanged for 1 U.S. dollar. A Blu-ray video disc costs $20 in the United States. If purchasing power parity (PPP) holds, what should be the price of the same disc in Singapore?
19-10 INTEREST RATE PARITY Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen = $0.00983, and 90-day risk-free securities yield 1% in Japan. What is the yield on 90-day risk-free securities in the United States?
19.9 CROSS RATES Use the foreign exchange section of a current issue of The Wall Street Journal to look up the three currencies in problem 19-8. What is the current exchange rate between Swedish kronas and pounds?
19-8 CROSS RATES Suppose the exchange rate between the U.S. dollar and the Malaysian ringgit was 4.40 ringgit = $1 and the exchange rate between the dollar and the Thai baht was 100 baht = $3.20. What would be the exchange rate between the Malaysian ringgit and the Thai baht?
19-7 CURRENCY APPRECIATION Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0.18. If the krone appreciated 10% tomorrow against the dollar, how many krones would a dollar buy tomorrow?
19-6 EXCHANGE RATES Use the foreign exchange section of a current issue of The Wall Street Journal to look up the six currencies in problem 19-5.a.What is the current exchange rate for changing dollars into 1,000 units of pounds, Canadian dollars, euros, yen, Mexican pesos, and Swedish kronas?b.
19-5 EXCHANGE RATES Table 19.1 lists foreign exchange rates for May 29, 2014.On that day, how many dollars would be required to purchase 1,000 units of each of the following. British pounds, Canadian dollars, EMU euros, Japanese yen, Mexican pesos, and Swedish kronas?
19-4 PURCHASING POWER PARITY An iPhone costs $500 in the United States.The same iPhone costs 2,400 Malaysian ringgit. If purchasing power parity holds, what is the spot exchange rate between the ringgit and the dollar?
19-3 INTEREST RATE PARITY Six-month T-bills have a nominal rate of 5%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 3.5%. In the spot exchange market, 1 yen equals 50.013. If interest rate parity holds, what is the 6-month forward exchange rate?
19-2 CROSS RATE A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.48 Israeli shekels or for 101.80 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged?
19-1 EXCHANGE RATE If British pounds sell for $1.67 (U.S.) per pound, what should dollars sell for in pounds per dollar?
19-7 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? In Chase Manhattan's Paris branch?Does the existence of the eurodollar market make the Federal Reserve's job of
19-6 Why might purchasing power parity fail to hold?
19-5 Does interest rate parity imply that interest rates are the same in all countries?
19-4 Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.
19-3 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 currencies? What is the corresponding effect on foreign investments in the United States?
19-2 If the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros as a result? Explain.
19-1Why do U.S. corporations build manufacturing plants abroad when they can build them at home?
What are the two broad categories of the various currency regimes? What are the subgroups of those two broad categories?
Differentiate between devaluation/revaluation of a currency and depreciation/ appreciation of a currency.
What is the basic difference between floating and fixed exchange rates?
What is the difference between spot and forward exchange rates?
What is the international monetary system?
Discuss the following statement: The United States is not immune to the influence of foreign corporations over U.S. economic and political policies.
Why do companies "go global"?
What is a multinational corporation?
18A-2 PUT-CALL PARITY The current price of a stock is $50, and the annual risk-free rate is 5.5%. A call option with a strike price of $46 and 6 months until expiration has a current value of $9.59. What is the value of a put option written on the stock with the same strike price and expiration
18A-1 PUT-CALL PARITY A put option written on the stock of Ellis Enterprises(EE) has an exercise price of $30 and 9 months remaining until expiration.The risk-free rate is 5%. A call option written on EE has the same exercise price and expiration date as the put option. EE's stock price is $45. If
18-10 OPTION PRICING MODELSa. Rework problem 18-4 using the spreadsheet model.b. Construct data tables for the intrinsic value and Black-Scholes exer- cise value for this option and graph the relationship. Include possible stock price values ranging up to $30.c. Suppose this call option is
18-9 BINOMIAL MODEL The current price of a stock is $50. In 1 year, the price will be either $40 or $70. The annual risk-free rate is 4%. The stock has an exercise price of $55 and expires in 1 year.a. Find the range of values for the ending stock price and the call option at the option's
18-8 BINOMIAL MODEL Stewart Enterprise's current stock price is $60 per share, Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50. These options will expire at the end of 1 year, at which time Stewart's stock will be selling at one of two
18-7 OPTIONS Audrey is considering an investment in Morgan Communications, whose stock currently sells for $60. A put option on Morgan's stock, with an exercise price of $55, has a market value of $3.06.Meanwhile, a call option on the stock with the same exercise price and time until expiration has
18-6 HEDGING The Zinn Company plans to issue $20,000,000 of 10-year bonds in March 2015 to help finance a new research and development laboratory.It is now early June, and the current cost of debt to the high-risk biotech company is 11%. However, the firm's financial manager is concerned that
18-5 FUTURES What is the implied nominal interest rate on a 10-year U.S.T-notes ($100,000) futures contract that settled at 100'16.0 (or 100-160)?If interest rates increased by 1%, what would be the contract's new value?
18-4 BLACK-SCHOLES MODEL Assume that you have been given the following information on Hartono Inc.Current stock price = $38 Exercise price of option = $30 Time until expiration of option = 9 months Risk-free rate = 8%Variance of stock price = 0.20d, = 0.9589 d' = 0.5716 N(d)=0.83120 N(d2) =
18-3 OPTIONS Which of the following events are likely to increase the market value of a call option on a common stock? Explain.a. An increase in the stock's priceb. An increase in the volatility of the stock pricec. An increase in the risk-free rated. A decrease in the time until the option expires
18-2 OPTIONS The exercise price on one of Flanagan Company's call options is$15, its exercise value is 522, and its premium is $5. What are the option's market value and the stock's current price?
18-1 OPTIONS A call option on Suzuki Fashion stock has a market price of $2.The stock sells for $50 a share, and the option has an exercise price of $55 a share.a. What is the exercise value of the call option?b. What is the premium on the option?
18-6 Give two reasons stockholders might be indifferent between owning the stock of a firm with volatile cash flows and the stock of a firm with stable cash flows.
18-5 How can swaps be used to reduce the risks associated with debt contracts?
18-4 Explain how the futures markets can be used to reduce interest rate and input price risk.
18-3 Discuss some of the techniques available to reduce risk exposure.
18-2 Why do options typically sell at prices higher than their exercise values?
18-1 List seven reasons risk management might increase the value of a firm.
ST-3 BLACK-SCHOLES MODEL An analyst is interested in using the Black-Scholes model to value call options on the stock of Ledbetter Inc. The analyst has accumulated the following information:.The price of the stock is $33.The strike price is $33.The option expires in 6 months (t = 0.50).The standard
ST-2 BINOMIAL MODEL The current price of a stock is $32. In 1 year, the price will be either $30 or $55. The annual risk-free rate is 4.50%. Using the bino-mial approach, what is the price of a call option on the stock that has an exercise price of $35 and that expires in 1 year?
ST-1 KEY TERMS Define each of the following terms:a. Derivative; natural hedgeb. Option; call option; put optionc. Long-term Equity Anticipation Security (LEAPS)d. Exercise value; strike (exercise) pricee. Binomial Option Pricing Model; Black-Scholes Option Pricing Model;riskless hedge f.Futures
How should derivatives be used in risk management? What problems can occur?
Explain how a company can use the futures market to hedge against rising raw materials prices.
What is a swap? Describe the mechanics of a fixed-rate swap and a floating-rate swap.
Explain how a company can use the futures market to hedge against rising interest rates.
Suppose you buy a December futures contract on a hypothetical 10-year, 6% semiannual coupon note with a settlement price today of 125%. You post the initial margin required for this transaction ($1,430 per $100,000 contract). What nominal annual yield to maturity is implied by the settlement price?
What is the difference between the initial margin and the maintenance margin on a futures contract?
What is the key difference between futures contracts and options?
What is a futures contract? What are the key differences between forward and futures contracts?
What is a forward contract?
Underwater Technology stock is currently trading at $30 a share. A call option on the stock with a $25 strike price currently sells for $12. What are the exercise value and the premium of the call option? ($5; $7)
What are some factors that affect a call option's value?
Define a call option's exercise value. Why is the actual market price of a call option usually above its exercise value?
What is an option? A call option? A put option?
List three reasons the derivatives markets have grown more rapidly than any other major market in recent years.
How does a nonsymmetric hedge differ from a natural hedge? Provide an example of a nonsymmetric hedge.
What is a "natural hedge"? Give some examples of natural hedges.
17-11 CASH BUDGETING Rework problem 17-10 using a spreadsheet model. After completing parts a throughd, respond to the following: If Bowers customers began to pay late, collections would slow down, thus increasing the required loan amount. If sales declined, this also would have an effect on the
17-10 CASH BUDGETING Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2015 and 2016:General and administrative salaries are approximately $27,000 a month. Lease payments
17-9 LOCKBOX SYSTEM Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its
17-8 CURRENT ASSETS INVESTMENT POLICY Rentz Corporation is investi- gating 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 expansion presently being undertaken. Fixed assets total $1 million, and the
17-7 CASH CONVERSION CYCLE Christie Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO)on its cash conversion cycle. Christie's 2015 sales (all on credit) were$150,000; its cost of goods sold is 80% of sales; and it earned a net profit of
17-6 WORKING CAPITAL INVESTMENT Prestopino Corporation produces motorcycle batteries. Prestopino turns out 1,500 batteries a day at a cost of 56 per battery for materials and labor, It takes the firm 22 days to convert raw materials into a battery. Prestopino allows its customers 40 days in which
17-5 RECEIVABLES INVESTMENT McDowell Industries sells on terms of 3/10, net 30. Total sales for the year are $912,500; 40% of the customers pay on the 100 day and take discounts, while the other 60% pay, on average, 40 days after their purchases.a. What is the days sales outstanding?b. What is the
17-4 CASH CONVERSION CYCLE Zocco Corporation has an inventory conversion period of 75 days, an average collection period of 38 days, and a payables deferral period of 30 days.a. What is the length of the cash conversion cycle?b. If Zocco's annual sales are $3,421,875 and all sales are on credit,
17-3 COST OF TRADE CREDIT AND BANK LOAN Lamar Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 60; and it currently pays on the 5th day and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much
17-2 RECEIVABLES INVESTMENT Lamar Lumber Company has sales of$10 million per year, all on credit terms calling for payment within 30 days, and its accounts receivable are $2 million. What is Lamar's DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar
17-1 CASH CONVERSION CYCLE Primrose Corp has $15 million of sales,$2 million of inventories, $3 million of receivables, and $1 million of paya-bles. Its cost of goods sold is 80% of sales, and it finances working capital with bank loans at an 8% rate. What is Primrose's cash conversion cycle(CCC)?
17-10 Indicate using a (+), (-), or (0) whether each of the following events would probably cause accounts receivable (A/R), sales, and profits to increase, decrease, or be affected in an indeterminate manner. The firm restricts its credit standards. The terms of trade are changed from 2/10, net
17-9 Why are accruals called spontaneous sources of funds, what are their costs, and why don't firms use more of them?

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Essentials Of Financial Management 4th Edition Eugene F. Brigham, Joel F. Houston, Jun-Ming Hsu, Yoon Kee Koong, A. N. Bany-Ariffin - Solutions

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